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Doctrine of Indoor Management

Doctrine of Indoor Management

The circumstances in which a company will be bound by the acts of its agents pose one of the most vexed questions in company law. The importance of this question needs no emphasis: as a company must, by its nature, always act through the instrumentality of agents any question of a company's contractual liability will invariably involve a preliminary question as to the authority of the relevant agent to bind the company. This article is an attempt at an elucidation of die rules governing the capacity of agents to bind a company. The Rule in Turquand's Case The so-called Rule in Turquand's Case is of course central to this discussion. The nature of this rule has long been the subject of debate. There seems little doubt now that its effect has changed considerably since its first formulation. As originally formulated and certainly as interpreted and applied in early cases, it seems clear enough that the Rule in Turquands Case was once a special rule of company law, that is, that third parties dealing with a person purporting to have authority to bind the company in respect of the transaction in question will be entitled to hold the company bound on contracts so made if that person under the company's articles might have had the necessary authority, The Rule in Turquand's Case can be found so stated in many early cases. 2 Attempts have been made by later courts3 andcommentators4 to read down these statements of the rule by spelling out of the cases in which they were made an acknowledgement that the party dealing with the company had actual knowledge of and relied on the provision in the articles under which the "agent* could have received the necessary authority thus raising some sort of estoppel against the company. However, any examination of these cases shows quite clearly that in none of them has the requirement of knowledge of the articles ever been explicitly laid down as an element of the Rule in Turquands Case, and moreover that in none of them has this even been considered a relevant inquiry. Indeed in Turquands case itself, Lord Campbell G.J. at first instance said ( and nothing was said subsequently in the case to derogate from this view ) : If the plaintiffs must be presumed to have had notice of the contents of the registered deed of settlement, there is nothing there to show that the directors might not have had authority to execute the bond as they asserted.5 In Houghton v. Nothard, Lowe and Wills,0 Sargant L.J. took the view that knowledge of the articles was generally necessary ( at least in the absence of some independent representation of authority) before the Rule in Turquands Case could be invoked in a third party's favour.The doubt expressed by Scrutton L.J. in Kreditbank Cassel v.Schenkers1 as to the consistency of this view with the early caseslaying down the Rule in Turquand's Case seems a real one: I hope it is not disrespectful to express the wish that SargantL.J. who is thoroughly conversant with this branch of the lawhad explained to those not equally familiar with it, how thisfits in with the doctrine enunciated in a line of cases of whichMahony v. East Holyford Mining Co.8 is an instance, that aperson is deemed to know of the company's articles of asso-ciation. Australian courts have felt a similar doubt. In the decision of theVictorian Supreme Court in In Re Hapytoz,9 Martin J. consideredthat to require either knowledge of the articles or that the agent inquestion be acting within his usual authority (requirements said tobe justified in particular by the judgment of Sargant L.J. in Houghton'scase) would be to create illegitimate refinements to the Rule in Tur-quands Case. To the extent that Houghton's case suggested theserefinements, it was not to be followed.10 Again in the decision of theNew South Wales Supreme Court in Re Scottish Loan and Finance Company Ltd.,11 Nicholas C.J. said12 that if Sargant L.J. in Houghton'scase was suggesting any requirement of knowledge of the articles,this was inconsistent with inter alia the judgments of the House ofLords in Mahony v. East Holyford Mining Co. 5. (1855) 5 E. & B. 248, 262; 119 E.R. 474, 479 (italics added). 6. [1927] 1 K.B. 246 (CA.). 7. [19271 1 K.B. 826 (CA.), 840. 8. (1875) L.R. 7 H.L. 889. 9. [1937] V.L.R. 40. 10. Id at 45 ff. 11. (1944) 44 S.B .. ( N.S.W. ì 461. 12. Id at 465.

It seems, therefore, that the original Rule in TurquantFs Case wasone peculiar to company law, extending considerably beyond ordin-ary agency principles in regard to the circumstances in which acompany as principal could be bound by the unauthorised acts ofits agents. However, as has already been indicated, the decision of the Courtof Appeal in Houghton's case marks a divergence from the originalRule. This divergence has grown and developed in succeeding deci-sions in such a way as to justify the conclusion that the whole natureof the Rule has now changed. It will be suggested in this article thatthe Rule now means no more than that ordinary agency principlesdetermine when a. company.will be bound by the unauthorised actsof its agents. In Houghton's ease,'■ Sargant L.J. (with whom Atkin L.J. agreed)took the view that the basis of the Rule in Tur quand s Case wasagency by holding-out. He held that a person dealing with a companycannot plead a provision in the company's articles under which theagent with whom he dealt could have .had authority unless at thetime of the transaction he was aware of, the existence of the provisionand had in fact relied upon it. However, Sargant L.J. added thefurther requirement that even if a party dealing with a company hasknowledge of such provision, this will not suffice unless the transactionin question is within the usual authority of the agent purporting tobind the company. This was not to say, however, that knowledge ofthe articles is always necessary; Sargant L.J. conceded that in thetype of situation which arose in Biggerstaff v. Rowatt's Wharf Ltd.13this would be unnecessary. There 'the agent whose- authority wasrelied on had been acting to the knowledge of the directors as amanaging director, and the act done was one within the ordinaryambit of the powers of a managing director in the transaction of thecompany's affairs.'14 Thus, on the views expressed by Sargant L.J. inHoughton's case, a third party will only be able to hold a companybound by. the unauthorised acts of its agent if, firstly, there has beena holding-out of authority whether in the form of a provision in thearticles which is known to the third party and upon which he hasrelied or in the form of a representation of authority independentlyof the articles (as in Biggerstaff v. Rowatt's Wharf) and, secondly, thecontract in question is within the usual authority of the agent trans-acting it. 13. [1896] 2Ch. 93 (C.A.). 14. E1927] 1 K.B. 246 (CA), 267.

