The Principle of Separate Legal Entity

Corporations are guided by the principle of separate legal entity developed in the celebrated decision in the case of Salomon vs. Salomon. There is a veil that is created upon incorporation that separates the company from its members and directors. One of the advantages derived from incorporation is that corporations are capable of entering into valid contracts in their own name as well as being capable of suing and being sued. But since a corporation is not a natural person, there are agents (mostly directors) of the said corporation who are the driving soul and mind of the company. The corporation therefore conducts its businesses including contract negotiations through the use of agents. The agents should always put the interests of the corporation ahead of their own interests in all their dealings. 

The principle of separate legal entity makes it possible for a corporation to recognize and be bound by agreements that the company’s agent enters into with third parties. The corporation appoints officials and officers to contract on its behalf, mostly directors with a scope of authority detailing the extent of their actions and the type of contract that would bind the corporation.

The authority of an agent of a corporation is guided by the law of agency and they are required to act in the interest of the company. They stand in a fiduciary position in relation to the company.

1. Question 1

• Whether EngCo can enforce the contract with Buildco

The main issue is whether Matt had the authority to contract and negotiate a binding contract on the company’s behalf with EngCo. Additionally, is EngCo entitled to enforce the contract, if any?

Transactions by corporations are governed by Corporations Act. Common law rules have also been applied in certain cases to resolve the issue of authority of a corporation’s agent. For instance, the Turquand’s rule in the case of Royal British Bank vs. Turquand (1856) 119 ER 886 did provide the circumstances when a corporation’s agent can act without authority. The rule aims at offering protection to third parties who have no knowledge of an agent’s lack of authority. It makes an assumption that all the internal rules of a corporation including grant of authority has been complied with.

Though the rule has been incorporated into the Corporations Act at sections 128-129, they are applied as the last resort. Courts still explore on the issue of the agent acting with authority. There are two main forms of an agent’s authority; apparent and actual authority. The act of an agent of a corporation always binds the corporation if they are captured in the objects clause of a corporation’s constitution.

Types of Authority in Corporations

This occurs where a principal gives the agent consent to do certain transactions on his or her behalf. This type of authority can be given expressly on can be by implication in certain occasions. In a corporation, appointment to a certain position, say, a managing director gives the appointed person the implied authority to act on certain transactions on behalf and for the benefit of the corporation.

An officer of a company who acts as a managing director acquires an implied authority to do certain acts  that the holder of such office would naturally be expected to do in the circumstances. In Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253, Mr X who was a director at the time was held to have had implied authority to act on behalf of the company when he had a majority shareholding and acted as the managing director after seeking and acquiring the consent of the other remaining directors of the company. He entered into transactions without seeking the consent of the Board of Directors but he was found to have had implied authority.

Normal operations of a corporation may restrict circumstances where its officer may be held to have had an implied actual authority. In Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557, it was held by the court that one of the directors did not consent into according the other director an implied actual authority that is always given to the managing director. The constitution of the company required all directors to give consent and as a result, the said director did not possess any implied actual authority which could be used to bind the company.

This is also referred to as ostensible authority. It does not occur as a result of an agreement or a prior agreement between the agent and the principal. An apparent authority may arise under any of the following circumstances:

• In circumstances where the agent has been permitted by the principal to occupy a certain position.
• The principal by his or her conduct allows the agent to perform certain tasks on his or her behalf, acts which in the natural sense are beyond the agent’s usual natural authority.
• It also arises in situations where the agent has no position he or she holds in the company but the conduct of the principal makes outsiders believe that the said agent possesses the said authority to act.

In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd, Diplock set out the conditions to be satisfied for a corporation to be bound by an agent who acts without actual authority to do so. The set conditions include;

• Making of a representation to third parties and outsiders that the said agent possessed the authority to negotiate and enter into it such similar contracts which the third party intends to enforce,
• The person making such representation must be an individual with actual authority to engage in the actual management of the business of the corporation or possess the authority that relates to the matters of the contract whose enforcement is sought.
• The third party must have been induced to contract as a result of the representation and made reliance on the said representation
• The corporation’s constitution does not prohibit the negotiation and conclusion of such contracts or a delegation to an agent to enter into the said contracts.

The conditions set out by Diplock LJ have been restated with approval in the case of Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Co Pty Ltd (1975) 133 CLR 72.

Matts is an assistant to Jenny at Buildco Ltd. On 10^th February 2018, Jenny went to Tahiti for a three week holiday. While leaving, she made it clear to Matt that he should take care of all issues and not to disturb her on her holiday. The statement allowing Matts to take care of all issues in her absence is a form of authority given to him to act and contract on behalf of the company.

