Question

Use ILAC format to answer this question.      

Hullaballoo Pty Ltd has three directors: managing director Michelle Armour, Danny Love and newly appointed director Mervyn Milgram. The company’s constitution specifies that board approval is required for any contract entered into by a director, on behalf of the company, in excess of $5000.

Mervyn recently attended a conference on the Gold Coast where he met Lotte Lomez. Lotte and Mervyn got on very well and when she advised Mervyn that she could supply Hullaballoo Pty Ltd much-needed production equipment for a substantial discount on the retail price Mervyn jumped at the chance. A contract was prepared in the name of the company and Lotte, for the supply of the equipment for $7,500. When the board knew this, they refused to honour the contract. Advise Lotte whether she can enforce the contract against Hullaballoo Pty Ltd. In your answer, make appropriate reference to relevant sections in the Corporations Act.

Answer 1

Yes, Lotte should be able to enforce the contract against Hullaballoo Pty Ltd.

Issues:

a. Can companies enter into contractual relations with other entities?

b. What is the position of a director of a company, and can he enter into contracts with outsiders on behalf of the company, and would such contracts be binding on the company?

c. Can outsiders enforce contracts against the company, where necessary proceedings as laid down have not been carried out by the company officers?

Law:

First of all, one important feature of a company is that it can sue and be sued. Therefore, it is implied that that it can enter into contracts with other entities.

Secondly, the position of a director of a company is that of its agent. As a company is not a biological person, it operates through the agency of its directors.

Third, outsiders dealing with the company are not expected to know what happens behind the closed doors of the boardroom of a company. They are entitled to assume that all procedures and formalities have been duly carried out.

Section 128-129 of the Corporations Act relate to the statutory adoption of the 19th century common law rule, known as the Turquand Rule ( the English common law case of Royal British Bank Vs. Turquand) or the Doctrine of Indoor Management. The rule not only applies the agency principles to companies, but also allows outsiders entering into bona fide contracts with the company to assume that the internal procedures of the company were duly carried out in relation therewith.

The Turquand Rule, as it is commonly referred to as, seeks to protect the outsiders dealing with the company and enables them to enforce contracts against a company.

There are some limitations and exceptions to the aforementioned doctrine, which have been codified in Sec. 128 ( 4) of the Corporations Act, e.g no knowledge of the Articles of Association, outsider has knowledge of the irregularity, outsider is party to the irregularity, forgery etc.

Application:

In the instant case, Mervyn Milgram is a duly appointed agent of Hullaballoo Pty Ltd, and as such, is authorised to enter into contracts with outsiders on behalf of the company.

The fact that any contract entered into by a director in excess of $ 5,000 would need to be approved by the board of directors should have been stipulated in the Articles of Association. It is assumed that Lotte has gone through the Articles, but at the same time, as per the indoor management rule, is entitled to assume that the required approval has been duly granted. It is a matter of internal management, and the outsider dealing with the company would not usually be aware as to whether the necessary procedures and formalities have been complied with or not.

It is not mentioned in the given situation whether Lotte Lomez falls within any of the exceptions as contained in Sec. 128 ( 4) . Therefore, one can assume that she has no knowledge of the irregularity. She was out to make a bons fide contract with the company through its director Mervyn Milgram.

Conclusion:

Lotte Lomez would be able to enforce the contract against Hullaballoo Pty Ltd.