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COMPANY CONTRACTS 313 The decision of the Court of. Appeal in Houghton's case was fol-lowed almost immediately in Kreditbank Cassel v. Schenkers15 whereagain the third party had not read the company's articles and wherethe transaction was held to be outside the usual authority of theagent in question. The case of British Thomson-Houston Ltd. v. Federated EuropeanBank10 decided by the Court of Appeal some four or five years afterthe two preceding decisions represents the next major refinement tothe original Rule in Turquand's Case and also to the propositionsenunciated by the Court in Houghton's case and applied in Kredit-bank Cassel v. Schenkers. In this case the party dealing with thecompany again had no knowledge of thè articles. There was furtherno independent holding-out of the agent as having authority to enterinto the transaction in question, as in Biggerstaff v. Rowatt's Wharf.Nevertheless, both Scrutton and Slesser L.JJ., relying in particularupon dicta of Atldn L.J. in Kreditbank Cassel v. Schenkers,17 held thatboth knowledge of the articles and any independent representationof authority were unnecessary where the company's agent was actingwithin the sphere of authority usually associated with his particularoffice in a company of the kind concerned, that is, no holding-out ofany kind was necessary, usual authority being a sufficient ground ofliability. Greer L.J., on the other hand, preferred to say that in thecircumstances of the case the agent had effectively held himself outas having the necessary authority to enter into the transaction inquestion.18 The view taken by Slesser and Scrutton L.JJ. in British Thomson-Houston v. Federated European Bank received trenchant criticismfrom Slade J. in his controversial judgment in Rama Corporation ,v.Proved Tin and General Investments Ltd.10 There the learned judgeheld himself bound by the decision of the Court of Appeal inHoughton's case and was emphatic that the dicta of Atkin L.J. inKreditbank Cassel v. Schenkers upon which Slesser and ScruttonL.JJ. relied in British Thomson-Houston v. Federated European Bankdid not support the propositions extracted from them. Slade J. saidthat Atldn L.J. was merely reiterating the views expressed by SargantL.J. in Houghton's case and that in addition to the party dealing withthe company showing that the agent was acting within his usualauthority, he must also be able to show either knowledge of thearticles or a holding-out independently of the articles. In other words, 15. [1927] 1 K.B. 826 (CA.}. 16. [1932] 2 K.B. 176 (CA.). 17. [1927] 1 K.B. 826 (CA.), 844. 18. [1932] 2K.B. 176 (CA.), 182. 19. [1952] 2 Q.B. 147.

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314 THE ADELAIDE LAW REVIEW a holding-out of some sort is always necessary; usual authority byitself is not a ground for liability. It must be admitted that the construction placed by Slade J. onAtkin L.J.'s dicta in Kreditbank Cassel v. Schenkers seems more likelyto represent what was intended by those remarks than the constructionof them adopted by the majority in British Thomson-Houston v.Federated European Bank. It seems clear enough that Atkin L.J.was only applying the decision of Sargant L.J. in Houghton's case.Certainly a full reading of his judgment strongly suggests that heintended the two conditions in question, that is, a holding-out andusual authority, to be concurrent and not alternatives. On the otherhand, the view taken by the majority in the British Thomson-Houstoncase is much more in accord with ordinary agency principles: aprincipal will be bound by the act of his agent if the latter has actedwithin his actual, usual or ostensible (that is, represented) authority. The most recent decision in this line of cases is that of the Courtof Appeal in 1964 in Freeman and Lockyer v. Buckhurst Park Pro-perties Ltd.20 In this case, the Court was unanimous that Slade J.was mistaken in his view of what was decided, by Houghton's caseand in his view that British Thomson-Houston v. Federated EuropeanBank was in conflict with it. The Court was apparently prepared toadopt a similar interpretation of Atkin L.J.'s remarks in KreditbankCassel v. Schenkers to that of the majority in the British Thomson-Houston case, that is, that usual authority was itself a sufficient basisfor liability. Diploek L.J. went so far as to say21 that if he was wrongin the view he took of Houghton's case and Kreditbank Cassel v.Schenkers, and these cases were in fact in conflict with BritishThomson-Houston v. Federated European Bank, he would, prefer tofollow the latter decision as he was entitled to do under the rule inYoung v. The Bristol Aeroplane Co. Ltd.22 The Court explainedBiggerstaff v. Bowatt's Wharf and British Thomson-Houston v.Federated European Bank as instances where the agent had actedwithin his usual authority and Houghton's case and Kreditbank Casselv. Schenkers as instances where the agent had acted outside any usualor ostensible authority. The Court, while holding that usual authority without any holding-out may be a sufficient ground for liability, of course recognised thatthere are circumstances where a conjunction of both elements will 20. [1964] 2 W.L.R. 61S (CA.). 21. 7rfat640. 22. [1944] K.B. 718 (CA.).

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COMPANY CONTRACTS 315 be necessary for a company to be bound. For example, where a com-pany has held out a person as occupying a certain office, for example,managing director ( as in Biggerstaff v. Rowatt's Wharf and Freeman'scase itself) when in fact he has not been so appointed, but has notspecifically held him out as having the authority to enter into theparticular transaction in question, the person dealing with the agentwill have to show that the transaction in question is within theauthority usually associated with the office which the agent has beenheld out as occupying. As regards knowledge of a company's articles, the Court was agreedthat in no circumstances was this a precondition to liability on thepart of the company. Indeed, such a contention was dismissedperemptorily. Pearson L.J, shortly remarked: 'Such a requirementwould be an absurd example of legal pettifoggery.'23 This view mustbe taken in conjunction with that expressed by Sargant L.J. inHoughton's case that even where there is actual knowledge of thearticles, this will rarely of itself be sufficient to enable a party dealingwith a company to hold it bound.24 This latter proposition makesobvious sense. A provision in the articles of a company simply pro-viding for the possibility of a conferment of authority on a given agentor agents cannot conceivably be construed as a positive representa-tion that such agent or agents actually have authority. Indeed, onceit is recognised that knowledge of the articles is relevant only to thequestion of whether there is an estoppel by holding-out, it becomesdifficult to conceive of circumstances where knowledge of a com-pany's articles will help a third party's case at all. Thus it seems nowto be the case that in most circumstances, knowledge of a company'sarticles will be both unnecessary and unhelpful. In the light, then, of Freeman and Lockyer v. Buckhurst Park Pro-perties, it seems that the position envisaged by Slesser and ScruttonLJJ. in British Thomson-Houston v. Federated European Bank hascome about and a complete adoption of ordinary agency principlesoccurred. An agent will bind his company if: ( a ) he has actual authority to do so; or (b) he has been held out by his company as having authority to doso; or (c) the transaction is within the authority usually associated withthe office he holds in the company or has been held out asholding. 23. [1964] 2 W.L.R. 618 (CA.), 633. 24. [1927] 1 K.B. 246 (CA.), 266.

