Ultra vires and pre-incorporation contracts Flashcards
1
Q
Companies formed prior to CA 2006
A
- incorporated with an objects clause in the memorandum
- objects clauses are treated as if they were a provision of the articles (s28(1) CA 2006) and will continue to bind the company unless altered by special resolution
2
Q
Agency and authority
A
- once it is established that the company has the capacity to enter into the contract, the next stage is to consider whether the individual entering the contract on the company’s behalf was authorised to do so
- as a company is inanimate and cannot act itself, the company’s directors or employees must therefore act as its agents.
- under general agency law, an agent is appointed by a principal to act on their behalf.
- an agent contracts on the principal’s behalf and the contract will be entered into between the principal and the third party, not the agent
- in order to validly represent the principal and to bind the principal, an agent needs authority
- this authority may be actual (express or implied) or deemed (either by statute or by common law (ostensible authority or the indoor management rule))
3
Q
Actual authority - express
A
- The actual authority of an agent is the authority that has been actually conferred on them by the principal
- A company’s articles typically give the board of directors the authority to manage the business of the company. MA 3 states:
- ‘Directors’ general authority
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
4
Q
Actual authority - implied
A
- Implied actual authority arises either from appointment to a specific role in the company or from a course of dealing
5
Q
(1) Implied actual authority from appointment to a specific role in the company
A
- Can be distinguished from ostensible or apparent authority as with implied actual authority, it is only the relationship between the principal and the agent which is relevant
- Smith v Butler: The court had to determine whether a managing director had implied power to suspend the company’s executive chairman without express authorisation by the board. It was held that the implied powers of a managing director are those that would ordinary be exercisable by a managing director in his position
6
Q
(2) Implied actual authority from a course of dealing
A
- Actual authority can also be implied from a course of dealing, e.g. where a director or other agent continually enters into specific transactions and the board of directors either acquiesces or agrees to this.
- Hely-Hutchinson v Brayhead Ltd: Despite having no express authority, the Court of Appeal held that he had implied actual authority from a course of dealing due to his conduct over many months of entering into similar contracts and later notifying the board, who never objected.
7
Q
Deemed authority
A
- an agent has no actual authority yet can still bind the principal. There are three categories of deemed authority:
(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
8
Q
Statutory deemed authority under s 40 CA 2006
A
- purpose is to 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.
- this means that the company cannot claim to not be bound by the acts of its directors by asserting these acts to be unconstitutional
- s 40 only protects third parties, not directors. If a director acts outside their authority, the company can sue the director and recover compensation for any consequential losses that those acts have caused the company. The director may also be disqualified.
9
Q
Deemed authority at common law — ostensible authority
A
- 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: Although not appointed as the managing director, K acted as such and engaged the claimants, a firm of architects and surveyors, to apply for planning permission to develop the estate. Although K had no actual authority, the board had held K out as the managing director, allowing him to act in this way, and therefore K had ostensible authority to bind the company.
10
Q
Deemed authority at common law — the ‘indoor management’ rule in Turquand’s case
A
- of lesser significance now due to s 40 CA 2006, but it still applies in certain situations, in particular where the third party has not dealt directly with the board or a question of whether the agent was authorised by the board applies
- Royal British Bank v Turquand : outsiders are entitled to assume that the company’s internal procedures have been complied with (often referred to as the ‘indoor management’ rule).
- Turquand’s case will not apply where the third party has actual notice of the irregularity or is not acting in good faith (Rolled Steel Ltd v British Steel Corpn)
- It also does not apply where the third party is an insider, such as a director who enters into a contract with the company (Morris v Kanssen)
11
Q
Ratification
A
- a 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 looking to ratify it (e.g. the board or the shareholders)
12
Q
Issue with pre-incorporation contracts
A
- A company comes into existence at the time of issue of the certificate of incorporation by the Registrar of Companies (s 16 CA 2006). Until this time, it is not a legal person and therefore has no capacity to enter into contracts. (Rover International Ltd v Cannon Film Sales )
- If the contract is entered into before the company is incorporated, then as the company did not exist at that point as a legal person, it is not possible for the company to have legal rights or duties under the contract. Therefore, an important issue arises as to who can be liable under a ‘pre-incorporation contract.’
- The Contracts (Rights of Third Parties) Act 1999, which allows third parties to enforce contracts where the contract expressly provides or a term in the contract confers a benefit on the third party, does not apply to pre-incorporation contracts because these will impose obligations (burdens) and not only benefits on the third party.
- This situation is now dealt with by s 51 CA 2006
13
Q
s 51 CA 2006
A
pre-incorporation contracts enforceable as personal contracts against the persons purporting to act on the company’s behalf (known as “promoters”)
- It is 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 (Denning LJ in Phonogram Ltd v Lane)
14
Q
Pre-incorporation contracts - ratification
A
- A company cannot ratify a contract made before it came into existence since ratification is only possible for acts which a company could have authorisied at the time.
- The only way in which the company can obtain the benefit of a contract purportedly made on its behalf before it came into existence is to novate the contract (Natal Land Co & Colinization Ltd v Pauline Colliery and Development Syndicate Ltd)
15
Q
When the company was incorporated from a shelf company
A
where a company is formed from an existing shelf company, s 51 does not apply. The 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.
