Company Contracts Cases

Company Law Supervision IV – Cases

COMPANY CONTRACTS

Actual Authority

Implied Authority

Hely-Hutchinson v Brayhead Ltd [1968]

Richards, a director and chairman of defendant company, was accustomed to entering into various contracts on D’s behalf and only informing other directors subsequently. C was managing director of a company with whom Richards had contracted. When C sued D under contract, D alleged Richards had no authority to enter contract in question on behalf of D. Held:

Lord Denning MR

Implied Authority

Authority is may be express or implied

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

e.g. X is managing director

X has implied authority to do anything

e.g. X is sales director

has implied authority to enter contracts of sale

Ostensible Authority

Ostensible authority often coincides with actual authority

E.g. where X is appointed managing director, also has ostensible authority to do anything usually falling under powers of a managing director

Thus here, even if X is expressly restricted from entering contracts of more than 1,000, will have ostensible authority to enter contracts of greater value

Facts

Richards had implied authority to enter into contract from circumstances of case

Richards did not have implied authority from nature of office

i.e. is nothing special about position of chairman entitling him to enter any contract without board approval

2. However did have implied authority from the acquiescence of board in his practice of entering contracts on behalf of company over period of many months

Harold Holdsworth [1955]

X was appointed managing director of a company; under terms of appointment was stated that X would carry exercise the powers of the company as would be from time to time vested in him by board of directors. Board decided to make X concentrate exclusively on a subsidiary company; X stated that this was repudiation of contract of employment as it was inconsistent with his role as managing director. Held:

Terms of appointment made it clear that X, as managing director, only had so much power as board might vest in him.

Thus board’s later decision was not breach of this agreement.

Panorama Developments [1971]

X was a Secretary of a company. He hired cars, claiming they were for use by company’s employees in their business; however he fraudulently used them for his own purposes. Held:

Company secretary has implied authority to bind company in relation to administrative matters

Thus X had ostensible authority to enter into hire contracts.

Thus company liable.

Improper Purposes/Bad Faith

Hopkins v TL Dallas Group [2004]

Director signed letters of undertaking on behalf of his company to pay 1 million to company B. He did so fraudulently for his own benefit. Company B attempted to get payment from director’s company. Held:

Director does not have actual authority where he acts for:

1. Improper purposes

2. Or in bad faith

   Thus where director acts contrary to interests of his company, does not have actual authority.

   This may be case where e.g. director signs contracts which are very onerous and disadvantageous for his company

Facts

Director did not have actual authority to sign letters.

Did not fall within scope of his implied authority as director

He acted in breach of fiduciary duty when doing so

In addition, Company B could not rely on ostensible authority

very facts which amounted to breach of directors’ duty put Company B on notice of lack of authority

i.e. transaction were so disadvantageous to director’s own company that Company B should have known director was acting in breach of duty

or at the least, should have asked the other directors to confirm validity of transaction

thus party cannot rely on ostensible authority where he is on notice of lack of authority

Criterion Properties plc v Stratford UK Properties [2004] (HL)

Two companies formed a partnership. Fearing that their company would be taken over, directors of first company (C) signed ‘poison pill’ agreement with second company (D) stating that in event of C being taken over, D would have right of favourable buy-out. Takeover did not materialise, but D refused to rescind agreement. C applied to have agreement set aside, on grounds that its directors had acted improperly when entering agreement (as the agreement was to commercial disadvantage of C) and that D had known this was the case.

In Court of Appeal, was held that use of powers by C’s directors was improper and that as D had known this, it would be unconscionable for them to rely on agreement. Held in HL:

Issue is not one of unconscionability.

Rather when third party seeks to uphold contract, question is always whether the agent had authority or not

Whether it would be unconscionable for T to rely on contract is irrelevant

Where third party knows that contract is contrary to commercial interests of company, is almost never ostensible authority.

i.e. as here, T cannot claim with any credibility he thought director had actual authority.

On facts, unclear whether there was ostensible authority or not.

Heinl v Jyske Bank [1999]

Section 40

Smith v Henniker-Major & Co [2002]

C was a director of company. Believed that two other directors had breached their duties by unlawfully diverting business from company towards themselves. Company had right of action against these two directors. By time this happened, both wrongdoing directors had resigned; was only one other director remaining. C called meeting to pass resolution, but other director did not turn up. C, not knowing that there was provision under articles requiring a quorum of 2 in directors’ meetings, passed resolution assigning company’s right of action to him. He then sued solicitors who had advised the two directors.

Under section 35A (which is now section 40), word ‘directors’ was replaced with ‘board of directors’. Thus issues were whether:

1. A sole director is capable of dealing with the company

2. If that was case, whether what is now section...

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