Tutorial

Topic 4

The company’s contractual dealings with outsiders

Exercise 1: True/False

Statement T/F? Explanation with authority (case and/or section of

an Act)
1. A company may make contracts directly in
different ways.

2. Agency involves an agent acting on behalf of a

principal to create or affect legal relations with
a third party.

3. A company usually makes contracts directly

rather than indirectly.
4. When a company contracts indirectly, it does
so through an agent.
5. Company agents must have any one of three
types of authority or power to be able to
arrange contracts on behalf of the company.

6. The express authority of a senior company

agent, such as a managing director, may
come from the Board or the constitution (if
any)

7. The scope of usual or customary authority of

a company agent depends on that person’s
position in the company.
8. Turquand’s case states that outsiders
usually cannot assume that the company’s
constitution is being followed by its
directors.

9. S 129(2) of the Corporations Act allows

outsiders to assume that a managing director
has usual authority to arrange most kinds of
contracts on behalf of the company.

10 Freeman & Lockyer v Buckhurst Properties

Ltd states that a single director ( who is not a
MD) can, in special circumstances, appear to
an outsider to be one, with the required
authority to arrange contracts.

11. S128(4) of the Corporations Act recognises

there may be some situations where an
outsider cannot assume that the person they
are dealing with, has authority to act as an
agent.

1
Exercise 2: Company’s capacity to make contracts

1. (a) Why is it necessary to determine whose actions will bind the company?
(b) Can a company enter a contract INDIRECTLY (through an agent? (see s126)
(c) Can a company enter a contract DIRECTLY( without an agent)? (see s 127).

2. (a) Electronics Suppliers intends to enter a supply contract with Acme

Pty Ltd. Acme’s board consists of Adams, Brown, and Crowe
( the latter being Managing Director).

Assume Crowe arranges the contract with Electronic Suppliers. In fact, Acme’s
constitution says he is only allowed to make contracts up to $10,000, but the
current contract he is arranging is for $12,000.

Would Electronic Suppliers be permitted to ‘assume’ that Crowe had the

required authority to act on Acme’s behalf in this contract? To answer this
consider:

(a) What does the rule in Turquand’s case state?.

(b) How does this rule assist outsiders such as suppliers to the company?

(c) What does s 129 of the Corporations Act state?

(d) If Crowe had told Electronic Suppliers that he was only allowed to make
contracts up to $10,000, and the current contract was to be for $12,000, would
Electronic Suppliers still be permitted to ‘assume’ that Crowe had the required
authority to act on Acme’s behalf in this contract? If not, is there an enforceable
contract?

(e) Assume the Board had contacted Electronic Suppliers informing it that
Adams, one of its directors but not Managing Director, had been given authority
to make contracts for Acme.

Adams then arranges a contract with Electronic Suppliers. Later, it is found that
the Board had not followed internal procedures to appoint Adams to that role so
she lacked authority.

Can Electronics Suppliers still enforce the contract? By reference to a case,

what kind of authority, if any, does Adams have?

3. State the facts of the Northside Developments case. Why was the bank (lender) unable
to enforce the contract against the company? Would s128(4) apply to the facts of the
case if it was heard today?

2
4. The Constitution of Acme Pty Ltd provides that the Board of Directors is only
empowered to borrow up to $50,000 on behalf of the company. Higher amounts
require shareholder approval. On one occasion, the directors claimed to borrow
$70,000 from East Bank Ltd without obtaining approval. The directors then change
their minds. Can East Bank enforce the contract?

5. A, B and C are the directors and equal shareholders of Hartford Pty. Ltd. a company
engaged in manufacturing. At a meeting with Core Suppliers Ltd ( an outside
supplier), A and B said that A was managing director of Hartford Pty. Ltd. The
Constitution of the company provided for the appointment of a managing director
but in fact one had not been validly appointed.

A entered into a contract with Core on behalf of Hartford Pty Ltd for the supply of
materials to the value of $20,000.

Hartford Pty Ltd refuses to pay this amount on the basis that A was not its managing
director and had no authority to enter into the contract on behalf of the company.

Advise Core.

6. Kidszone Pty Ltd operates a chain of kids clothing shops in Victoria. In March 2015
Sally was appointed managing director for a period of two years. By August 2017 she was
not formally reappointed but she continued to act in that position until the present day. Her
contract of appointment required that she not enter into contracts on behalf of the company
in excess of $30,000. Anything over that amount could only be approved by a vote of the
board of directors. In December of 2017 she signed a loan contract with Ezycash Bank on
behalf of the company for $50,000. This contract was not referred to the board for approval.
The bank was not aware of the terms of Sally’s employment contract or of any restriction on
her capacity to enter into contract on behalf of the company. When the board is made aware
of the loan they do not want to continue with it. The bank starts recovery proceedings on the
loan.
REQUIRED:
Explain whether the bank will be able to enforce this loan contract. Would it make any
difference if the bank was aware that Sally had not been formally reappointed to her position
and was looking for another job?
(10 marks)