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316 THE ADELAIDE LAW BEVIEW If this view is correct, the Rule in Turquand's Case has lost whateversignificance it may once have had as a special rule of company law.25 Who Can Hold Out on Behalf of à Company? In the confusion which has surrounded the principles governingcompany contracts, a question of considerable importance has beenlargely overlooked: who can make a' representation of authority onbehalf of a company so as to bind the company? In Freeman and Lockyer v. Buckhurst Park Properties, Pearson L.J.pointed out20 that shareholders, directors, and others such as secre-taries, have all in the past been held able to hold out on behalf of acompany. It is proposed now to examine the circumstances in whichsuch a holding-out is possible. (i) Holding-Out by Shareholders This situation has not arisen frequently and generally only in thecase of small companies where shareholders have taken an activepart in the management of the company. In Mahony v. East Holyford Mining Co.,27 the articles of the com-pany provided that 'the first seven persons who sign these articles, ora majority of them, shall appoint the first directors'. The directors inturn were to appoint the secretary. No appointments were evermade. Nevertheless, a person acting as secretary of the company 25. It has never been explained how this whole body of law sauares with theCompanies Act 1962-1964, s. 35 (S.A.): '(1) Contracts on behalf of a company may be made as follows: (a) . . . (b) a contract which, if made between private persons, would beby law required to be in writing signed by the parties to becharged therewith may be made on behalf of the company inwriting signed by any person acting under its authority expressor implied; (c) a contract which, if made between private persons, would by lawbe valid although made by parol only (and not reduced intowriting) may be made by parol on behalf of the company by anyperson acting under its authority express or implied, and any contract so made shall be effectual in law and shall bind thecompany and its successors and all other parties thereto and may be variedor discharged in the manner in which it is authorised to be made/ Implied authority is usually regarded as a form of actual authority,being authority which by implication is embodied in an express grant ofauthority. If implied authority were to have this meaning in section 35, acompany would only be bound by agents acting within their actual author-ity. However, provisions similar to section 35 have existed in CompaniesActs for many years, and it can only be assumed that the courts haveregarded implied authority in this context as extending (on the presentlaw) to usual and ostensible authority. 26. [1964] 2 W.L.R..618 (CA.), 632. 27. (1875) L.R. 7 H.L. 869.

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COMPANY CONTRACTS 317 forwarded to the appellant bank a notice setting out a resolutionpurportedly passed by the initial subscribers appointing certainpersons directors and authorising them and himself as secretary todraw on the company's bank account. While such a resolution badnever been passed, a majority of the initial subscribers acquiesced inthe assumption by these persons of the offices concerned. The House of Lords held inter alia that the shareholders had per-mitted the persons in question to act as directors and that thereforethe company was bound by the drawings. The basis of this holding appears clearly to have been that whilethere had been no formal meeting together of, or formal appointmentby, a majority of these subscribers, the proper inference from the factswas that there was a de facto appointment of the directors by reasonof the informal assent of the majority.28 It therefore appears that any representation of authority by such, anumber of shareholders as under their company's articles could havein fact conferred the authority in question will bind the company.- Itwould seem to follow that where.under the articles, shareholders havenot this power ( as, for example, where it has been delegated exclu-sively to the board of directors20), any representation of authority bythem would be ineffective. As regards the position of the secretary in Mahpny's case, it washeld that once the directors could be said to have been 'appointed*by the holding-out of the shareholders, it was then possible for theformer to make an.'appointment' by similar means. Thus the positionarose of A etc. (the shareholders) holding out B etc. (the directors)and B etc. holding out C (the secretary). While not strictly relevant to the present discussion, a feature ofthe decision in Mahony's case which warrants greater attention thanit has hitherto received is the interpretation the Court there attachedto a defective appointments clause in the articles. Clause 88 pro-vided: All acts done by the board or by a committee of directorsshall, notwithstanding that it be afterwards discovered thatthere was some defect in the appointment of any such directors,or persons acting as aforesaid^ or that they or any of themwere or was disqualified, be as valid as if every such personhad been duly appointed, and was qualified to be a director. 28. So stated by KeDy C.B. in the Exchequer Chamber, id at 883; affirmedunanimously in the 'House of Lords. 29. As in Shaw <kr Sons Ltd. v. Shaw [1935] 2 K.B. 113 (CA.), and Scott v.Scott [1943] 1 AU E.R. 582.

