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Company Contracts There are two separate issues in company contracts, both must be satisfied for the action to be valid and binding on the company. There must be capacity for the company to do the action, and the person being dealt with must have authority to bind the company. There is a simple 5 step process that will answer any problem question.
1. Capacity of the Company Unless stated otherwise in the articles, a companies objects are unrestricted (Companies Act s.31(1))
Just because a company is able to do something does not mean that it should be done by the director. If the company has capacity and the director abuses his authority then the company can sue the director personally for any loss, but the contract may only be rescinded if it is possible to restore third parties to their precontractual positions (Rolled Steel)
This is a very permissive general position and means that there will almost always be the capacity for the company to do something.
2. CA 2006 s.40 and Turquand's rule These two steps can be used if there is a restriction in the company's articles to still find capacity for the purposes of the contract.
A person dealing with the company in good faith may assume that the power of the board to bind the company is free from any limitation (CA 2006 s.40)
Turquand's rule, described by Lord Simmonds in Morris v. Kansen as: a person who believes that they are dealing with the company in good faith is entitled to presume that the company deals free from restrictions in the articles.
3. Is there actual authority?
This means that the board has power to run the company, and so has actual authority (Model Articles, Article 3)
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