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How do companies contract with third parties?

Directly by the company performing the necessary acts (see sections 124 and 127)

Indirectly through an agent who has authority from the company.


Contracting directly

Traditional method

Traditionally: by using its “common seal”
Seal no longer required


Three ways possible now:

Contracting directly

Execute the document with seal, and necessary witnesses – s127(2)
Execute the document without seal – signed as required by s127(1)
Use procedure set out in constitution


authority for the company to enter the contract

As well as proper signing/sealing procedure, there must also be authority for the company to enter the contract
Normally comes from the board:
Resolution #1 approves company entering the contract (“substantive authority”)
Resolution #2 authorises the execution of the documents in a specified way (“formal authority”)


What are the powers of a company?

S 124(1) Legal capacity and powers of a company

A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to:                      (a)  issue and cancel shares in the company;                      (b)  issue debentures (despite any rule of law or equity to the contrary, this power includes a power to issue debentures that are irredeemable, redeemable only if a contingency, however remote, occurs, or redeemable only at the end of a period, however long);                      (c)  grant options over unissued shares in the company;                      (d)  distribute any of the company's property among the members, in kind or otherwise;                      (e)  give security by charging uncalled capital;                       (f)  grant a circulating security interest over the company's property;                      (g)  arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction;                      (h)  do anything that it is authorised to do by any other law (including a law of a foreign country).


S 125 Constitution may limit powers and set out objects

(1) If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company's exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company's constitution.
(2)  If a company has a constitution, it may set out the company's objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company's constitution.


Purpose of s 127

If a company executes a document in accordance with section 127(1) and (2) then a person dealing with the company can rely on s 129(5) and (6) to assume that the company documents have been duly executed by the company even if it is not true.


Acting via an agent

Company contracting indirectly through its authorised agents on company’s behalf – s 126(1)
This is the most common way a company enters into contracts (i.e. through actions of employees, advisors etc.)


The Law of Principal and Agent

Three parties:
Third Party

Two contracts:
Principal and Agent
Principal and Third party (subject to powers and authority of agent)

Generally, the Board of Directors collectively, is the agent of the company.
Also includes senior employees and directors acting alone
The issue is depending on the level of the person what authority they have to enter into contracts on behalf of the company


S 126 Power of agents

(1)  A company's power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company's express or implied authority and on behalf of the company. The power may be exercised without using a common seal.         
(2)  This section does not affect the operation of a law that requires a particular procedure to be complied with in relation to the contract. (internal rules)


What are the issues when the company acts via an agent?

Practical and legal issues:

How do outsiders know whether the agent they are dealing with has the necessary authority to contract on behalf of the company?
What are outsiders allowed to assume about the agents they deal with?


What are outsiders allowed to assume about the agents they deal with?

Outsiders are entitled to assume certain things in their dealings with the company and its agents


Outsiders are entitled to assume certain things in their dealings with the company and its agents
Reason for these assumptions is to balance competing interests:

to avoid the need for outsiders to check company’s constitution and to investigate whether it has been complied with vs deterring fraudulent behaviour or unjust favour.

to protect outsiders (TPs) who deal in good faith with the company indirectly through the company’s agents so they can assume certain agents have the required authority to act for the company.


Who has authority to act for a company?

The officer(s) must have “authority” to act on behalf of the company

That authority is:
Actual authority (Express or Implied). This is where the principal has actually agreed that the agent can act on the principal’s behalf.

Apparent authority


Express actual authority

Can arise from a provision in the Corporations Act or the company’s constitution (e.g. s198A – Power of Directors)
Can also arise when a company agent (e.g. The Board) who has actual authority delegates some of their own actual authority (e.g. appoint a CEO with certain authority).
Can arise by way of oral or written statement, e.g. The Constitution of the company says ‘Board may make contracts up to $100,000, but above that, shareholder approval is required’.
Can be limited in scope up to level of actual authority, e.g. The Board to MD ‘Managing director may make contracts up to $10,000 in value, but above that value, Board approval is required’


Implied actual authority (IAA)

Implied: although not expressly stated, it is implied by courts in the circumstances as being reasonably necessary to carry out express authority of the position or title you have (flows naturally from express authority).