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318 THE ADELAIDE LAW REVIEW The House of Lords was unanimous that this clause extended to thesituation with whioh they were faced where strictly neither thedirectors nor the secretary had been appointed at all. The wordingof this clause in the articles is very similar to the Companies Act1962-1964, s. 119 (S.A.): 'The acts of a director or manager or secre-tary shall be valid notwithstanding any defect that may afterwards bediscovered in his appointment or qualification/ Both the House ofLords, in Morriss v. Kanssen,ao and the Australian High Court, inGrant v. John Grant and Sons Pty. Ltd.,81 have held that this sectiononly applies to cases where directors, etc, have been regularlyappointed in substance. It was held in both cases that the onlydefect in appointment which the section will cure is a mere pro-cedural slip; it will not extend to cases where there has not beenany appointment at all. Significantly, in neither case was thedecision in Mahony v. East Holyford Mining Co. on this point eithercited or considered. The only other reported case in which a company has been heldliable through a holding-out by its shareholders is the decision of theFull Court of New South Wales in City Bank v. The Australian PaperCo.32 In this case, the articles of the company vested all powers ofmanagement of the company in the board of directors exclusively.The directors proceeded to obtain credit from the company's bank.At two successive general meetings of the shareholders, the indebted-ness of the company to the bank was brought to their notice and nodissent was expressed. The company subsequently purported torepudiate the debt. The Court held that even if the directors hadno power to borrow (which was not decided), the action of theshareholders amounted to acquiescence in the loan: Tt was in effectan acknowledgment by them that their directors had power to borrowand that the company was liable for the debt/33 It was said that ifthe shareholders considered the company was not liable, they oughtto have objected to the transaction at the earliest opportunity. The conclusion reached in this case and the reasoning advancedtherefor (such as it is) are probably equally consistent with theview that the conduct of the shareholders amounted to a ratificationof the contract in question as with the view that their conduct raisedan estoppel against the company. On either view, probably the onlypersons who in the circumstances could have acted so as to bind thecompany were the shareholders in general meeting. The significance 30. [1946] A.C. 459. 31. (1950) 82 C.L.R. 1; see especially Williams J., ibid at 34. 32. (1871) 10 S.C.R. (N.S.W.) 235. 33. Id at 243, per Stephens C.J.

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COMPANY CONTRACTS 319 of the distinction between ratification and estoppel by subsequentacquiescence will be adverted to later. In the present context, a statement by Parke B. in the case ofRidley v. The Plymouth Grinding and Bakery Co.34 must be disposedof. He said in this case: I perfectly agree that the liability of the company may beshown without producing the original deed, or a copy of it,provided it be shown that all persons who formed the com-pany had sanctioned any particular individuals entering intocontracts to bind them; if there were any proof of such author-ity, no doubt the company would be bound.35 If this statement was intended to mean .that a company will alwaysbe bound whenever there is a holding-out by the shareholders what-ever the provisions of the articles, it would have to be rejected asunsound. This would enable a company to hold out in contradictionof limitations on an agent's authority contained in its articles. Sucha position would be a denial of the doctrine of constructive notice:it would enable a person dealing with a company to rely upon a repre-sentation of authority when he is deemed to know that such authoritydoes not exist. Further, it would enable the shareholders to departfrom the articles when under the Companies Act 1962-1964 (S.A.)they are, at least to some extent, bound by them.30 Finally, it wouldenable shareholders to alter a company's articles (retrospectively)by a procedure other than that contemplated by the Act.37 (ii) Holding-Out by Directors Numerous statements can be found in the cases to the effect thata representation of authority in an agent by directors of a companywill bind the company in respect of contracts transacted within thescope of that authority. However, the nature of the circumstancesin which directors may make an effective representation of authorityis not entirely clear. Two problems in particular arise: firstly, maydirectors only make a representation of authority if, under the articles,they could actually invest the agent in question with the authoritywhich they represent he possesses? In other words, must the require-ment which apparently obtains in the case of a holding-out by share-holders also be met in the case of a holding-out by directors?Secondly, in any event, how many directors must be party to theholding-out for it to bind.the company? 34. (1848) 2 Ex. 711; (1848) 154 E.R. 676. 35. (1848) 154 E.R. 676, 679. 36. See section 33. • 37. I.e., under section 31.

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320 THE ADELAIDE LAW REVIEW As regards the first question, it must be conceded that generallywhere a representation of authority by directors has been held to bindtheir company, it lay within their power to make an appointment tothe office that the agent had assumed or, as the case may be, todelegate the powers to the officer of the company which he hadassumed.38 Obviously with the modern trend in the drafting ofarticles towards the delegation of very wide powers to the board andthe managing director, a representation of authority by directors willgenerally occur in either of the above circumstances. However, thisneed not necessarily be so. For example, where the relevant powerhas not been delegated to the directors at all or where the power hasbeen delegated to the directors but no power to sub-delegate given,any representation of authority by the directors would not be con-sistent with any power that they themselves possess to confer anactual, authority equivalent to that held out. In these circumstances■the power to confer actual authority on an agent would rest withthe company in general meeting. Here the question' arises whethera representation of authority by the directors would bind the com-pany. This question can only be answered by considering the generalbasis on which a representation of authority by directors should beregarded as binding a company. . The most explicit and authoritativestatement of this is to be found in the judgments of the House ofLords in Houghton's case.30 Curiously enough, the decision of theHouse of Lords in this case has.been almost entirely neglected byboth courts and commentators, who have been much more concernedwith the decision of the Court of Appeal in the same case.40 In theHouse of Lords, Viscount Dunedin said: The person who is sought to be estopped is here a company,an abstract conception, not a being who has eyes and ears.The knowledge of the company can only be the knowledgeof persons who are entitled to represent the company. It maybè assumed that the knowledge of the directors is in ordinarycircumstances thé knowledge of the company.41 Viscount Sumner said: Has knowledge then been brought home to the respondentcompany on which to found the alleged standing by? In thécase of a natural person, if information is intelligibly con-veyed to and received by him, its source, whether a servant 38. E.g., Mahony v. East Holy ford Mining Company (1875) L.R. 7 H.L. 869;Biggerstaff v. RotoaU's Wharf [1896] 2 Ch. 93 (C.A.); Smith v. Hull GlassCo. (1852) 11 C.B. 897; (1852) 138 E.R. 729. 39. [1928] A.C. 1. 40. In his treatment of this topic, Professor Gower dismisses the decision ofthe House of Lords in a footnote as 'affirmed on other grounds* (ModernCompany Law (2nd ed. 1957), 147). 41. [1928] A.C. 1, 14.

