Corporations Law in Australia - Essay Example

Corporations Law A contract can be defined as a legal exchange of assurances between two or more individuals or groups to do or to refrain from doing a certain act or deed. A contract, by virtue of the fact that it is legal is normally enforceable in a court of law. It is an agreement that is binding in its nature (Carter and Peden, 2005). This basically means that in case any of the parties refuse to fulfill the terms of the contract thereby giving rise to a dispute, the dispute will be resolved by a legal remedy provided in a court of law. By this definition therefore it would become clear that Contract Law would be made of and would include the laws and regulations that are aimed at enforcing the agreements that have been entered upon by willing parties (Poole, 2008). In Australia contract law is regulated primarily by the 'common law', but there are more and more decrees that are being passed thereby supplementing the common law of contract - particularly in relation to consumer protection. Abstract: The following paper seeks to explain the statement that was made in ‘Companies and Securities Law, Commentary and Materials, Redmond P. 5th ed, at page 279’, which says “Where an organ contracts in the name of the company, its act is the act of the company itself which contracts directly by its organ. The position is different, however, when the company contracts through an agent whose act is for, but not of, the company”. It will also further try and analyze whether or not distinctions made are on the basis of technicality rather than practicality. Accordingly the paper through an analysis of case law and a review of the literature will seek o analyze the significance of the differentiation. In most cases a company irrespective of its size and number will seek to enter into an agent will an outside entity through the offices of an agent. A review of Sections 128 and 129 of the Corporations law, 2001 need to be used and reviewed in order to understand the statement in better light. Section 128: The law states in this regards that a person may assume that anyone who is held out by the company to be an officer or agent of the company has been duly appointed; and has an authority to exercise the powers and perform the duties that are usually exercised and by the same kind of officer in a similar company. This basically means that an agent who is dealing with an outside party and negotiating on say a contract or a deal has an authority to do so because he has been nominated to take care of such negotiations by the company in question and the outside authority therefore has to consider and give weight to negotiations carried out by the agent same as it would have been in case they were carried out by the company itself.              Section 128 goes on to state that the third party may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). Section 128 also states that it may be assumed that an officer or agent of the company who has authority to issue a document or a certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a true copy. Section 129: The second section in the Corporations Act, 2001 that deals with the topic in question is Section 129. It basically states the conditions on the basis of which the third party is to assume he conditions on the basis of which it is to assume that the agent is acting on behalf of the company. 1. It is entitled to make the assumptions 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. A person is entitled to make the assumptions in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company. The company and the other person are not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. 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. The meaning of the statement that has been made by Redford can be understood in the context of the organic theory (Goldring and Lawrence, 1998). The organic theory is basically a theory of protectionism which ensures the fact that the investors feel secure enough to come forward and put money in an organization (Melbourne University law Review, Anderson, 2006). Courts rely on the longstanding legal doctrines of limited liability, separate legal entity and the organic theory, without actually questioning if these are of any use in order to achieve either economic efficiency or fairness (Farrar, 1998). The organic theory basically can be understood in terms of the concept of protectionism. It means that the corporation is a separate legal entity and that it has a life of its own. Thus a contract that has been entered into by an organ or an agent of the company is different from a contract that the company enters into itself. If it is indeed the agent that is entering into the contract then, there are a number of variables that are to be considered to justify whether or not the contract entered into is indeed applicable to the company as well (Common law). The first variable under consideration is that a contract can only be binding on a company if it is entered into by an agent of the company with the company’s authority. This means in essence that the contract can be declared void in case it can be proven that that the agent's authority is "denied" by a company (Freeman and Lockyer v Buckhurst Park properties (Mangal) Ltd [1964] 2QB 480 at 502 per Diplock Lj). The idea here is simple. Actual authority is the authority granted to an agent by a company in