Application of Common Law Rules and the Corporations Act

Matt goes ahead and in consultation with Cath, they contract with EngCo Pty Limited for a major project to build a shopping centre at Rosewood.

Conclusion

The fact that Jenny indicated to Matt that he could take care of all issues without disturbing her is a true representation that he was given actual authority to run the affairs of the company while she was away on holiday. Matt therefore had authority to do all the acts that Jenny could do in her capacity as a managing director except those that required the prior approval by the Board of directors of Builco such as entering into contract with EngCo Pty Limited to build a shopping centre at Rosewood.

Therefore, the contract concluded between Matt and EngCo Pty Limited is invalid; EngCo Pty Limited does not have the right to enforce the said contract and seek specific performance in the circumstances due to lack of authority on the part of Matt.  

The issue is whether Buildco can enforce the extension at the interest agreed to in the exchange of emails by Matt.

An agent with actual authority should not engage in acts that are outside the scope of the authority he or she has been given. Where an agent exceeds his or her authority, the principle has to ratify the acts of the agent for such acts to have a binding effect on the corporation. This is referred to as agency by ratification. Where the principle does not ratify or approve the contract entered into by the agent without authority, such contract becomes void and cannot be enforceable by the third party against the corporation.

Matt is contacted by Sarah, an accountant in Buildco advising him that the company’s loan facility with South Bank needed extension due to a temporary cash flow problem which Buildco had at the moment. The facility was set to expire in 5 days time. Matt then told Sarah to make arrangements for such extension and went ahead tom approve exchange of emails between the company and the Bank. The Bank later refused to release the money on claims that the emails had only been approved by Matt whom the believed to lack authority to approve such contract. 

Conclusion

Builco cannot therefore enforce the extension at the interest agreed to in the exchange of e-mails that had been approved by Matt. Matt did not have the authority to approve the extension of such facilities. The argument that it was a contract of necessity cannot be applied since South Bank is aware that Matt lacked the required authority. The said contract had also not been approved by Jenny since she is the person who always approved such contracts.

The facts have depicted Matt as someone who engaged in acts in which he did not have the authority to engage in. though he had been given actual authority by Jenny, the authority did not extend to the acts he engaged in.

1. The first step that Matt should have been done was to seek that the authority given by Jenny be reduced into writing so that all the acts to be done in the absence of Jenny be clear and in a written document. The document was to be issued by Jenny, appointing Matt as an agent and listing all the acts and contracts he is allowed by the grant of such authority to engage in and conclude on behalf of the company. By having a written document signed by both the agent and the principal, there would be minimal problems since all the acts that the agent could engage in are contained in the said agreement. This would limit and minimize any claims that the agent acted outside his powers especially if the type of contract illustrated by the above facts forms part of the agency agreement. The document could be used by Matt as a defence to show that he actually had the authority.
2. The other step that could be open to Matt is to seek ratification of the contract by Jenny, the principal. An agent who acts without authority can seek that the contract be ratified so that it binds the agent and the company. Matt should have contacted Jenny immediately she returned from holiday and briefed her on all the contracts he engaged in in her absence and sought that Jenny ratifies them to avoid claims that he lacked the authority to act and bind the company by his actions.

The application and use of the two actions/steps briefly discussed above would ensure that the contracts conclude between Matt and third parties acquire a binding effect on both the principal and other third parties. Claims that Matt did not have the authority to enter into such contracts on behalf of the company would therefore not arise. 

Books

Brian, Cheffins  Company law: theory, structure, and operation (Oxford: Clarendon Press; 2007)

Paul, Davies. Gower & Davies: the principles of modern company law (Sweet & Maxwell; 2008)

Paul, Davies, Gower, Lone. Davies: Principles of Modern Company Law (London, Loweet and Maxwell. 2003)

Hickman, Farrar. Corporate Governance in Australia and New Zealand (Oxford University Press, USA; 2001)

Ford A, Austin P, Ramsay I. Ford’s principles of corporations law ( Butterworths; 2005)

La Porta , Lopez-de-Silanes , Shleifer , Vishny. Investor protection and corporate governance (Journal of financial economics. 2000)

John, Montrose. The apparent authority of an agent of a company (LQ Rev. 2004)

James Sealy &Paul, Worthington. Sealy & Worthington’s Cases and Materials in Company Law (Oxford University Press; 2013)

Ron, Tomasic, Mark, Bottomley & Roy, McQueen. Corporations law in Australia (Federation Press; 2002)

Ron, Tomasic. The Modernisation of Corporations Law: Corporate Law Reform in Australia and Beyond’ (2006) Australian Journal of Corporate Law; 19:2

Case Law

Salomon vs. Salomon

Royal British Bank vs. Turquand (1856) 119 ER 886

Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253

Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Co Pty Ltd (1975) 133 CLR 72