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COMPANY CONTRACTS 321 or a stranger, whether he is high or low, matters little, if at all.With an artificial incorporated person it must necessarily beotherwise, for an impersonal corporation cannot read or hearexcept by the eyes and ears of others. Who are to be theorgans*2 by which it receives knowledge so as to affect itsrights may be specially determined by the articles of its con-stitution, but otherwise, in a matter where knowledge maylead to a modification of the company's rights according as it isor is not followed by action, the knowledge, which is relevant,is that of the directors themselves, since it is their board thatdeals with the company's rights. The mind, so to speak, of acompany is not reached or affected by information merelypossessed by its clerks, nor is it deemed automatically to knoweverything that appears in its ledgers. What a director knowsor ought in the course of his duty to know may be the know-ledge of the company, for it may be deemed to have been dulyused so as to lead to the action, which a fully informed cor-poration would proceed to take on the strength of it.43 Diplock L.J. in Freeman and Lockyer v. Buckhurst Park Properties**made a statement to a similar effect to the foregoing. In summarisingthe conditions which a person dealing with a company must satisfyto hold it bound, he said that "he (i.e., the person dealing with thecompany) can rely upon a representation by a person or persons whohave actual authority to manage or conduct that part of the businessof the corporation to which the contract relates/45 The basis in policy for treating representations of authority bydirectors as binding a company which emerges from the above obser-vations obviously is that a directors duties normally involve him in aclose acquaintance with the affairs and activities of a company andin particular with such questions as the appointment of agents andthe delegation of authority to them. Thus an outsider receiving arepresentation from a director as to the authority of an agent of thecompany would normally be entitled to believe that this representa-tion was accurate and would therefore be justified in relying upon it. It is accordingly submitted that, in the absence of circumstancesputting the outsider on inquiry, the directors of a company willalways be in a position to make a representation as to the authorityof an agent of their company.40 This conclusion is consistent withthe policy consideration upon which the original Rule in Turquand's 42. This is a term of which Professor Gower would no doubt enthusiasticallyapprove. 43. [1928] A.C. 1, 18. 44. [1964] 2 W.L.R. 618 (CA.). 45. Id at 638. 46. One circumstance which might put an outsider on inquiry is where therepresentation is to his knowledge made by a 'nominal' director who hasno real acquaintance with the company's affairs.

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322 "THE ADELAIDE LAW REVIEW Case was based — that an outsider is neither able nor entitled toinquire into matters concerning the internal management of a com-pany and must necessarily be satisfied by representations made byofficers of the company apparently occupying, positions qualifyingthem to make such representations. The second question which arises in relation to representationsof authority by directors, that is, how many directors must be partyto a holding-out, can be answered by reference to considerationssimilar to those applying to the first question. Once it is acceptedthat the basis for holding that a representation of authority by directorsbinds their company is not that such representation is a de factoexercise of a de jure power of appointment or delegation, there isthen no legal necessity for requiring the representation to be bythe number of directors required to exercise any de jure power. Itis submitted that there are several considerations favouring the con-clusion that any director can make an effective, representation ofauthority. First, such a proposition finds.support.in the decision ofthe House of Lords in Houghton's case.47 In this case, one of thefour directors of a company in complicity with his brother, anotherdirector, but without the knowledge of the other two, entered into acontract on behalf of his company which involved meeting the debtsof another company. This transaction was held to be beyond bothhis actual authority and also any authority which would usually beassociated with his office. The appellants, however, sought to renderthe company liable an the basis that some or all of the directorshad acquiesced in the transaction either at the time it occurred órsubsequently when, in the case of the two innocent directors, it wasdiscovered. The House of Lords held that the acquiescence of thedirector who had actually negotiated the transaction and his brother,who was party to the negotiations, could not bind the company asboth directors were participes criminis in the sense of being 'artificersof the infringement'.48 Their Lordships would, however, have beenprepared to hold the company bound if it could have been shownthat one or both of the remaining two directors had become aware ofthe transaction and yet had done nothing to disaffirm it as soon aspossible. In the event it was held that as soon as these directorshad become aware of the transaction, they had taken steps to disaffirmit and that there was therefore no acquiescence such as to bind thecompany. It is significant that the House of Lords took the viewthat the acquiescence of either of the two innocent directors couldhave bound the company notwithstanding that, under the articles, a 47. [1928] A.C. 1.. 48. Jd at 14, per Viscount Dunedin.

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COMPANY CONTRACTS 323 delegation of any of the board's powers to one of their nunlberrequired the assent of a majority of the directors (in this case, three). Apart from authority, the. view that any director can make an effec-tive representation of authority must he supported on practicalgrounds. To require an outsider to go beyond the representations ofa single director would be virtually to require him to convene ameeting of the company's board of directors. Apart from beingabsurd, this is clearly beyond his legal competence. Practically, hecan do little else but accept the representations of a director as true.Again this seems in accord with the policy considerations given effectto in the original Rule in Turquand's Case. It is accordingly submitted that a representation of authority byany director of a company will bind the company subject, of course,to two obvious qualifications, that the representation is not contra-dicted by the articles, and that the circumstances of the transactionin question are not so unusual as to render any reliance by the out-sider on the representation unreasonable. (in) Holding-Out by Secretary That the secretary of a company may in some circumstances makean effective representation of authority on behalf of the company isnow well established. Indeed, in Mahohy's case49 itself, two of the five judges expresslytreated the bank's reliance on the certificate of the secretary as beinga material factor in the bank's favour.60 This decision was followed bythe New South Wales Supreme Court in Re Scottish Loan and FinanceCo.51 where a representation by the secretary of a company in corre-spondence that a certain person was the managing director of thecompany was held to bind the company. The position of the secretary of a company was adverted to by theHouse of Lords in Houghton's case. Viscount Dunedin stated that:'the knowledge of a mere official like the secretary would only be theknowledge of the company if the thing of which knowledge is pre-dicated was a thing within the ordinary domain of the secretary'sduties'.52 It would seem clear enough that Viscount Dunedin did notmean by this that merely because knowledge of the transaction inquestion would be likely to occur in the ordinary course of anemployee's duties, the company would be fixed with that knowledge. 49. (1875) L.R. 7 HX. 869. - 50. See Lord Chelmsford, id at 892, and Lord Penzance, id at 902. 51. (1944) 44 S.R. (N.S.W.) 461. 52. [1928] A.C. 1, 14.