question by virtue of a consensual settlement or contract to which they alone were party. The act has further specified that in relation to companies, an agent's actual power to act for the company in question may arise from: an internal management rule in the Constitution of the company; an in-house management rule that has been stated in the in the CA; or Any such power has its source in the consent that has been given by someone who has an authority to give such consent on the company's behalf, such as by the board of directors. There can also be a condition where the agents are vested with express or implied actual authority to contract on a company's behalf. The concept can be understood in terms of Lord Denning’s judgment in Hutchinson v Brayhead Ltd: [An agent’s actual authority is express when it is given by express words, such as board of directors pass a resolution which authorizes two of their number to sign cheques. It is implied when it is inferred from the conduct of parties and the circumstances of the case, such as when the board of directors appoint one of their own to be managing director. They thereby impliedly authorize him to do all such things that falls into the scope of that office], (retrieved Tomasic, 2002, p216). Section 127 is clear with regards to what exactly it is that constitutes a contract as drafted negotiated and entered into, by an agent a real and valid contract. The first method is that of the common seal. If the company has affixed its seal and the fixing of the seal has been witnessed by two directors, a director and secretary, or the sole director of the Pvt company. If the director happens to be the sole secretary the clause that is applicable is 127(2). The second method is when the document has been signed by (a) two directors, (b) director and Co Secretary or (c) sole director of Pvt co (if that person is also sole secretary then again clause applicable is 127(1). Before going into the nuances of what exactly it is that the statement made by Redmond is supposed to mean it is required that one understand the difference between a direct and an indirect contract. A direct contract is marked by non complying execution i.e. the company despite the fact that it is not bound by a contract takes it upon itself tom properly execute the tenets of an agreement. Here one can consider the example of ‘Northside Developments Pty Ltd v Registrar- General (1990) 170 CLR 146, at 202 (Dawson J)’ where the standing judgment was that “the authority to affix the seal is not the same thing as authority to determine those documents to which the seal should be affixed” Authority by which a contract is executed is of two kinds primarily- formal authority and substantive authority. The absence of either will mean that the company is not bound by a contract which on its face appears to be properly executed a ‘direct contract’. It is here that one has to understand the exact implications of the term ‘agent’. An officer of the company, as an agent of the principle, can bind his/her company only if the officer has the authority to act for the company. An indirect contract in this context is formed when it has been executed ‘for and on behalf of the company. The only point of contention that arises in this regard is whether or not the agent posses the requisite authority to bind the principle in question. There are two types of authority: actual and apparent authority. Actual authority is when the company has agreed that the officer can act on its behalf. Apparent or ostensible authority which (a) does not require an agreement conferring authority to act upon its officer, (b) officer binds the company because the agent appears to have the requisite authority and (c) officer may have evident authority even though this does not translate into actual authority. Actual authority can again be of two kinds: Express and Implied. The authority by virtue of which the agent makes a negotiation or decision in question is called Express Authority. This kind of authority finds its sources in Empowering provision of the corporations act, 2001, the company’s constitution (198A (2)) or a delegation of authority to the agent by the company’s directors. The act further permits the board to delegate all or any of its powers to the Managing Director (198C (1)). Implied authority on the other hand will has its source in powers implied in the post that is occupied by the agent in question or the company’s board has given legitimacy to the conduct of the agent. If observed closely however the tenet turns to be a more of a technicality which has been provided in the Corporations Act, 2001 to minimize the risk of unenforceability for the outsider. It is in fact in this regard that one has to review not just the Corporations Act, 2001 but some of the landmark judgments that have been passed in this regard along with some other case laws. The reason for this kind of a hypothesis is simple. A contract that has been entered upon by an officially recognized agent of a company within the scope of powers as have been allotted to the agent by the company then the contract as it stands is a contract that the company has to honor irrespective of whether the contract was of company or for the company. The Rule in Turquand’s case (Royal British Bank v Turquand (1856) 119 ER 886) has traditionally struck a balance where officers of a company act without authority. It protects outsiders and enables