PRBL 004

Commercial and Corporate Law for

Managers
Weeks 1- 6: Corporate Law
Lecture 5
Corporate & Agent Liability

Focus of this lecture:

Where companies deal with outsiders/public, we will look
into the liability of companies in the areas of its:
Contractual liability
Criminal liability (briefly)
Tort liability (briefly)
Pre-incorporation contracts (briefly)
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Contractual Liability

Contractual Liability:
General rule:

Co. will only be liable where a person or an organ of the co. (eg. the
board) has the authority to enter into the contract on the cos behalf;
or

Co. has approved or ratified an act or contract that has been done or
made without proper authority

Contractual Liability:
Revisit s 124 Corporations Act
read again (and think of Salomons case)
Once a company is registered, it has legal
capacity and powers of an individual,
including the power to enter into contracts
in its own name

Contractual Liability
How does a company execute a contract?
Directly by one of its organs (eg. the board of directors or
members in GM) the directing mind and will of co.
Indirectly by one of its agents acting on its behalf and with its
authority
Types of authority:
Actual
- express: stated orally or written (eg. RR)
- implied: authority associated with the position (eg. Managing
director) or on the basis of acquiescence of co. (eg, condoning
unauthorised transactions purportedly entered into)
Apparent (sometimes referred to as ostensible)
- co. has held out or represented that a particular person has
authority to act on its behalf

Contractual Liability
How to enforce agency principles?
Common law principles
Actual / apparent authority
A director is not (without more) an automatic agent of
the company with power to bind it: J Wright
Enterprises Pty Ltd (in liq) v Port Ballidu Pty Ltd [2010]
QSC 213
Statutory provisions ss128-130 of the CA
- entitles an outsider to make an assumption when
dealing with a co. that the person has authority
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Contractual Liability
How to enforce agency principles?
Common law principles:
1. Turquands case (indoor management rule)
Royal British bank v Turquand (1856) 119 ER 886
- Persons dealing with a co. are taken to have constructive notice of the
cos public documents , they need not go further to ensure the internal
proceedings of the co have been properly carried out
- Protects an outsider from cos procedural irregularities eg. No quorum
or some voting irregularity
- Rule has been embodied in (but not replaced by) s 129(1) CA
Exceptions to the rule in Turquands case:
- where outsider has actual knowledge of irregularity; or
- Is put upon inquiry by the circumstances of the case and fails to make
inquiries
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Contractual Liability
How to enforce agency principles?
Common law principles:
2. Actual authority of co agents
- may arise expressly or by implication
- Expressly eg, per the RR/Constitution
- Implied acts customarily done by persons occupying the
office/role (eg. Managing director)
- Caution: just because director acts in a dominant way, does
not mean actual authority conferred eg, absence of
knowledge/acquiescence of Board
National Australia Bank Ltd v Sparrow Green Pty Ltd
[1999] SASC 280
(doc signed by single dir and acted as co sec against
constitution mgmt of co vested in the board and not a single
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director bank had copy of constitution)

Contractual Liability
How to enforce agency principles?
Common law principles:
3. Apparent (or ostensible) authority of co agents
- applies where an outsider deals with person who has customary
authority eg, acts as MD but who has not actually been appointed
to that position or the appointment is defective (eg, no quorum for
resolution to be passed for the appointment of MD)
Freeman and Lockyer v Bathurst Park Properties [1964] 2 QB
480 (L&H 118)
- Instances where representation by person who lacks actual
authority may not be sufficient to create an agents apparent
authority (eg. representations of a de facto MD)
Crabtree-Vickers Pty Ltd v Australian Direct Mail (1975) 33 CLR
72
(family co. MD not officially appointed hence no actual authority; at
most apparent authority and therefore not capable of making
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representations for the co)

Contractual Liability
How to enforce agency principles? (cont)
Common law principles:
Freeman & Lockyer v Buckhurst Park Properties (Mangal)
Lord Diplock in that case set out 4 conditions of a contractors
entitlement to enforce against a company a contract entered into
by an agent who had no actual authority:
1. representation made to the contractor that the agent had
authority to enter on behalf of a company into a contract of
the kind sought to be enforced
2. the representation was made by a person or persons
who had actual authority to manage the business of the
company either generally or in respect of those matters to
which the contract relates
3. the contractor was induced by such representation to
enter into the contract ie relied on it in fact
4. under the constitution the company could actually
enter into contracts of the kind that is sought to be enforced
or to delegate authority to enter into a contract of11that kind to
the agent