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324 THE ADELAIDE LAW REVIEW If this were so, knowledge on the part of some inferior employee suchas, for example, a foreman or even the traditional case of the officeboy, could conceivably bind the company. What his Lordship musthave meant was that if the officer would normally have knowledgeof all the circumstances of a transaction such as the one in questionincluding the fact of whether the officer had been authorised to actor not, then the company would be bound. While it was actuallyheld on the facts in Houghton's case that the secretary had no sortof authority to bind the company, this holding is entirely consistentwith the above proposition, because in this case the secretary hadattempted to enter into the transaction in question himself on behalfof the company, and not simply represented that someone else hadauthority to do so. The basis on which a secretary can make a representation of author-ity binding his company would seem to be that generally a secretarywill be acquainted with the internal administration of the companyincluding such matters as resolutions appointing agents, etc.; he isalso the person with whom outsiders will usually communicate forinformation on these matters. In line with the policy that an outsidercannot be required to go 'indoors', reliance on any statement by thesecretary on these matters will generally be justified.53 This justification of a secretary's position is, of course, such as notto be restricted to that office alone. In British Thomson-Houston v.Federated European Bank,5* Greer L.J. remarked: . . . Some-one must represent the company for the purposeof conducting correspondence; it may be a secretary, or themanaging director, or some other officer; and he must haveauthority to bind the company by letters written on its behalf.The person chosen by the defendants for this purpose was thechairman of the board, and the defendants have represented■by their chairman that die plaintiffs could rely on the guaranteeof the defendants as the act of the defendants and are respon-sible for those acts which they have held him out as havingauthority to perform.55 Later cases have taken this statement to mean not that simplybecause a person of the kind described is authorised to conductcorrespondence on behalf of a company, he can therefore himselfenter into any contract he cares to on behalf of the company, but 53. An instance where reliance on such a statement might not he justified iswhere the secretary is an 'outsider', such as a public accountant, who hasno real acquaintance with the company's affairs. 54. [1932] 2 K.B. 176 (CA.). 55. Id at 182.

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COMPANY CONTRACTS 325 rather that such a person may make a representation as to an agent'sauthority which will bind the company.56 However, an aspect of Greer L.J.'s statement in the BritishThomson-Houston case which creates real difficulty is the suggestion(which he himself applied in that case) that an agent may make aneffective representation as to his own authority, that is, hold himselfout. This proposition was cited with approval by Slade J. in RamaCorporation v. Proved Tin and General Investments,57 and withapparent approval by Pearson L.J. in Freeman and Lockyer v. Buck-hurst Park Properties,58 and was also applied by the Supreme Courtof Ontario in the recent case of Walton v. Bank of Nova Scotia.59 Inthis latter case, the managing director of a company purported to execute a security on behalf of his company in favour of a bank. This was done without the delegation of authority from the board required by the articles. Apart from representing directly to the bank that he himself had the necessary authority, the managing director held out a person as being the secretary of the company when in fact she was not (the real secretary was on holiday) and she in turn certified to the bank that the board had passed the appropriate authorising; resolutions. The Court held that both the managing director's own representation to the bank, and also the secretary's certificate, bound the company. This, of course, amounts to holding that an agentmay hold out him self. In effect, this is so even as regards the secre-tary's certificate: A (the managing director in this case) holds out B(here the secretary) who in turn holds out A. A has indirectly held out himself. The validity of the proposition that an agent may make an effective representation as to his own authority must be regarded as open to serious doubt. It will be recalled that the House of Lords in Houghton's case held that a representation of authority cannot be made by 'the artificer of the infringement', that is, the agent acting without authority. Indeed, the decision of the House of Lords in thiscase rums entirely on the principle that an agent cannot hold out himself. Diplock L.J. in Freeman and Lockyer v. Buckhurst Park Properties also adopted this view: It follows that where the agent upon whose 'apparent 'authority the contractor relies has no actual' authority fromthe corporation to enter into a particular kind of contract withthe contractor on behalf of the corporation, the contractor 56. See the cases cited infra, nn. 57-59. 57. [1952] 2 Q.B., 147, 170. 58. [1964] 2 W.L.R. 618 (CA.). 632. 59. (1964) 43 D.L.R. 611.

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326 THE ADELAIDE LAW REVIEW cannot rely upon the agent's own representation as to his actualauthority.60 . ,: Powell states,01 as is, of, course, obvious, that where a principal hasexpressly or impliedly authorised his agent to make a représentationas to his own authority, the principal is bound. However, Powellfurther contends that, on principle, if the agent's representation iswithin his usual or apparent authority, the principal should again bebound simply on the basis that any act (such term presumably includ-ing representations) done by an agent within his usual or apparentauthority normally binds his principal. Powell, however, concedesthat the present tendency of the law both in England and thé UnitedStates appears to be against this view and seems to require that therepresentation be by the principal himself (or in the casé of com-panies, by any of the classes of persons who can hold out on behalfof a company other than the agent himself). The preponderance of; authority therefore seems to favour the viewthat an agent öf a company cannot make a representation as to hisown1 authority which will bind the company. Thus, for example, anyattempt to support the decision in British Thomson-Houston v. Feder-ated European Bank62 on the ground suggested by Greer L.J. in thatcase would have to be rejected. As earlier suggested, the decisionshould be regarded simply as a case of an agent acting within hisusual authority. (iv) Summary In Freeman and Lockyer v. Buckhurst Park Properties, DiplockL.J. attempted to formulate a general proposition in answer to thequestion, who can hold out on behalf of a company? He said that'in order to create an estoppel between the corporation and the con-tractor, the representation as to the authority of the agent whichcreates his "apparent" authority must be made by some person orpersons who have "actual" authority from the corporation tó makethe representation'.03 The learned judge said later in his judgment, byway of a summary of his views, that the contractor 'can rely onlyupon a representation by a person or persons who have actual author-ity to manage or conduct that part of the business of the companyeither generally or in respect of those matters to which the contractrelates.'04 "While Diplock LJ. seems to have considered this second 60. [1984] 2 W.L.R. 618 (C.A.), 637. 61. Law of Agency (2nd ed. 1961), 57 ff. ; 62. [1932] 2 K.B. 176 (CA.). 63. [1964] 2 W.L.n. 618 (CA.), 637,,r 64. Id, at 638.

