Company Contracts Notes

COMPANY CONTRACTS

Capacity of The Company to Enter Contract

Used to be case that companies were required to have objects clause in their memorandum of association.

Where company entered into contracts not covered by objects clause, had acted ultra vires

Modern Position

1. Section 31: presumption that companies have unlimited objects and powers.

2. Section 39: acts carried out contrary to any specific restrictions on company’s powers contained in Articles are NOT ultra vires.

• i.e. third parties from outside the company can rely upon them, even if such acts were in breach of company’s constitution

• acts cannot be challenged simply because they breached a provision in company’s constitution

  Thus specific restrictions in articles only have consequences as restrictions on directors’ powers

  i.e. are only relevant in terms of authority (see below)

Acts of the Company’

Company is a legal person

Thus to see if contract is binding on company, necessary to look at who actually has authority to enter into contracts on behalf of the company?

Company law uses principles of agency to solve this question

1. company is principal,

2. and the board or an individual director is agent

ACTUAL AUTHORITY

Actual authority may be express or implied.

Express Actual Authority

Someone has express actual authority to make a decision on behalf of company (e.g. entering a contract) if:

1. authorised to do so by company’s articles

2. or if they have had this power delegated to them by someone possessing that power

   1. Articles

      Model Articles puts power to act on behalf of company in board of directors

      NB the **board of directors acting as a whole**

      Thus individual directors do not have power to act on behalf of company unless expressly permitted to (or unless they have power delegated to them – see below)

   2. Delegation

      Model Articles 5+6 allow company to delegate power (provided there is nothing preventing this in constitution)

      Thus board of directors (via Art 3) may validly delegate one of their powers to someone else

      e.g. may delegate power to enter contracts on behalf of company to individual director

      Where this validly occurs, delegee has actual authority to enter contracts on behalf of company

      provided he acts within scope of delegated powers

      2. Implied Actual Authority

         Even if D has no express actual authority from Articles to enter into contract, actual authority may be implied

         Hely-Hutchinson v Brayhead [1968]

         Authority is implied where it is inferred from conduct of parties and circumstances of case

Examples

1. Where director occupies a particular position in company, has implied authority to do anything which that position entails

   If X is managing director,

   has implied authority to do anything falling within scope of office

   Hely-Hutchinson v Brayhead [1964]

   thus does not have power to do things which are properly remit of the board

   e.g. cannot suspend members of the board

   Smith v Butler [2011]

   actual authority may depend on terms of MD’s appointment

   i.e. where X is appointed MD but his terms of appointment restrict his powers, actual authority is restricted to these areas

   Harold Holdsworth [1955]

   2. If X is a director of particular area (e.g. sales director), has implied authority to do anything which that position entails

3. If X is the company secretary, has implied authority to bind company in relation to administrative matters

   Panorama Developments [1971]

4. However for positions lower than that of director, courts reluctant to accept implied/ostensible authority

   e.g. a ‘manager’ does not have implied/ostensible authority

   Freeman & Lockyer [1964]

2. However if X is an ordinary director, does not without more have implied actual authority to enter contracts without approval of board

   Hely-Hutchinson v Brayhead [1968]

3. Where other directors acquiesce to X entering contracts on behalf of company for long period of time, X has implied actual authority to enter contracts

   Hely-Hutchinson v Brayhead [1968]

   Implied authority has great overlap with ostensible authority

   i.e. even if MD does not have implied authority, will be held out as having authority to do anything which that role entails

   Freeman [1964]

Limits

Director/s cannot have actual authority (even implied) if he:

Acts contrary to specific restrictions on company’s powers as set out in constitution (see above)

Acts in bad faith or for improper purposes

Bad Faith/Improper Purposes

Where director had actual authority to enter transaction but did so in bad faith or for improper purposes, this vitiates his actual authority

i.e. is breach of director’s duty (s.171) which removes authority

Hopkins v TL Dallas Group [2004]

Thus here, third party must rely on ostensible authority.

NO ACTUAL AUTHORITY

1. Section 40

Section 40

Where person deals with a company in good faith, power of directors to

bind the company

or delegate this power to others

is deemed to be free of any limitation under company’s constitution.

Thus applies wherever:

1. board of directors exercise their power to act on behalf of company (Art 3)

2. board of directors delegate any part of their power to act on behalf of company to someone else (Art 5)

   If there are any limitations on these powers in articles, are ignored so as to make contract with third party valid.

Application

Section 40 only deals with the powers of the board of directors to act or delegate power.

Has been argued that s.40 applies to individual directors

i.e. in CA 1985, previous equivalent to s.40 (s.35A) referred to the power of the “board” to bind the company

whereas s.40 refers only to the “directors”

Davies: thus arguable that where an individual director exercises power to act on behalf of company or delegate this, can be deemed to be free of limitations

i.e. the plural includes the singular

this view doubtful: no reason to think change in wording is relevant

Better view is that where individual director exercises a power, section 40 DOES NOT APPLY

‘Good Faith’

Section 40(2): third party:

1. is not bound to...

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