Corporate Contracting via the Company versus via an Agent - Essay Example

Corporations Law. -Corporate contracting via the company versus via an agent. Introduction Corporations are separate legal entities having legal capacity and powers of an individual as per s 124 of the Corp Act. They can therefore enter into contracts directly by its common seal or through authorized persons who sign the contractual document. This implies individuals must be authorized to use the seal and sign the document. However problems can arise if the individuals exceed their authority in using the common seal and signing on company’s behalf. The law also provides alternative means to direct contracting by giving persons within the corporation to enter into contracts on corporation’s behalf. This is to act as an agent of the corporation and it may be on continuing basis through corporate constitution or on selective basis depending on the exigency or particular situation. It follows therefore the law relating to agency should be looked into in order to understand or fully appreciate merits and demerits of corporate direct contracting or contracting via agent.1 Agency law Agency law facilitates two persons to enter into contracts with each other in certain situation in which one of them is not directly participating in the process of yet another contract or set of contracts on a continuing basis. This leads to formation of relationship between three parties. They are the agent, principal and third party. Agent acts on behalf of the principal who comes into contractual relationship with the third party through his agent. It is only for the purpose of the principal and the third party coming together, an agent enters into the picture and therefore actual parties to the contract are the principal and the third party and the agent is not a party to the contract. However, the principal is bound by the actions of the agent by entering into contracts with third parties on behalf of the principal, subject to exceptions. Agent gets the power to act by the authority. Question arises whether a director or an employee can act as agent of the corporation where he is the director or the employee. 2 This will be examined after discussing of the principles of agency, authority and position relation to pre-incorporation contracts. Actual Authority The most obvious way of giving authority to an agent is by expressly giving authority to him. This way the principal and the agent reach a consensual agreement about the authority being granted. The agreement will stipulate the extent of authority of the agent, limitations on the authority if any, duration of the agency etc. Hence it is by the same way of applying contractual principles, the scope of an agency agreement is determined and in so doing, implications of any express wordings, trade custom and “the course of business between the parties” are taken into consideration.3 The express grant of authority will vary in forms in that it will be by way of deed in some cases and just by writing in some others. Where there are no legal requirements, it can be also by an oral agreement though there will be evidentiary problems later in case of disputes. The written agreements by express authority also may not cover all aspects of agency functions such as when appointments of managing director or company secretary are made. Hence the implied authority is discerned by examining the circumstances of the appointment, the circumstance and manner in which the managing director is running the business of the corporation and the circumstances of the particular transaction in question. 4 Lord Denning said in Hely-Hutchinson v Brayhead Ltd5 that there may be powers by express authority which will give rise to implied authority from the express grant of powers. The implied authority may actually arise from agent’s actual authority as occurred in this case by virtue of conduct of the principal and the agent. Though the chief executive officer (CEO) had not been expressly appointed as such, the company acquiesced in him acting as the CEO. Apparent/ostensible authority In many circumstances, the third party will not know the nature of the authority the agent may possess in which case the third party will have to just rely on what appears to be the authority of the agent. It can result in two risky situations i.e, either the agent may have no authority at all or he may be exceeding his authority. In order help third parties to such situations, the doctrine of ostensible or apparent authority will be invoked. It can be discerned by examining the manner in which the principal conducted himself before the third party. The apparent or ostensible authority is actually the legal relationship between principal and the third party created by a representation which the House of Lord stated as follows: An “apparent” or “ostensible” authority … is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent authority”, so as to render the principal liable to perform any obligations on him by such contract. To the relationship so created, the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract.6 Hence if the third party is aware that agent has no authority at all or only limited authority, he cannot avoid his liability saying he believed that agent had wider authority. The principle of ostensible authority can overlap the implied actual authority but the distinction is that implied authority arises by relationship between the principal and the agent whereas ostensible authority arises by what transpired between the