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COMPANY CONTRACTS 327 proposition to be merely a paraphrasing of the first, almost certainlyit is not. However, be that as it may, neither proposition accommo-dates all the situations in which a representation of authority hasbeen held to bind a company. For example, it is difficult to saythat the shareholders of a company will ever have actual authorityto make a representation of authority. Furthermore, in most casesit will be difficult to say "that they are managing or conducting anypart of the business of the company. Again, with directors, it seemsto be straining language to say, in many circumstances, that they willhave actual authority from any one to make representations ofauthority. Further, it is impossible to say of the secretary of acompany, that he has actual authority to manage or conduct any partof the business of the company. It is suggested that the only element common to all the classesof persons who, on the existing law, can make representations ofauthority binding their company, is that in each case the personswho make the representation know or ought to know whether theagent concerned has been regularly appointed or, as the case may be,regularly invested with authority. Their position in the company issuch that an outsider receiving any representation from them will, inthe absence of circumstances putting him on inquiry, be entitled toassume that the representation is in accordance with the actual internalstate of affairs of the company with which they can only be assumedto be acquainted. To this extent, the Rule of Turquand's Case, whilehaving ceased to exist as a special rule of company law, still carrieslegitimate influence, as embodying a'policy consideration. What Form May an Estoppel Take? The commonest form of estoppel will, of course, be a representationas to the authority of an agent either positively or by acquiescenceat the time the transaction in question takes place. However, a less common form of estoppel may sometimes arise. Ifany of the classes of persons described earlier discover after a trans-action has been entered into that it has been entered into withoutauthority and fail to notify the third party as soon as possible of thatfact and the third party is allowed to proceed upon the basis of abinding contract with the company, then an estoppel by subsequentacquiescence will be raised against the company. The case of City Bank v. The Australian Paper Co.G5 probably pro-vides an example of estoppel by the subsequent acquiescence ofshareholders. 65. (1871) 10 S.C.R. (N.S.W.) 235.

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328 THE ADELAIDE LAW BEVTEW Houghton's case,00 as considered by the House of Lords, providesan example of the type of situation where subsequent acquiescenceon the part of directors will bind the company (although for thereasons given earlier, acquiescence was not made out in the circum-stances of that case). Walton v. Bank of Nova Scotia07 provides an example of a casewhere subsequent acquiescence by the secretary can bind a company.Here the real secretary, on his return from holidays, discovered thetransaction in question but took no steps to have it repudiated. Itwas held08 that he was under a duty to notify the bank that thegranting of the security had not been duly authorised and that hissilence and inaction amounted to a representation to the bank thatthe granting of the security had been validly authorised by thecompany. Thus, it can be stated as a general principle that those personswho can estop a company by prior representations or acquiescencecan also estop the company by subsequent acquiescence. It is now opportune to examine the distinction, mentioned earlier,between estoppel by subsequent acquiescence and ratification. Theconsequence produced by an estoppel and by ratification is, of course,precisely the same: the company becomes bound on the contract.However, differences exist as to what amounts to each. First, a thirdparty relying on an estoppel must generally prove that he has actedto his detriment in reliance on the estoppel, whereas this is notnecessary for ratification. In fact, however, this distinction seemsmore theoretical than real in the case of estoppel by acquiescence,at any rate in the context of company contracts. Here, the courtshave been content to require only that the party seeking to set upthe estoppel continue in the belief that he has a binding contractwith the company without that belief being dispelled. A more significant distinction arises from the question of who canratify, as opposed to who can hold out, on behalf of a company. Asa matter of general principle, the person on whose behalf a contracthas been entered into must ratify it.60 In the case of a contractentered into on behalf of a company, this, of course, begs the question.Obviously the company cannot itself ratify but must in the natureof things do so through an instrumentality. With a company, thenearest one can approach the usual principle of ratification is to say 66. [1928] A.C. 1. ~ 67. (1964) 43D.L.R. 611. See supra, 325. 68. Id, at 625. 69. See Powell: Law of Agency (2nd ed. 1961), 124.

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COMPANY CONTRACTS 329 that whoever could have authorised the agent to enter into the contractin question can ratify it on behalf of the company. This would, forexample, be the board of directors where they have a power ofappointment or delegation under the articles. Where they do nothave such a power, then the company in general meeting would haveto ratify. Where the company in general meeting has not delegatedthe relevant power to the directors exclusively but has reserved powerto appoint, etc., concurrently within the same field,70 then presum-ably either the board or the company in general meeting could ratify.Where the relevant power has been delegated to the directors exclu-sively but without a power of Subdelegation, it would seem to followthat nobody could ratify on behalf of the company and a new contractwould have to be concluded. However, it seems at least arguablethat the proposition, whoever could have authorised the agent inquestion can ratify his acts, may not in fact apply. In Ridley v. ThePlymouth Grinding and Baking Co.,11 the defendant company hadsublet premises to the plaintiff by an agreement pursuant to whichthe company undertook to keep the plaintiff indemnified against anyliability to the head lessor. The lessor distrained on goods of theplaintiff as a result of which the plaintiff sought to be indemnifiedin terms of the agreement. The company denied that it was boundby the agreement. The articles of the company required contractsto be authorised by resolution of the board of directors comprisingat least five of the eleven directors. The directors were given nopower of Subdelegation. At a subsequent meeting of the board atwhich four directors were present, the agreement was purportedlyratified. Parke B. held that the agreement 'was clearly entered intoon behalf of the company, and if it had been sanctioned by thenumber of directors sufficient to enter into contracts, it would havebound the company. But it appears to have been sanctioned at aboard meeting at which the requisite number of directors were notpresent; and consequently the defendant company is not bound byit.'72 This case thus appears to provide authority for the wider proposi-tion, that whoever has power to enter into the contract in questioncan ratify it. This would mean, for example, that where the boardof directors possesses power to enter into a contract on behalf oftheir company but is not authorised to subdelegate that power, theywill be able to ratify a contract entered into by an agent withoutauthority notwithstanding that they could not have authorised the 70. As in Mercantile Bank of India v. Chartered Bank of India [1937] 1 AllE.R. 231. 71. (1848) 154 E.R. 676. 72. Id, at 679.

