The doctrine of ultra vires and pre-incorporation contracts

Question 1

Historically, how was the power of a company to enter into a transaction limited?

Answer 1

1. Capacity: Was the act within the power of the company? (objects clause)
2. Authority: whether the individual who contracted on the company’s behalf was authorised to do so (less relevance to companies incorporated under CA 2006)

Question 2

What is the key doctrine under capacity?

Answer 2

Doctrine of ultra vires

Question 3

What is the doctrine of ultra vires?

Answer 3

Refers to the situation where a body purports to act outside its power. Derives from public law - companies were not permitted to act outside of their objects clauses. (Re German Date Coffee Co (1882))

Question 4

What were the number of problems that resulted from the doctrine of ultra vires?

Answer 4

1. objects clause was initially not permitted to be altered. (until 1991 amendments to CA 1985)
2. Registered companies often did diversify and change their business, and this then led to problems.
3. Doctrine of constructive notice combined with the ultra vires rule caused problems for third parties seeking to enforce contracts against companies.
   * *The doctrine of constructive notice applies to all publicly available documents - The doctrine of constructive notice applies to all publicly available documents

Question 5

What was the result of the these issues from the doctrine of ultra vires? (pre 1991 CA 1985 amendments)

Answer 5

Companies usually had very long objects clauses, setting out in detail all the possible types of business the company may want to engage in - see Bell Houses Ltd v City Wall Properties Ltd [1966]

Despite long objects clauses, cases still came before the court (Re Introductions Ltd case - Festival of Britain)
- calls for reform the law in this area happened.

Question 6

What was the reform of ultra vires? (2 key changes)

Answer 6

CA 1985 - number of changes. Key;

1. s 35 CA 1985 - removing the doctrine of constructive notice in relation to a company’s memorandum and articles. (s 39(1) CA 2006)
2. requirement for an objects clause in the memorandum was completely removed.
   - -> s 31 CA 2006 states that the default position is now that all companies have unrestricted objects.
   - -> (note companies incorporated prior - still bound by objects clause but can change).

Question 7

Once established the company had capacity to enter into contract, what next?

Answer 7

Consider whether the individual entering into the contract on the company’s behalf was authorised to do so (Agency).

Question 8

Elements of Agency? (3,3)

Answer 8

• Agent (person)
• Principal (company)
• Authority (authority conferred on agent by principal)
• – Express
• – Implied
• – Deemed

Question 9

What is an ‘actual’ authority as per Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964]?

Answer 9

Legal relationship between principal and agent created by a consensual agreement to which they alone are parties.

Question 10

Under what MA do directors have general authority?

Answer 10

MA 3 - ‘Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.’

(MA 5 and 6 also give directors the authority to delegate any of their powers to others).

Question 11

How does implied actual authority arise?

Answer 11

1. Appointment to a specific role in the company
   - only the relationship between the principal and the agent which is relevant to determining whether implied actual authority exists - i.e. MD carries power of that person, although not expressly stated in contract - Smith v Butler [2012]
2. Course of dealing
   - Hely-Hutchinson v Brayhead Ltd [1968]

Question 12

Three categories of deemed authority?

Answer 12

1. Statutory deemed authority under s 40 CA 2006
2. Deemed authority at common law – ostensible (or ‘apparent’) authority
3. Deemed authority at common law under the ‘indoor management’ rule in Turquand’s case

Question 13

Purpose of 1. Statutory deemed authority under s 40 CA 2006?

Answer 13

Protect third parties where there are restrictions on the power of the company’s agents to bind the company set out in the company’s constitution. Third parties who deal with a company in good faith are entitled to assume that directors’ powers are free of any constitutional limitations.
The threshold for bad faith is high – see s 40(2)(b) above.
Note that s 40 only protects third parties, not directors.

Question 14

What does 2. Deemed authority at common law – ostensible (or ‘apparent’) authority deal with?

Answer 14

Determined by looking at the relationship
between the principal and the third party. Ostensible authority refers to the authority of an agent as it appears to the third party. (Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964])

Question 15

What does 3. Deemed authority at common law under the ‘indoor management’ rule in Turquand’s case deal with?