principal and the third party. Thus an agent can have ostensible authority via-a-vis the third party and no implied authority vis-à-vis the principal.7 Hence the ostensible and actual authorities are different i. e they are independent and indeterminate and the concept of ostensible authority cannot be understood without understanding the meaning of actual authority. Authority by Ratification If a person acts as an agent without an actual or apparent authority, the putative principal may later ratify the actions of the agent provided the principal himself was having capacity to enter into contract at that time of original date. This has the retrospective effect on the grant of actual authority and the principal-agent relationship is deemed to have existed from the time of the contract. Pre-registration contracts Promoter of company undertakes several tasks for bringing the corporation into being. Since corporation comes into existence only after registration for which the promoter undertakes several tasks such as leasing or purchasing premises for the corporation, purchasing machinery, recruitment of staff and similar purposes, question arises whether the actions of the promoter can be binding on the corporation after it comes into existences. In the above, it was seen the principal should have had the contractual capacity at the time of promoter making the pre-registration contracts. In other words, whether corporation alone is liable or both the promoter and the corporation are liable have to be examined. Sections 131 to 133 of the Corp Act deal with these matters. Section 131 enables a person to enter into contracts prior to registration of a company on its behalf and for its benefit. Thus section 131 (1) will help the person who is the promoter purporting to enter into contract as an agent or trustee for the company under formation. In common law, the promoter was held liable.8 The section also applies when promoter executes contract in company’s name although it does not exist at the time of contract. At common law, the principle of company’s existence was rejected and held there was no contract especially when promoter did not undertake personal liability.9 The section can now be applied in situation of the promoter entering into contracts in the mistaken belief that the company is in existence. This also was held as nullity at common law 10 Two types of liabilities arise as primary liability and secondary liability though no such terms are used in the section 131. Primary liability is the one owed by the corporation to third parties for contracts entered into by the promoter. Sometimes the corporation may fail to meet obligations in breach of contract when the promoter will be called upon by the court to meet them as per section 131(4). This is called secondary liability of the promoter. This is necessary to prevent possible misuse of the provision by a promoter by conducting sham transactions for a non-existent company and ultimately avoid the obligations to meet them. 131(4) is the provision for the court to “lift the veil of incorporation”11 The above cover primary liability of the corporation and secondary liability of the promoter. There are situations where promoter as an agent has the primary liability and the corporation as the principal has the secondary liability. Primary liability for the promoter to pay damages to third party arises when the company does not get registered or when it does not ratify even after registration as per section 131(2). It should be noted that the section 131 is concerned with a person who need not be a promoter. Thus in Bay v Illawarra Stationery Supplies Pty Ltd12 , Bay was one of four promoters engaged in forming a company. The promoters engaged Dyke to assist them in the promotion. Consequently Dyke entered into pre-registration contract with the Illawarra in the name of the company the other four were promoting and yet to be registered. Illawarra demanded payment from the four promoters as principals including Bay. Because Dyke was liable as per section 131 as an agent, his principals were liable. Bay’s argument was that Dyke was not his agent and hence Dyke alone was liable to the company. Court agreed as the person engaged in pre-registration contract was alone liable as per the provisions of sections 131. Secondary liability of the company arises where it fails to ratify the pre-registration contract. Section 131(3) enables court to order the company to meet obligation using its discretionary power.13 Contracts after incorporation Section 124 confers legal capacity for company to enter into contracts immediately after registration. It cannot however be achieved without a human intervention. 14 Sections 126 and 127 recognise post-incorporation contracting by the company on its own and through an agent. Contracting via an agent Section 126(1) provides for a person to act on behalf of a company if he has express or implied authority. At common law, company is liable for the acts of a person with ostensible authority of the company. However, scope of actual authority and company’s representation on the apparent authority are subject speculations. Hence to avoid difficulties, Corp Act has provisions in section 128-130 to clarify the authority unambiguously Actual authority of company agents As per section 126, a person with an express or implied authority can make, vary, ratify or discharge a contract of the company by acting on its behalf. Whether the person has the actual authority can be ascertained only by verifying how the authority has been distributed