E.g. Managing Directors: Manage the daily affairs of the company
‘To do all things as fall within the usual or customary scope of that position’: Hely- Hutchinson v Brayhead Ltd [1968]1 QB 549.


What is the usual scope?

Dealing with everyday matters; running the company; supervising others; and being in charge: Entwells Pty Ltd v National And General Insurance Co Ltd (1991) 5 ACSR 424
but NOT selling the company’s business!



Implied actual authority


IAA arising from conduct

IAA can also arise from other conduct
E.g. “acquiescence” or agreement
If board knows that someone is purporting to represent the company, and does nothing to stop that, then board has “acquiesced”
If the person has been doing “CEO type” things, then will probably have the implied actual authority of a CEO in a similar company: “de facto CEO”
Brick and Pipe v Occidental


Apparent or ostensible authority

Agent appears or seems to have authority from the perspective of the outsider because the company has held out or represented the person as having the necessary authority(even if they do not have express/implied authority): Implied from the conduct of the parties and the circumstances
When agent is placed in a particular position by the principal e.g. appointed to manage the business and therefore authority to make contracts that a person in that position customarily has. (Hely-Hutchinson v Brayhead Ltd.)
In Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd the court held that a director was taken to have implied authority


Apparent or ostensible authority

3 requirements:

(i)There must be “holding out” or representation The agent is held out and by words or conduct

(ii) The holding out must be by someone with actual authority

(iii) Reliance by third party on representation and entered into contract


Common Law: The Indoor Management Rule

“Where persons deal with a company in good faith they may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular”
Mason CJ in Northside Developments Pty Ltd v Registrar-General

The outsider can assume:
There have been no procedural defects in the appointment of the directors
A meeting of the Board has been called and held
Any board approval required under the constitution has been obtained


What is forgery?

If forge a signature of some one else (IMR not apply and contract not enforceable) or
If transaction not authorised or seal fixed without authority (IMR applies and contract enforceable)


Is there an exception to the Indoor Management rule?

Does outsider have actual knowledge of the irregularity?
(must know that the agent lacked authority or that contract defective in some other way)
Are they put on notice of the irregularity?
(third party failed to make enquiries that would normally be made or a reasonable person would have made such enquiries in the circumstances)


The statutory assumptions in s128 & s 129

What are they and why do the exist?
Why not rely on the above common law principles?

In practice you will look at the statutory assumptions first but in interpreting them you need to go back to common law principles explained above
The purpose behind these assumptions is to protect outsiders or third parties who deal in good faith with:
the company directly (P) so they can assume those dealings are proper and regular
the company indirectly (through the company’s agents) so they can assume certain agents have the required authority to act for the company


What are the areas of authority that assumptions can be made by outsiders?

Authority of the officers of the company s129(2)
Apparent authority of the agents s 129(3)
Indoor Management Rule s 129(1) (covered in Topic 2)


s 128 – Entitlement to make assumptions

(1)  A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.
(2) …[Acquiring title to property from a company]…
(3)  The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings.
(4)  A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.

Therefore if fraud proved (but third party didn’t know, or suspect) it will still be assumed the contract is valid.


s 129(1) – Assumption that constitution and replaceable rules complied with

S 129(1)  A person may assume that the company's constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with.


Section 129 assumptions: Authority of Officers s 129(2)

Director or company secretary

Director or company secretary
(2)  A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company:
                     (a)  has been duly appointed; and
                     (b)  has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.

Customarily means powers that fall within the scope of that position.
Only applies to director or company secretary.


Section 129 assumptions: Authority of Officers s 129(2)

Director or company secretary

Officer or Agent

(3)  A person may assume that anyone who is held out by the company to be an officer or agent of the company:
                     (a)  has been duly appointed; and
                     (b)  has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.
Proper performance of duties
(4)  A person may assume that the officers and agents of the company properly perform their duties to the company.

Applies to others than directors and company secretary
Applies to discussion re apparent authority