Lecture 10

Managing a Company

Company Contracts: Authority and Agency

Student Notes

Company Contracts

The starting point for a company entering into a contract is s. 43:

(1) … a contract may be made …

(a) by a company, by writing under its common seal [or by execution

in accordance with s. 44], or

(b) on behalf of a company, by a person acting under its authority, express

or implied.

Contracts made by a company

s. 43(1)(a)

By execution of a document, s. 44

• A document is executed by a company by:

– the affixing of its common seal (see also Art 49); or

– by signature in accordance with s. 44:

• two authorized signatories (two directors or a director and the

company secretary), or

• a director in the presence of a witness who shows the signature (s.

44(2)).

Contracts made on behalf of the company: s. 43(1)(b)

• Informal contract may be made pursuant to s. 43(1)(b):

(1) … a contract may be made …

(b) on behalf of a company, by a person acting under its authority, express or

implied.

Contracts made on behalf of the company: s. 43(1)(b)

• Professor Fridman:

“Agency is a relationship that exists between two persons when one, called the
agent, is considered in law to represent the other, called the principal, in such a way as
to be able to affect the principal’s legal position in respect of strangers to the relationship
by the making of contracts or the disposition of property.”

• The company is the principal

Contracts made on behalf of the company: s. 43(1)(b)

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 • Who is the agent of a company?

• Consider:

– The directors or shareholders collectively

– Individual directors/non-director employees/commercial agents of the

company

Policy Tension

The central policy tension in this field is between seeking to maximise third party
security of contract (the modern position reflected in s. 40 CA 2006) and facilitating the
company’s ability to control the authority of its decision making organs (the board of
directors or shareholders collectively in general meeting) and agents (the common law
position reflects this objective more strongly). Accordingly, we will see in the following
scenarios when the company is purportedly acting through its decision making organs
the reasonable expectations of third parties that the company should be bound is much
more significantly protected than is the case when the company is purportedly acting
through a sole director or employee where the third party is expected to take greater
care in securing its dealings with the company.

Authority & Agency: Directors Collectively

• The actual scope of the authority of the board is principally found in the articles of
association

– Model Articles for Private Companies Limited by Shares

• Article 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”. (emphasis added)

• Article 7

directors are to take decisions collectively

• Article 3 vests powers in the directors collectively

Scenario one

Scenario: a decision making organ of the company (i.e. the board of directors or
shareholders collectively in general meeting) binds the company to a contract with a
third party. There is no limitation in the company’s constitution.

Result: the company is bound as the relevant decision making organ (usually the board
under Art 3 of the Model Articles) is authorised to act on behalf of the company. S. 40 CA
2006 is not relevant as there is no constitutional limitation.

Scenario two

Scenario: a director or employee enters into a contract on behalf of the company and
the is no limitation in the company’s constitution.

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Result: the company will be bound if the third party can prove that the director or
employee is a duly authorised agent of the company (the board can delegate its powers
under Art 5 Model Articles). This will depend on the common law principles of agency –
the director or employee may either have actual authority (express or implied) or
apparent authority (also known as ostensible authority). In the case of ostensible
authority, which is based on estoppel, the third party will also have to show reasonable
reliance. In either case actual knowledge that the director or employee has no authority
will be fatal to the third party.

Scenario three

Scenario: a decision making organ of the company (i.e. the board of directors or
shareholders collectively in general meeting) purports to bind the company to a contract
worth £550,000 with a third party. There is a relevant limitation in the company’s
constitution as the company only has authority to enter into a contract for £500,000 or
more with prior shareholder approval by ordinary resolution. The board has not sought
such shareholder approval.

Can the third party enforce?

• Traditionally at common law the third party was deemed to have knowledge of
the articles due to the doctrine of constructive notice and the contract would be
void if the constitutional limitation had not been fulfilled.

• This doctrine was mitigated by the rule in Turquand’s case (1856) also known as
the indoor management rule. This rule allowed the third party to assume that the
company had correctly carried out its internal procedures unless the third party
was on notice (see East Asia Co Ltd v PT Satria Tirtatama Energindo (2019) PC –
Lord Kitchin para 93).

• The indoor management rule thus moved the balance towards the third party as
opposed to the company but there was still uncertainty around the situation when
the third party was on notice and the scope of the rule was limited (e.g. it did not
apply to constitutional limitations expressed as prohibitions rather than
limitations). S. 40 seeks to address these issues in favour of the third party.

Authority & Agency: Board of Directors

s. 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.

(2) For this purpose–

“(a) a person “deals with” a company if he is a party to any transaction or other

act to which the company is a party.”