Contractual Liability
How to enforce agency principles?
Statutory provisions:
Statutory Assumptions s 129 of the CA
- sets out the assumptions a person dealing with a co is
entitled to make
- reinforces Turquands case
- apply to dealings with a co
Story v Advance Bank of Austraila (1993) 31 NSWLR 722
- dealing includes where a document is forged; extends to
purported dealings
- Each assumption in s 129 is separate and discrete
- S 129(8) gives cumulative operation to the assumptions (eg,
assumes officer performs duties; assumes officer duly
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appointed)

Contractual Liability
STATUTORY ASSUMPTIONS

Section 129 Assumptions:

(1)
constitution and replaceable rules complied with
(2)
Director duly appointed (and has customary
powers) if ASIC docs say so
(3)
Officer or agent held out by co. has been duly
appointed (and has customary powers) if ASIC docs
say so
(4)
document duly executed without seal if signed in
accordance with the requirements of s 127(1)
(5)
document duly executed with seal if done in
accordance with s 127(2)
(6)
an officer or agent who has the authority to issue
a document you can presume they are also authority
to warrant that the document is genuine or is a true
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copy

Contractual Liability
How to enforce agency principles?
Statutory provisions:
Statutory Assumptions s 129 of the CA
Compliance with the constitution 129(1)
Oris Fund Management Ltd v NAB [2003] VSC 315
(unless outsider had knowledge)
Person named as officer in public documents s 129(2)
Person held out as officer or agent s 129(3)
(s 9 defines officer of a corporation)
see Freeman and Lockyer; ANZ v Australian Glass and
Mirrors (1991) 9 ACLC 702

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Contractual Liability
How to enforce agency principles?
Statutory provisions:
Statutory Assumptions s 129 of the CA (cont)
Officers and agents properly perform their duties s 129(4)
- fiduciary and statutory; constitution or legislation; administrative or
statutory tasks
Document duly executed s 129(5)
- in accordance with s 127(1) and 127 (2)
see Brick & Pipe Ind Ltd v Occidental Life Nominees Ltd (1992) 2 VR
279
Warranting documents genuine
- eg. co secretary assumed to have authority to warrant that a share
certificate is genuine contrast from common position in Ruben v
Great Fingall Consolidated (1906) AC 439 (L&H P 127)
(co sec forged signatures and affixed co seal without authority did not
bind co. co sec only authority to deliver share certs property did
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not pass)

Contractual Liability
How to enforce agency principles?
Statutory provisions:
Statutory Assumptions s 129 of the CA (cont)
Customary authority of officers s 129(2)&(3)
1. Individual directors
- witness fixing of co seal / sign cos negotiable instruments eg.
Cheques
- case of a dominant director as per Brick and Pipe case
(mind and will of co)
2. Managing directors
- to make contracts related to day to day management of
cos business
eg, engaging person to work (Freeman & Lockyer);
borrowing money on behalf of co
(but may not include transactions that are not in the
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ordinary course of cos business)

Contractual Liability
How to enforce agency principles?
Statutory provisions:
Statutory Assumptions s 129 of the CA (cont)
Customary authority of officers s 129(2)&(3)
3. Chair
- same as individual director and no authority to contract on cos
behalf
4. Company secretary
- not as wide as a director and no authority to bind co
- limited to administrative, internal nature eg, employing staff
Panorama Developments (Guildford) Ltd v Fidelis (..) (1971) 2 QB
711(examined customary authority of co sec; hired cars stating for co
purpose but used for own purposes failed to pay hire charges did
co sec have apparent auth? Yes, co sec has customary authority to
enter into contracts connected to administrative side of cos affairs)17

