Agency and Contracting for the Company Flashcards

Question 1

Q

AGENCY -

CAPACITY AND AUTHOIRTY

Answer

A

^{Salomon v Salomon - company is a seperate legal person that is different to the shareholders or the people. Means company can create contracts, sue, be sued and buy property. Company requires an agent to make binding contracts.}

^{Principal (company) - agent (directors or managers) = agency relationship.}

^{Difference between (1) capacity and (2) authority}

^{Capacity - whether an act is within the company’s powers (companies can perform certain actions and agreements as noted in the articles of association).}

^{E.g. company cannot sell drugs.}

^{Authority - ability to enforce and sign agreements on behalf of the company.}

^{Company has no capacity agreement is void and unenforceable. If person no authoirty to bind the company then agreement is ultra vires (agreement for one to act on behalf of the other is a power therefore it would not be beyond powers).}

^{Traditionally}

^{Ultra vires (limited powers)(for protection of consumers and creditors) created as ‘checks and balances’. Companies had lot of power therefore uv and limited authoirty was created protect non-educated dealing with companies (who they are and their limits). All three terms put the company within a framework.}

Question 2

Q

OBJECT CLAUSE (PRIOR CA 2006)

Answer

A

How do we know that the company has the right capacity? Articles of association.

Object clause (prior 2006)

Every company obliged by law to specify their ‘object’ (what the company was doing). Anything outside the clause was uv. Important aid & formulate the statement widely. Knew object in advance and type of activities that company wanted enter a contract with (legal certainty).

If you did not like the company or wanted to start a new one then had to create a new company - inflexible (did not change the clause).

Changes

Government allowed companies to change their object clauses through normal procedure (AMG). Required 75% majoirty vote to change the AoA. Any act beyond the power of the company or limit the authorisation of the members is void because it crosses the boundaries (object clause was protection to creditors and shareholders).

Ashbury Railway Carriage - railway company tired to create a description of all the potentional activities that they may or may not engage with in next years. Impossible to predict all the contracts that will be perofrmed and concluded.

Bell Houses - ‘in connection or as ancillary to any of the above business or the general business of the company’. General phrases used to cover everything.

This appraoch creates problems (unability to determine when to bring a legal action) because the clauses are more vague, unclear and general. Change due - trap for non-experts (focus of the law is the protection of consumers).

Question 3

Q

OBJECT CLAUSES

PRIOR CA 2006

IN PRACTICE

Answer

A

^{Independent or subjective object clauses?}

^{Cotman v Brougham - long list of objects. Company decided offer holiday packages different from its object. Q was whether it was possible to have a main object and others secondary. Held: possible have independent (subjective) objective clause.}

^{Re Introductions Ltd - loan in order to breed pigs. Object clause said can take loans but nothing about pigs. Held: can have extensive object clause but needs degree of clarity for transaprency and consumer protection. Can borrow money as long don’t mention animal breeding (otherwise unenforceable). Object construed as substantive and seperate.}

^{Sign of shift towards unfairness to an unreasonable degree}

^{TWO PURPOSES OF OBJECT CLAUSES}

Show subscribers what their money was to be used for and;
Show those who dealt with a company the extent of its powers.

Narrow - less risk subscriber.

OBJECT CLAUSES & THRID PARTIES

Good faith is not a defence.
Constructive notice - if it is written on the object clause in the AoA that are avliable then you cannot say that you ‘did not know’.

[EXAM: PQ - company clause just consultancy and you sign for buying milk then cannot claim that didn’t know.]

Regular relationship - if it published then you should know.

Question 4

Q

OBJECT CLAUSE

CA 2006

Answer

A

^{S. 31 of CA 2006 - “unless a company’s articles specifically rstrict the objects of the company, its objects are unrestricted”.}

^{No requirement to have an object clause (no issue of uv). Issue of capacity is unlimited. Updated to keep up with modern business practice. If you want one then free to use it (if kept the old regime rules apply - s. 3A CA 1985).}

^{S. 39(1) - an uv claim cannot be brought based on the company’s constitution.}
S.28(1) - if cmpanies in existence with object clause, these clauses will become part of the articles.
S. 171 - act within powers within AoA.

Rolled Steel Products - director personal interest (shares) in the company making the agreement. Everyone knew but styaed silent. Held: internal error therefore not ultra vires (directors duties). Company constructively knew about the lack of authority therefore no rights.

S. 239 - allows a company to rectify a transaction subsequently if there is no issue of ultra vires.

Question 5

Q

AGENCY

TRANSACTIONS WITH THIRD PARTIES

Does the agent have authority and if so how far does it extend?