• Dealing in bad faith

• S. 40(2) (b) a person dealing with a company–

(i) is not bound to enquire as to any limitation on the powers of the directors to
bind the company or authorise others to do so,

(ii) is presumed to have acted in good faith unless the contrary is proved, and

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 (iii) is not to be regarded as acting in bad faith by reason only of his knowing that
an act is beyond the powers of the directors under the company's constitution. (see Ford
v Polymer Vision Ltd (2009), Wrexham FC Ltd v Crucialmove Ltd (2006), and Criterion
Properties plc Ltd v Stratford UK Properties LLC (2004) HL)

• If s. 40 does not apply it is necessary to revert to the common law.

• Analysis of hypothetical scenario three:

• Is the power to approve entering into a contract of £500k or more, which is

reserved to shareholders, a “limitation under the constitution” on the
power of the directors?

• Was F dealing with the company?

• Was F dealing in good faith?

• If the answer is yes to all three of the above:

• the power of the board to bind the company is deemed free of the
requirement to obtain the approval in advance of the shareholders.

• ONLY in favour of the third party

• the company cannot rely on s. 40 but can ratify the contract

Authority & Agency Individuals

The actual authority of individual directors or other individuals principally results from
the exercise of the power of delegation by the board (or a committee of the board or an
individual themselves authorised by the board to delegate their authority to bind the
company)

 Model Articles for Private Companies Limited by Shares

Article 5

– gives the directors power to delegate powers conferred on them under the
articles; and
– any such delegation may authorise further delegation of the directors’ powers
by the delegate

Authority & Agency: Individual Directors & Employees

• Consider hypothetical scenario two: an individual director (or another person)

purporting to exercise a power of the company without any constitutional
limitation.

• This hypothetical raises questions of common law agency

• The third party must show that the individual had either actual (express or
implied) or apparent authority.

Authority & Agency: Individual Directors & Employees

– express actual authority (actual authority looks to the relationship between

the principal and agent)

– implied actual authority

• Hely Hutchinson v Brayhead Ltd (1968) CA

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 – ostensible or apparent authority looks to the relationship between the
principal and third party

• Freeman Lockyer v Buckland Park Properties (Mangal) Ltd (1964)

CA per Diplock LJ – three elements, a representation to third party
by a person with actual authority which third party reasonably
relied upon so as to raise an estoppel against the principal

Authority & Agency: Individual Directors & Employees

• Can the company enforce the contract against the third party?

– Implied actual authority allows a company to insist on enforcing the

contract against a third party

– A company cannot rely on the ostensible authority of its agent to enforce a

contract against a third party.

• Re Quintex Ltd (No 2) (1990)

– A company can usually ratify a contract entered into in excess of an

agent’s authority

Authority & Agency: Individual Directors & Employees

• Consider hypothetical scenario four: a purported individual agent in contravention

of a constitutional limitation.

• It is unfortunately unclear as to the extent to which s. 40 applies in such

circumstances beyond the core situation where the board purportedly expressly
authorises the individual agent (see the three key difficulties specified in the
scenario).

• Outside that situation the best view is that s.40 does not apply and therefore the
third party must fall back on the common law.

Additional information

Scenario four

Scenario: a director or employee purport to bind the company to a contract worth

£550,000 with a third party. There is a relevant limitation in the company’s constitution
as the company only has authority to enter into a contract for £500,000 or more with
prior shareholder approval by ordinary resolution. The company has not sought such
shareholder approval.

Result: this is the most difficult scenario and unfortunately there is no case law, as yet,
to indicate to what extent it would fall within the scope of s. 40. The third party would
want to argue that the acts of a single purported agent should fall within s. 40 due to the
advantages it gives (see scenario three above) but s. 40(1) is generally thought to be
problematic on its wording in extension to a single purported agent for the following
principal reasons:

1. The section refers to ‘the power of the directors’, not an individual director, to
authorise. Note that even if a single director is covered by the section such a
director is not deemed to have ostensible authority by it; the third party has to
prove this prior to s. 40 applying.

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 2. It is not clear that the power of the directors to ‘authorise others to do so’ extends
beyond a purported actual express authority by the directors to the agent – it
certainly does not cover ostensible authority but might cover a purported implied
actual authority.
3. Equally, it is not clear that the power of the directors ‘to authorise others to do so’
extends beyond the first agent purportedly authorised i.e. it is not clear that it
cascades down the management chain for example to an employee who is
authorised by an individual director who was authorised by the board.

If s. 40 does not apply the common law will be relevant and the constitutional limitation
will be dealt with through application of the doctrine of constructive notice as mitigated
by the indoor management rule, subject to the third party being on notice to make
further enquires. The latter is likely to be more problematic for a third party dealing with
a single purported agent as it is a highly fact sensitive test and it will be less reasonable
for the third party to rely on a single purported agent for a very high value contract.

In conclusion, the general view is that it is more likely that the common law alone will
apply to an individual purported agent who is not directly purportedly expressly
authorised by the directors. This reflects the policy that the company needs to be able to
limit the authority of its agents and that it is less reasonable for a third party to rely on a
single agent without more due diligence in the context of a significant transaction for the
company.