within the management structure of the company. Replaceable rules and constitution of the company can provide necessary information in this regard. Replaceable rule in section 198 A says that a company can give full discretionary power to its directors for managing the company. But in practice, they do not always directly deal with third parties and they delegate powers for day-to-day management to the other officers of the company. This delegation was upheld in AWA Ltd v Daniels by Rojers J. 15 Section 198 A (1) also states that company’s business can be managed by directors or under their directions. Section 201J has a replaceable rule providing for appointment of a managing director by the directors. Hence the key company officers are supposed to have actual authority conferred on them by express or implied terms subject to certain limitations. Thus an individual director cannot have actual authority to bind the company by merely being a director.16, though exception to this is applicable to a proprietary company having only one director. In Northside Developments Pty Ltd v Registrar-General17, Dawson J held that directors could only act collectively as a board and individual director could only take part in the decision making process by the board. Lord Denning held in Hely-Hutchinson18 even the chairperson is similarly placed as a director unless he is authorised to act in a particular manner by the board. But at the same, a managing director is deemed to have acted with actual authority if he has been already authorised by the chairperson even to act as the chairperson.19 Similarly the managing director and the company secretary can act as authorised by the board. Although the company secretary’s position does not involve actual authority of a director, he still acts and negotiates on behalf of the company in the matters connected with administration such as appointment of staff, purchasing cars etc and therefore is deemed to have actual authority delegated by the company as held in Panorama Developments (Guilford) Ltd v Fidelis Furnishing Fabrics Ltd.20 Court also held that the company secretary had apparent authority to enter into contracts for hiring of cars on company’s behalf. Apparent authority of company agents Section 128(1) provides that persons dealing with the company are entitled to make certain assumptions regarding the authority of persons whom they are dealing with, without having to check theses assumptions any further. The assumptions are found in section 129 subject to exceptions as set out in section 128(4).However the parties dealing with the company need not make these assumptions for relying on them as held in Lyford V Media Portfolio Ltd 21. The decision states that although section 128(4) entitles a third party to make assumptions, it does not require that those assumptions must be proven to have been made. The assumptions are available to persons dealing with the company. Direct Corporate Contracting A company can make direct contracting in two methods. One with the common seal and the other by the persons acting as the company. Thus when the seal is affixed, it requires to be witnessed by two directors. The seal affixing is not mandatory now in all trivial matters. Hence seals are sparingly used only in share certificates, debentures, and instruments for transfer of company property and security documents such as mortgages. The second method of contracting directly is by the persons acting as the company. Discussion and conclusion From the above, it would appear that a company can contract directly and through its agents. An organ of the company can be the chairperson, managing director, director, company secretary or any other officer. It is only to avoid the possibility pf third parties being exploited even by the remotest chances, the corporation act has brought in exhaustive provisions discussed above. At the same time, the company has been made a separate legal entity with wide powers so as not be exploited by even by its owners. By virtue of being a separate legal entity, the corporation is enabled to recognise and exercise actual authority and ostensible authority both for itself as well as its agents. It would therefore appear that difference between the company acting directly and through agents have the same end result. Each method of contracting is designed to meet a particular situation so that both the parties to the contract are not denied of their legitimate rights and also at the same time prevented from avoiding their obligations. Bibliography Books Peterson WE and Ednie HH, Austrailian Company Law, Butterworths, Sydney, vol 1, 1971, p. 1478 Roman, T, Bottomley, S, McQueen R, Corporation Law in Australia, ed 2, Federation Press, 2002 Stone R, Usual and Ostensible Authority- One Concept or two, 1993 JBL 325 Cases AWA Ltd Daniels, 1992, 10 ACLC 933 at 1013 Bay v Illawarra Stationer Supplies Pty Ltd, 1986, 4 ACLC 429 Black v Smallwood, 1966, 117, CLR 52 Freeman and Lockyer v Buckhurst Park Properties (Managal) Ltd, 1964, 2 QB at502 per Diplock LJ Hely-Hutchinson v Brayhead Ltd, 1968, 1 QB 549 at 883 Kelner v Baxter, 1866, LR 2 CP Lyford V Media Portfolio Ltd, 1989, 7 ACLC 629 at 640 Panorama Developments (Guilford) Ltd v Fidelis Furnishing Fabrics Ltd., 1971, 2 QB 711 at 716-17 Necy Pty Ltd v Ritek Incorporation, 1997, 15 ACLC 813 at 817 per Lechane J Newborne v Sensolid (Great Britain) Ltd, 1954, 1 QB 45 Northside Developments Pty Ltd v Registrar-General, 1990, ACLC 611 at 645 Re Haycraft Gold Reduction & Mining Company, 1990, 2 Ch 230 Read More