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330 THE ADELAIDE LAW REVIEW transaction in advance. At first sight this seems an infringement ofthe principle delegatus non potest delegare. It is perhaps arguablethat in the above example any ratification by the directors wouldamount to a retrospective and unauthorised Subdelegation of author-ity. This objection can be at least partly met. The policy behindthe rule against Subdelegation is presumably that the delegate shouldnot abdicate to another his function of deciding personally whethera particular transaction, etc., should be entered into on behalf of hisprincipal. Where ratification by the directors of a company takesplace in the circumstances envisaged, this does not occur. The agentcannot bind the company by his own decision. Whether the companywill be bound will depend upon the decision of the directors to ratifyor not. Thus the company retains the benefit of the collective con-sideration of the board. In this sense at least, the present situationdoes not constitute a breach of the rule against Subdelegation. Tothe extent that it is a breach the special nature of a company's struc-ture probably renders it desirable that an exception be made to therule. Relating ratification now to estoppel by subsequent acquiescence, itseems to be the case that the requirements governing who can ratifyare stricter than those governing who can create an estoppel. Whilethis might seem anomalous in view of the fact that the consequenceis in each case exactly the same, analytically the differences are explic-able on the ground that the two doctrines are concerned with differentquestions: ratification is concerned with the retrospective confermentof actual authority, estoppel is concerned with the creation of anapparent authority. That the distinction between ratification andestoppel by subsequent acquiescence has not always been sufficientlyappreciated is illustrated by Ridley's case itself. On the facts of thatcase, it would seem to have been perfectly arguable that the subse-quent acquiescence by the directors in the agreement while not con-stituting ratification nevertheless raised an estoppel against thecompany. Similarly, in In Re Hapytoz,73 where the four directorswere the only shareholders, the fact that a majority of shareholderscum directors had not acquiesced in the managing director's assump-tion of authority, while fatal to a claim that ratification had occurred,should not also (as was held) have prevented an estoppel arisingbased on the acquiescence of any of the directors. The final form of estoppel to be considered is estoppel by negli-gence. It will be recalled that Viscount Sumner said in Houghton'scase that 'what a director knows or ought in the course of his duty to 73. [1937] V.L.R. 40.

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COMPANY CONTRACTS 331 know may be the knowledge of the company.*74 Viscount Dunedinsaid-jn the same case: It only remains to consider whether negligence on the partof the unincriminated directors can found an estoppel againstthe company. I am of opinion that it cannot. It is no partof a director's duty to inspect accounts, every day. There wasnothing in the circumstances to arouse the suspicions of thetwo directors as to the existence of any such agreement. Assoon as they were all at home, the whole thing was found outand the arrangement stopped.75 While thus it was not established'in this case that non-discovery ofthe transaction resulted from negligence on the part of the directors,it was nevertheless recognised that if negligence had been made out,the company would have been estopped from denying the regularityof the transaction. The soundness of any separate doctrine of estoppel by negligencehas been vigorously challenged by Spencer Bower.70 He asserts thatthe expression is misleading because it implies that negligence inone's own interests will of itself raise an estoppel whereas everyestoppel requires a representation. While he, of course, concedesthat silence or inaction can amount to a representation by acqui-escence, he considers that the representor must actually know ofthe circumstance that his acquiescence prevents him from denying.Thus, on this view, presumably acquiescence in a transaction throughignorance of its existence, although such ignorance is produced bynegligence, will not raise an estoppel against a company. Admittedlythe leading cases on what is commonly described as estoppel by negli-gence do not concern the circumstances envisaged in Houghton'scase.77 However, if failure to undeceive where directors have know-ledge of the deception raises an estoppel against the company (asapparently it does), it seems a very short step to the proposition thatfailure to undeceive in respect of deceptions of which directors oughtto know also raises an estoppel. Again, approaching the question inthe light of the policy consideration given effect to in the originalRule in TurquancFs Case, a third party can reasonably assume thatwhere directors, ' etc., do not object to a transaction to which theformer is a party and of which the latter would normally be awarein the course of their duties, they accept the transaction as beingbinding on their company. 74. [1928] A.C. 1, 19 (italics added). 75. Id, at 15. 76. Estoppel by Representation (1923), 84 ff. 77. See cases cited by Cross: Evidence (2nd ed. 1963), 287; these concernthe negligent issue of documents etc.

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332 THE ADELAIDE LAW BEVTEW It is therefore submitted that acquiescence by any of the classes:of person, a holding-out by whom can bind the company, in a trans-action of which in the course of their duties they ought to know,will raise an estoppel against the company. The Doctrine of Constructive Notice The one rule governing company contracts which remains peculiarto this field of contract law is the doctrine of constructive notice:outsiders are deemed to have notice of a company's public documentsincluding limitations on the authority of agents contained therein.This doctrine finds no support in any provision of the Companies Actbut appears to derive from the decision of the House of Lords inErnest v. Nicholïs.78 In this case Lord Wensleydale appeared to takethe view79 that in the absence of such

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