them to enforce contracts against a company. The only hitch in the matter would probably arise with regards to the authenticity of the agent. Disputes can also arise when the principle argues that the agent has acted outside the purview of the powers that were allotted thereby making the contract hitherto entered into null and void. In recent times this issue of corporate authority has most often arisen in the context of financial transactions where a company has contested the validity of a document executed under the seal of the company. From the point of view of lenders such as banks, the most important issue that has arisen is the scope of exceptions, that is, whether the lender was put on inquiry by the circumstances surrounding the formal execution of the contract. Under the present structure of corporate authority and the present law however, the assumptions that have been put forward are a mere technicality. In order to understand this one needs to observe the course of the corporate ladder. The MD/CEO of any given corporate has sufficient authority to bind the company in any given contract. They have an implied authority to do all things that basically fall within the scope of their office. The judgment in the Hely-Hutchinson v Brayhead Ltd (1968) 1 QB 549 case is an example in point. The functions in question are inclusive of the day to day management along with the supervision of senior executives-Entwells Pty Ltd v National and Geneal insurance co Ltd (1991) 5 ACSR 424. Senior executives in the company have all kind of implied authorities to bin the company to a contract. This authority can rest on the CEO/CFO by virtue of it being part of their post or it can be expressly delegated to them by the borad-198D (1) (c). Implied actual authority in this regard exists in relation to the conduct of the person in position. This happens when the person acts as if he/she has authority to bind the company and board of directors permits that person to act in the manner that he does. There are two considerations in this regard. (a) A director of the company who, despite not having been appointed the MD acts in the capacity of the MD with the approval of the board. In this case the person in question enjoys the same implied authority as the duly appointed MD if he decides to bind his company- the judgment in the Hely-Hutchinson v Brayhead Ltd is a case in point. A second typical case of implied actual authority is when a de facto MD/CEO is typically a director of the company who assumes executive control. A controlling shareholder can also be a de facto MD/CEO. The Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd is a case in point. At first instance, defendants argued that if there was no board meeting and the deed was otherwise irregularly sealed, there was nevertheless the unanimous support of the membership of Brick and Pipe (i.e. the parent company and its controlled Mr. Goldberg) because its only shareholder supported giving the guarantee in that Mr. Goldberg (the shareholder’s spokesperson and director) had directed its execution. Apparent authority is when the company is bound by the acts of a person even where there is an absence of express or implied authority when the establishment of ostensible authority creates an ‘agency by estoppel’ i.e. the company is precluded from denying that the agent lacked authority. There are prerequisites to be considered. These include: The principle of representation or ‘holding out’ which means that the person must be represented by the company as having the requisite authority to act Representation must be made by someone with actual authority- Crabtree- Vicers Pty Ltd v Australian Direct Mail Advertising Co Pty Ltd (1975) 133 CLR 72 The third pre requisite is that of reliance i.e. the third party must have entered the contract with the agent in reliance on the representation of apparent authority- Freeman and Lockyer v Buckhurst Park properties(Mangal) Ltd [1964] 2 QB 480 There are a certain number of defects that have been identified with the legislation. It is here that the rule of the indoor management comes into the limelight as well. There is a duty on the part of the directors to act in good faith and the best interests of the company. [s 181(1) (a), Corps Act, 2001]. The idea is that there cannot be a question that a reasonable person, in the direct officer’s position who will not act in good faith to promote the best interests of the company- Hutton v West Cork Railway Co (1883) 23 Ch D 654. In conclusion therefore it maybe reiterated that the law as it exists now it basically a method of protecting the outsider from over enterprising individuals and corporates who seek to make use of a technicality in order to get of contracts that they do not want to honor. There are of course a number of restrictions and conditions that need to be fulfilled but in most cases an officer under present circumstances there in fact is very little that they cannot are not allowed to do. The difference between a decision that have been made of the corporate and one that has been made for the corporate is basically the same thing. Reference: Carter J and Peden E, (2005), The natural Meaning of Contract, Journal of Contract Law, Vol.21 No.06/58, p277 Poole J, (2005), Contract Law, Ed.9, Published by Oxford University Press p33-49 John Farrar, ‘Frankenstein Incorporated or Fools’ Parliament? 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