Contracts with Companies - Essay Example

Running Head: Contracts with Companies Contracts with Companies Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecture Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 7th September, 2012. Introduction Under Australian law companies are recognized as legal entities separate from the people who own or run them. However as a company is an abstract representation it can only enter into contracts with other people through agents of the company. In some instances there have been disputes whether particular individuals have the capacity to enter contracts on behalf of the company. As contracts affect people who are outside the company these disputes may negatively affect other legal entities who deal with the company negatively. This problem mostly occurs where a company board of director’s refuses to pay creditors purporting that the contracts entered on their behalf by a representative is not binding. This paper looks at how the law protects person’s dealing with companies from being taken advantage in a scenario’s where a corporation denies existence of a contract even though the Person who made the contract was acting on behalf of the company. It also explores what action a corporation can take against an employee who binds the company to a contract without the express authority of the company. Issue From the facts of the case the legal issue that can be established; is whether Fred had the legal capacity to enter into a contract that is legally binding for the company? As it is clears the company had not expressly given Fred the authority to act on its behalf there thus arise of a question of whether Fred could have had implicit authority. Secondly an issue of the actions that Fred’s company can take against him if it finds that he acted beyond his authority? The Law To determine the validity of a contract the various elements of a contract have to be present in the contract. The elements are1; 1. Intention to create legal relations 2. Agreement; where there is an offer and an agreement 3. Consideration; where something of value has to change hands 4. Capacity, the person making the contract must be must be able to handle contractual obligation 5. Consent – the contract must express the genuine intention of the parties 5. Legality of objects– the intentions of the contract must not constitute an illegality 6. Form – whether written or oral; both are enforceable. Under common law matters of implicit authority is defined as authority to act on behalf of a principal even if the principal has not expressly granted the authority2. It is determined by application of rules established as far back as the 1800s. In Royal British Bank v Turquand' (1856) 6 E&B 327 the indoor management rule established that a person who is dealing with a company need not know about the internal operation of a company to determine whether the agent they are dealing with has the capacity to contract.3 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 also established the following conditions if implicit authority is to recognized4; 1. A representation must have been made to the outsider that the agent represents the company. 2. The person conferring the authority to the agent must have explicit authority from the company. 3. The person entering into contract must rely on the depiction of legal capacity to enter into a contract; 4. The undertakings of the contract are within the limits of the company. Statute law recognises corporation as having the same capacity to contract as ordinary individuals. Section 124 of the Corporation Act 2001 (cth) states that; ‘a company has the legal capacity and powers of an individual both in and outside this jurisdiction’5. In section 126 the Corporation Act 2001 (cth) recognises the power of agents ‘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’6. It also entitles people who are dealing with the company the right to make some assumptions about the company’s internal operations. Most importantly section 129 (8) allows a person to ‘assume 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’7. At common law the issue of an agent’s liability to a principal for entering into a contract was established in Turbin v Bilton (1843) 5 Man & G 458. It established that a person who acts on behalf of another must act within the authority of the principle or otherwise he will be liable for any loss sustained by the principal due to his conduct. Application It is evident that the contract between Fred and the salesman was intended to create legal relations as it was made in a business setting. Secondly, evidence of the offer and agreement is clear in the case as the salesman dropped into Fred’s office with the offer which he said would expire before the end of week thus Fred accepted the offer immediately. The third element of a contract, capacity to contract is questionable as Fred had been left in-charge of the office during the absence of his manager but was told to make no changes to the way things were. Consent as the fourth element of a contract is also present as both parties in the contract agreed to exchange something willingly and their intentions for the contract was genuine. Fifth, legality of objects is also present as the intention of the contract does not constitute an illegality as it is a normal sale of goods contract. Finally, the