Answer

A

^{Close and fiduciary relationship}
^{Conduct of the agent must not deviate from instructions.}
^{Relationship is proved with consent.}

^{AoA can state in detail what the agent is allowed or not to do. In practice, use generic job title.}

^{‘Whoever acts through another does the act himself’}

^{Contract between the company and the third party. Agent is not a party to the contract but does the introduction and negoitation (dealing). If company not happy with the dealings of the agent cannot exclude liability to be bound.}

^{Issue: impossible to run a business without an agent. Increases the risk of liability - loss in translation or lost in understanding then subject.}

Question 6

Q

ABILILTY OF AGENTS

TO BIND

THE COMPANY

Answer

A

Authority

[Essay: on contract of the company start analysing previous points: background of why companies are using agents.]

^{There are three types of authoirty which the parties may be held to assume the duties of principal and agent. Only need to find one of them [EXAM: go through all]. No authority the company is released from the contract.}

^{1. Actual authority}

^{2. Implied authority}

^{3. Apparent authority}

Question 7

Q

ACTUAL AUTHORITY

OF

AN AGENT

Answer

A

‘Actually’ have authority i.e. someone gave it to you and there is no dispute as to existence because given through AoA, board meeting or any other communication with evidence.
Directors (other person) free and allowed to do whatever is necessary for the company’s affairs (statement as such must be made in the AoA).
E.g. Model Article 3

Directors are authorised to negotiate, sign and conclude any agreeemnt they think is benefical and profitable for the company. If you are not happy with the result you can remvoe them at the end of their term but nothing can be done in terms of the contract. Ensures legal certainty.

Directors can delegate power to committees and indiviudals (Model Article 5):

Criterion Properties Plc - confirmed that others can have actual (or apparent authority) given by someone with power to confer authority.

Question 8

Q

IMPLIED AUTHORITY

OF AN

AGENT

Answer

A

Inferred from the conduct of the parties and circumstances of the case.

Things to look for in problem questions to prove implied authority:

Appointment to a job or role

Implicitly gives power needed to do the job. Careful job titles change from business to business.

^{Words or conduct of the parties will be relevant}

^{E.g. if you tell someone ‘to do whatever it takes to do the deal’. Willingness of the person to complete an agreement.}

^{History of previous transactions}

^{Include accepting contracts made by the person previosuly without complaint e.g. the same person that represents the company comes to you to sign the contract.}

^{Hely Hutchinson (always mention) - two compnaies wanted to merge. Chairman of B was de facto MD concluding agreements. Gave personal guarantee to bankers for the debts of another company B was proposing the takeover. H signed and company went into liquidation. B refused to pay basis that C had no authority to make the contract.}

^{Held: authority because C was representing the company for a number of years, job title and conduct. Fact that he was chairman and invovled in all negoitations was sufficent to give him implied authority (conduct and history).}

Denning: allowing him to continue to act = actual authority.
Roskill - board acquiesced in his acting without sanaction = implied actual authority

Freeman & Locker - agent enters into a contract pursuant to actual authority creates contractual rights and liabilities between principal and contractor.

Question 9

Q

APPARENT

OR

OSTENSIBLE AUTHORITY

OF AN

AGENT

Answer

A

Appears to others and it can used to enlarge actual authority or to create authority where no actual authority exists e.g. Law Society example.
Representation made by the principal (through person or persons with express actual authority) to a third party that the agent has authority.

^{Two elements are required:}

Representation by the party and
Creation or impression to the third party

^{If your impression is correct then you could have actual and apparent authority. if wrong then simply have apparent authority.}

^{Freeman & Lockyer - director employed architects to develop company’s property. Collapsed. Company refused to pay because director did not have any authority to employ. Held: actions within his ostensible authority and board had been aware of his conduct and acquiesced in it.}

^Note:

^{Hely-Hutchinson (supra) Armogas LTD v. Mundogas SA [1986] Ac 717}

^{Principles of apparent authority }

^{[EXAM: this is how you would break it down following Diplock in Freeman & Lockyer.]}

Representation by a principal

E.g. someone sent an email or made a phone call.

Acting through an agent with actual or apparent authority
To a third party
That the agent has authority
Good faith and reliance by third party

Court will consider the totality of the principal’s conduct. Good faith is subjective as the judge’s mentality.

First Energy Ltd - bank manager offered to FE fianance without authority. FE did not use the credit therefore argued that no contract was made. Held: he was clothed in ostensible authority - statement by manager created an impression he was in good faith and he had authority to offer the contract and conclude the agreement.

Knowledge contract made in breach of duty or without actual authority may be fatal to attempt to establish apparent authority.