Answer 15

Turquand: The principle stated was that outsiders are entitled to assume that the company’s internal procedures have been complied with. This is often referred to as the ‘indoor management’ rule.

Lesser significance now due to s 40 CA 2006.

Question 16

What’s the context of ratification re. authority of its agents?

Answer 16

Company is able to ratify acts that are beyond the actual authority of its agents, provided that the act is within the authority of the appropriate organ of the company who are looking to ratify it (the board or the shareholders). (New Falmouth Resorts Ltd v International Hotels Jamaica Ltd [2013]).

Question 17

What’s a pre-incorporation contract?

Answer 17

Contract that was entered into before company being incorporated.

Question 18

Does The Contracts (Rights of Third Parties) Act 1999 apply to pre-incorporation contract?

Answer 18

No - because these will impose obligations (burdens) and not only benefits on the third party.

Question 19

What section of CA 2006 deals with pre-incorporation contracts now?

Answer 19

s 51 CA 2006: protect third
parties who believe they are entering into a contract with a company which is incorporated and registered by making pre-incorporation contracts enforceable as personal contracts against the persons purporting to act on the company’s behalf.
Necessary to look at the facts to determine whether there was an express agreement that the signatory would not be personally bound by the contract.

Question 20

2 key cases for s 51 interpretation?

Answer 20

1. Hepburn v Revenue and Customs Commissioners [2013] UKFTT 445: The
2. Royal Mail Estates Ltd v Teesdale [2015] EWHC 1890

Question 21

Can a company ratify a contract made before it came into existence?

Answer 21

No - ince the company did not exist at the time the contract was formed, it could not have authorised an agent to act on its behalf and so is not able to retrospectively authorise purported agents (Kelner v Baxter (1866).

Question 22

What’s the only way the company can obtain the benefit of a contract purportedly made on its behalf before it came into existence?

Answer 22

NOVATE the contract.

Question 23

Does s 51 apply to shelf companies?

Answer 23

No - reason for this is that the company which enters into the contract is already formed and is a legal person, even though the name of the company and other details are later changed. This means that an individual involved in the negotiation of a contract formed between a shelf company and a third party before the shelf company is renamed as
the new company is not personally liable.

Question 24

Can the agent or promoter for a company not yet incorporated be liable under the contact?

Answer 24

Yes - under the contract and under 51 - but also can enforce that the contract ie both the obligations but also the rights under that contract are conferred on the agent.
- Must beware - likely to lead to them assuming burden for personally liability, though they may personally enforce the benefits of such contracts.

Question 25

What are the two ways in which a company may be liable in tort?

Answer 25

1. Primary laibility

2. Vicarious liability

Question 26

What is the attribution theory?

Answer 26

Looks for the ‘controlling’ or ‘guiding’ mind.

Question 27

3 key cases for controlling mind?

Answer 27

1. Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] - not guiding mind
2. Tesco Supermarkets Ltd v Nattrass [1972] - not guiding mind
3. Meridian Global Funds Management Asia Ltd v Securities Commission [1995] - opened up the possibility of finding liability based on an assessment of the controllers of the company for the purposes of attribution

Question 28

Relevance of the Corporate Manslaughter and Corporate Homicide Act 2007?

Answer 28

Was enacted due to difficulty in establishing criminal liability because it was often difficult to find one particular individual with the necessary criminal intent where a series of individuals were involved in an overall corporate failing.
This Act only applies to companies or organisations.

The offence under the Act is set out in s 1 and is committed by a company if the manner in which its activities are managed or organised by its senior management causes the death of a person and amounts to a gross breach of the relevant duty of care owed to the person

Question 29

First company convicted of corporate manslaughter?

Answer 29

Cotswold Geotechnical Holdings ltd in 2011. The company was convicted and fined £385,000 in relation to the death of an employee who had entered an unsupported pit during the course of soil investigation work which had collapsed and killed him (R v Cotswold Geotechnical Holdings Ltd [2011] EQCA Crim 1337).

Number of cases since.

Further guidance; www.hse.gov.uk/corpmanslaughter/about.htm and https://www.cps.gov.uk/legal-guidance/corporate-manslaughter.