contract is in a written form which means all its terms are clearly set out in writing. The question of whether Fred has the capacity to contract can be determined by looking at what entails the capacity to contract in law9. First, it is not in doubt that Fred as an individual has the capacity to contract as he is an adult and does not have any mental condition that may affect his capacity to contract. It is also clear that Fred’s organization as a corporation also has the capacity to contract as authorized by Section 124 of the Corporation act 200110. In light of this the only question of capacity to contract is whether Fred had the capacity to act on behalf of his company. Section 126 of the Corporation Act 2001 (cth) allows Fred as an employee of the company to enter contracts on behalf of the company but limits it to occasions where he has explicit or implicit authority of the company11. The question of whether an employee of a company has implicit authority of the company to act on its behalf while entering into a contract is a tricky one. It is clear from the cases Fred did not have the explicit authority of the company to enter into a valid contract. But, the salesman can argue that he had implicit authority by way of being an assistant manager and the fact that he had been left in-charge of the regional office when the manager took a one week holiday. By use of Turquand rule the Salesman can disapprove the company’s argument that he did not have the capacity to contract12. However, this argument would be hard to prove going by past judgments on the same issue. The salesman may also quote Hambro v Burnand [I9041 2 KB 10 where it was established that a principal cannot deny the existences of a contract because the agent representing the company has acted inappropriately in the contract13. In Freeman and Lockyer during the absence of the actual managing director the board of directors appointed among themselves an acting managing director14. The acting director made a contract with an architect firm which the firm declined to pay arguing the director in an acting capacity did not have the authority to transact any business on behalf of the company. At the court of appeal it was ruled the Plaintiff was bound to the contract made by their acting managing director as the board has held him out as their representative15. In the ruling the judge set out the following conditions that imply an agent of a company has the legal authority to enter into a contract. Under the conditions set out under Freeman and Lockyer, it is clear that Fred does not have the authority to enter into contract with the Salesman16as the company had not held him out. The common law decisions discussed above deal with contracts made by directors and unlike in the case where the Fred is a mere employee of the company17. The salesman can rely on the Section 129(3) of the Corporation Act 2001 entitles him to assume Fred as the acting manager of the regional office has been conferred with the authority to enter contracts just like other regional managers in similar firms18. Since Fred acted against the express authority of his manager it can be argued he contravened the rule in Turbin v Bilton (1843) 5 Man & G 45 that requires him to act within the instructions of the principal19. Conclusion From the discussion above it is evident that Fred did not have the express authority of the firm to enter into contract with the salesman. However, since Section 129(3) of the corporation act entitles a person dealing with an employee of a corporation to make assumptions that he has the capacity to enter the contract between the Salesman and Fred’s company is valid. It is clear Fred acted beyond his authority as he had been instructed to change nothing but this is of no consequence to the validity of the contract as the rule in Turquand makes it unnecessary for him to check if Fred had placed in a place of authority in regard the contract. Fred’s apparent disregard for the instruction given to him by his boss not to change anything finds him liable for the loss sustained by cancellation of the contract. Although all the rulings in similar cases point out that Fred lacks the capacity to contract, the statutory assumption in corporations act are enough for the salesman to show Fred had the implicit authority of the company. Therefore, the salesman can recover the early termination charges from the company who in turn will pass the liability to Fred. Bibliography A. Articles/ Books, Reports Ford, H.A.J., Austin, R.P and Ramsay, I. M, Ford’s Principles of Corporations Law (10th Ed, 2001) Grantham, R. ‘Attributing Responsibility to Corporate Entities: A Doctrinal Approach’ (2001) 19 Company and Securities Law Journal 168. Law, L. and Pascoe, J ‘Financiers and Constructive Trusts: Protection versus Liability’ (2000) 11 Australian Journal of Corporate Law 219, 229. Ramsay, I., Stapledon, G and Fong, K. ‘Affixing of the Company Seal and the Effect of the Statutory Assumption in the Corporations Law’ (1999) 10 Journal of Banking and Finance Law and Practice 38, 39. Carter, J. Peden, E. and Tolhurst, G., Contract Law in Australia (5th ed. LexisNexis, 2007) B. Cases Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Hambro v Burnand [I9041 2 KB 10 Royal British Bank v Turquand' (1856) 6 E&B 327 Turbin v Bilton (1843) 5 Man & G 45 Read More