Criterion Properties Plc - apparent authority can only be relied on by, someone who does not know that the agent has no actual authority.

Question 10

Q

IMPLIED ACTUAL

OR

APPARENT AUTHORITY?

Answer

A

Diplock: Freeman & Lockyer

Actual authority would have required not merely the silent acquiescence of the indivudal members of the board, the communication by words or conduct of their respective consents.

Implied - it cannot have been implied by silentence. There must be words or conduct.

Denning: Hely-Hitchinson

Actual authority implied the board by their conduct over many months had acquiesced. Necessary to consider previous affairs and transactions.

Actual authority depends upon the agreement between the principal and the agent: words, conduct, agreement (with evidence).

Apparent authority depends upon the representation made by the principal to the third party: someone got the impression - how convincing is this representation.

Question 11

Q

RACTIFICATION AND ESTOPPEL

Answer

A

^{Ractification}

^{Occurs when an agent acts to bind the principal without authority. Principal comes to knowledge of the act but does not renounce it.}
^{Both silence and affirmative statement can act as ratification.}

^{Estoppel}

^{No one may claim that a person was not his agent, if he knew that others thought the person was acting on his behald, and he failed to correct their belief.}

Question 12

Q

SECTION 40

(1) In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution.

Answer

A

The prosecution will have to prove that the consumer was in bad faith i.e. knew that something was wrong and not only did they not say anything but they carried on building up his knoweldge in order to defraud the company and extract some type of advantage.

Magical Marking Ltd - director A had a disagreement with director B announced that he did not wish to continue as operational director. B enagaged IT consultant X instructing him to copy all the company’s electronic records. X not entitled to rely on representations made to him as the circumstances should have put him on enquiry.

AoA - important to establish authority - vague and generic. Try to find if there is any agreement or resolution of the company for that specific act.

‘A person’

Smith - director was not included. Note s. 40(6). S. 40 is only for outsiders as it gives protection against the company.

EIC Services - shareholders not included. Internals and not third parties. Raise issues in the AMG. If there is issue with specific director then find the power by shares or allies and remove this person.

‘Deals with…’

Any type of trasnaction, bilateral most of the time, between the company and TP.

EIC Services - Co issed bonus shares to existing members in breach of the AoA. Held whenever an issue is behind the corporate veil the court will not intervene. Issue of shares was void and unenforceable and shareholders could not rely on s. 40.

Cottell v King -Memeber issued trasnfer of a share depsite the existence of the other members’ pre-emption rights (power maintance). Consistuted dealing with the company because the equitable right of shareholders had been violated. Exceptional case - public policy. Payne thinks this was not the right decision arguing that the issue of bonus is an act which the company is a party. I think it is right in all fairness.

‘In good faith’ - s. 40(2)(b)

There is a presumption of good faith.

S. 40(2)(b)(iii) - bad faith is knowledge as to improper purpose on the part of the directors or collusion by the TP in breach by the directors of their duties. There has be something more than knowledge e.g. fraud. Evidence that should lead the TP to question the trasnaction this is the point that bad faith will begin to interfere (high threshold - constructive notice).

Wrexham AFC - TP knew about the irregulairy and improper purpose invovled and failed to inquire. TP should have inquired.

Aim protect TP entering transactions that companies might seek to avoid. Secures commercial certainty and TP protection and excluded non-innocent TP.

‘The power of the directors to bind the company, or authorise others to do so’

How does a director know that he is protected?

Decisions should be made as a body as it gives more legitimacy. Individual directors can only bind the company if they are authorised by resolution. TP should make the director authorise them specifically and give clear madate about what the TP has to do and how.

^{De facto director is not an excuse.}

^{Section 40 does not apply where directors have managerial capacities - only for board of directors.}

^{Court not sympathise with attempts to find loopholes:}

^{Application to actions by inquorate boards}

^{Smith - irregularity in the composition of the board = TP protection is above that therefore it is irrelavant.}

^{Procedural issues (e.g. failure to give notice)}

^{Ford - TP protection above everything.}

^{Possible redress for shareholders}

‘Bring proceedings to restrain the doing of an action that is beyond the powers of the directors’

S. 40 prevents shareholders from disowning an unauthorised transaction - incentive to minor directors’ conduct.

Issue with attempt to replace directors:

Dispersed all around the world.
When you find out something has happened it is often too late because you have to wait until the AMG to get all the information.

S. 40(5) - if a director breaches his duties or execeeds his powers then shareholder is free to take them to court (s. 171). If there is any criminal offence, fraudulent activity or breach of duties then s. 40 is something seperate for TP.

Section 41 - The transactions that are questionable become void unless ratified. Rectification means there are no issues internally but liability remains.