Contractual Liability
How to enforce agency principles?
Statutory provisions:
Limitations to statutory assumptions s 128 (4) of the CA
Knew assumption incorrect
at the time of dealing
knew can be said to mean actual knowledge
see Brick and Pipe case
Suspected assumption incorrect
- actually suspecting the assumption is incorrect
- Lipton & Herzberg: may rely on assumption if person did not in
fact have suspicions, even though a reasonable person would
have
see Oris Fund Management Ltd v NAB Ltd (2003) VSC 315
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Contractual Liability
How to enforce agency principles?
Statutory provisions:
Effect of fraud or forgery
Person may rely on s 129 even if officer or agent acts
fraudulently or forges a document in connection with
dealings
- s 128(3) covers situation where co seal/signatures are
forged
Story v Advance Bank Australia Ltd (1993) 31 NSWLR
722

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Criminal Liability
s 12.1(2) of the Criminal Code Act 1995 (Cth) (CCA)
- a body corporate may be found guilty of any offence including
one punishable by imprisonment
- cannot be imprisoned but can be fined
s 12.2 CCA - a physical element of an offence is attributed to a
co if it is committed by an employee, agent or officer of the co
acting within actual or apparent authority
s 12. 3(6) CCA defines high managerial agent and
corporate culture
s 12. 5(1) CCA co can rely on mistake of fact defence (if there
was reasonable belief; exercised due diligence
Common law
- Criminal liability of a co. could be traced to actions of persons
highly placed whose mind and will could be attributed to the
company
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see Tesco Supermarket case

Tort Liability
Co is vicariously liable for torts committed by
employees/agents in the course of their
employment
Damages may be reduced on grounds of
contributory negligence where directors or
managers were negligent
see Daniels v Anderson (1995) 37 NSWLR 438
s 128(3)
codifies common law rule regarding vicarious
liability of co for the fraudulent acts of their
employees/agents
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Pre registration Dealings

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Pre registration dealings

Pre registration dealings refer to transactions/contracts
entered into by promoters prior to the registration of a co
Who is a promoter?
Twycross v Grant (1877) 2 CPD 469; Cockburn CJ:
one who undertakes to form a company with reference
given to a project and to set it going, and who takes
necessary steps to accomplish that purpose

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Pre registration dealings

Pre registration contracts:
Common law position
- Co. cannot enter into a binding contract until it is registered
- As a result, a person could not make a legally binding contract
in the name of the co. in anticipation of it being registered
Newbourne v Sensolid (Great Britain) Lat (1954) 1 QB 45
- Co also incapable of ratifying pre-registration contract after co
was registered
Kelner v Baxter (1866) LR 2 CP 174
(Signed with the words on behalf of [unregistered cos name].
After co.s registration, ratified contract co became
insolvent terms demonstrated intention of the promoters
to be personally bound)
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Pre registration dealings

Pre registration contracts:
Common law position
- Kelner v Baxter (1866) LR 2 CP 174
c/f Black Smallwood (1966)117 CLR 52
(signed ctt using cos name followed by their own
names as directors of the co, which they believed was
registered at that time promoters not liable as liability
in contract depends on intention of the parties to the
contract the directors in Smallwood did not intend to
become liable which is the reason they signed using
the cos name distinguished Kelner)
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Pre registration dealings

Pre registration contracts:
Statutory position changes common law rule
S 131(1) - if a person enters into a contract on behalf of or
for the benefit of a company before it is registered the
contract is binding
if the company or
a company that is reasonably identifiable with it
ratifies the contract ( see Aztech Science Pty ltd v
Atlanta Aerospace (woy woy) Pty Ltd [2005]
NSWCA 319)
within the time specified in the contract or
where there is no agreed time, within a reasonable
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time after the contract is entered into

Pre registration dealings

Pre registration contracts:
Statutory position changes common law rule
s131(2)
The person who entered into the pre registration
contract is personally liable to pay damages to the
other contracting party if the company
is not registered
or if registered but does not ratify the contract
within the agreed timeframe or a reasonable
timeframe
The amount of damages is the amount co would be
liable to pay if it had ratified the contract and did not
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perform it

Pre registration dealings

Pre registration contracts:
Statutory position changes common law rule
s131(4)
If co ratifies pre registration contract but fails to perform
all or part of it, court may order person to pay all or part
that co should pay
131(3)
Court may do anything appropriate in the
circumstances, including ordering the co to:
- pay all or part of s 131(2) damages;
- transfer to the other contracting party property that the
co received because of the contract
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- pay an amount to a party to the contract