Question 13

Q

INDOOR MANAGEMENT RULE

Answer

A

^{Turquand - railway co given bond to bank signed by two directors and the secretary as per AoA. AoA noted that directors only had power to give a bond authorised by the company through resolution. Resolution was passsed but no indivation of the account (how much) therefore technical error. Bank sued for repayment.}

^{Held: TP could have known if the resolution was passed but they couldnt have know whether a specific amount was specified or not because the decision of the boards resolutions was not published. If things look legitimate then support should be given to TP. Entitled to assume the internal procedures were complied with.}

No requirement to look into the internal workings of the company = indoor managment rule. Restruction on constructive notice doctrine.

TP must have been acting in good faith or have no actual notice of the irregularity.

Mahony - AoA provided that cheques should be signed by two of three named directors and secretary, fact that directors who had signed had never been proeprly appointed was held to be a matter of internal management and TP entitled to preume they had been properly appointed. No way could have known.

Section 40 v Turquand

S. 40 has a broader scope as it applies to any constitutional limitation to the powers of directors, whereas T is limited to internal procedural irregularities.

T applies only:

If a director has not been appointed,
If a meeting has not been done according to legal requirements
If there is a small asterisk in the internal procedure that is not possible to find out if you are an external person.

All other cases s. 40 is applicable.

Question 14

Q

LIABILITY

Answer

A

Corporate liability in contract

Contract between TP and Co = s. 39-40.

Corporate liability in tort

Two types of liability: (1) personal liability of the agent and (2) vicarious liability.

There is joint liability in company law.

VL requirements

(1) A tort
(2) This tort has to be committed by an employee/agent of the company
(3) Acting in the scope of their employment/agency

Standard Chartered Bank - MD falsified shipping documents to obtain payment from the bank. Sued director and the company. Held: MD own responsibility because it is his tort. He thought that it was the best way to achieve the result that he wanted therefore it was not part of his agency relationship or duties as MD (act of fraud). Modern decision.

Assumption of responsibility

Company is directly and exclusively liable

Negligent misstatment or provision of services.

Gee - CEO and GM orchestrated set of fraudulent activites for personal gains. Co not be accussed as their personal choice and plan. For Co intent need resolution.

Wiseman - MD signed document that Co make payment. Knew that unable to do so (fraudulent misrepresentation). Person is liable because they committed a wrong because they are director (there could be a double basis for a claim).

William - personal liability if there is a special relationship between injured party and director himself, not the company. If unable to prove special relationship or the person cannot be found then go against the company. This is the only time that vicarious liability takes primacy over personal liability because the latter is obvious and the most fair in terms of results. If there is a director that has made a negligent misstatement this is sued.

Director Liability for procuring wrongdoing

Evidence director or board have incitied, directred or authorised a specific action that is all that is required to go against them personally for wrongdoing. Connection between the director and wrongful act has to be straightforward - board resolution or verbal communication.

^{Performing Right Society - one thing to be heavily involved in the company and another thing to procure or indiciate a wrongful act.}

^{Criminal Liability}

^{Lennards - ‘directing mind and will of the corporation’.}

^{Tesco Stores - if the person has the power and skills to be the directing mind means that you have flexibility and authority that no one else has in the company. If the persons who are identified with the company delegate their duties to some other person in such a way that the delegation is deemed to be total, then the acts of that other will be deemed to be the acts of the company.}

^{Meridian Global Funds Managment Asia Ltd - K and N (behald of M)brought 49% of E and wanted to hide the transaction. Comission wanted to impose penalties. Held: sometimes don’t have to be at the top to be criminal liable or found to be the directing mind and will of the company. Exceptional circumstances depending on the structure and hierachy of the company it is possible to be somebody below CEO or GM.}

^{Re Odyssey - different appraoch finding that there is uncertainty as to who exactly is a ‘directing mind’.}

^{Manslaughter & Corporate Killing }

^{Requires ‘gross negligence’}

^{Corporate Manslaughter and Corporate Homicide Act 2007}

^{No individual has to be identified whose acts constitute the offence of corporate manslaughter}
^{Direct liability, independent of individual guilt}

^{This piece of legislation was doomed to fail, not because the provisions were not good enough but because when someone loses their life there is nothing that we cannot do anything about it – money is not an aid. Is better to be proactive than reactive: the issue is whether the standards of care are high enough to prevent these accidents not the number of because prosecuted.}

^{BP Oil Spill}

^{Would the directors, officers and employees be liable for the spill?}

[EXAM: try to deal with corporate manslaughter through the Act from a procedural point.]

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Agency and Contracting for the Company Flashcards

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