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There are many types of businesses nowadays such as joint venture, partnership or association. However, the company is the most common business because it has many advantages for owner, stockholders of that business . For example, the company has legal personality, perceptual life and limited liability which means that the personal assets of stockholders will be protected from the company’s debts. By having the legal personality, company can own property, can sue and be sued and the most important is it can enter contracts under company’s name by primary organ. However, a company usually uses an agent to enter the contract on behalf of the company because an agent is more professional and effective than a company when they make a contract with the third party. On the other hand, if the agent works beyond their authority, there will not be a balance between the company and the third party when they want to claim for the loss of transactions. Some doctrines state that the company has more advantages than the third party, whereas some doctrines indicate that the third party has the balance in favour than the principals. This essay will discuss the appropriate balance between the company and third party by discussing the doctrine of actual authority, the doctrine of ostensible authority, the indoor management rule, and sections 128 129 of the Corporations Act 2001.
The agent has many liabilities and authorities when entering the contract. An agency will arise where one person called the principal authorizes another person called the agent to perform certain acts on behalf of the principal which will create legal contract between principal and third parties. “Agency is governed by the law of contract in regard to the agency agreement itself as well as in relation to contracts made by the agent on behalf of the principal with third parties” . Besides the authority to create a binding contractual agreement between the principal and third parties, the agent also can make the principal liable in tort to third parties .
Firstly, the agent’s authorities can be created expressly or by implication in the doctrine of actual authorities. When the agent acts within the scope of his actual authorities, the principal will be bound into the contract. Furthermore, in express authorities, the agent will have “express consensual agreement” which holds out the extent of the agent’s authority . If the agent’s acts exceed their authorities in the agreement and the third party can prove the tort and negligence, they can sue the principal for the loss. However, they can not sue the agent because the third party and agent did not have a contract or an agreement between them . After that, the principal can sue the agent to claim that payment. In addition, in implied authorities, there is not an expression about the agreement between agent and principal, it will be conducted based on the circumstance. For example, the secretary can go to the bank and withdraw the cheque for company. If there is any argument between the principal and third party about the agent’s authorities, the court will make decisions based on the authority that is conferred by custom, inferred from the position which the agent occupied or inferred as being reasonably necessary to carry out express authority . If the court indicates that the agent is the only guilty party, it means that there is no authority between the principal and the agent, the agent will be personal liable for the contract with the third party, so that the principal will not be bound in the contract. Finally, in doctrine of actual authorities, the law seems to protect the company from the loss of transactions more than the outsider.
Secondly, the agent’s authorities can be also created by apparent authority or ostensible authority. In this situation, the principal does not need to give consent, the apparent authority will arise if it is proved by the law. The most common case of apparent authority is when the principal appointed a person to position that has authority to work and make a contract with the third party. They are said to be estopped from denying the existence of agency . This means that between principal and third party, the principal is liable for the loss of transactions. The apparent authority will arise when the agent was held out or represented to the outsider that they have authority to act on behalf of the principal or the third party enter contract with the agent based on the principal’s representation . For example, in Hely – Hutchinson v Brayhead Ltd , although Richards had no express authority to enter two contracts of lending money and guaranteeing a loan to that company because he was a chairman, the court stated that he had the apparent authority to enter the contracts based on the circumstances that the board had accepted his acting as their chief executive. As a result, it was held out that the principal or the defendant company must be liable to the loss of the third party.
However, there will be no apparent authority where the third party is put on inquiry or known that the agent has no actual authority . An example of that is the case Crab Tree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd . In this case, Peter was a previously director of the company, but his bankruptcy mean that he could no longer be a director, so that Peter continues to work as a full time employee, but his job has no title. However, he still attended to many administrative matters on behalf of the company. After that, he ordered a printing press using company order form. Peter signed under the printed signature as “per Peter”. The family company refused to pay the fee and after that the vendor company sued them for the payments. The court held that Peter has no apparent authority to contract on behalf of the company, so that the contract was not enforceable. In that case, the third party knew that Peter’s job has no title, but they still signed the contract with him on behalf of the company, so that the principal was not liable to the loss of transaction. As a result, the doctrine of ostensible authority may be balance in favour of the third party because if the third party can prove that there is an agent who is acting on behalf of the principal, the principal will became liable to the third party. However, if the third party can not point out the agent who was acting on behalf of the company in a contract, the third party can not claim the payment and the contract will not be enforceable.
Thirdly, the indoor management rule seems to protect the outsider more than the principal in the contract. The indoor management rule was created based on the Royal British Bank v Turquand because this law protects the third party who is doing business with a company but does not know if the internal rules of company have been complied with . In this case, the director of a company issued a bond to the Royal British Bank. There was no authority given by the general meeting. The company refused to repay the loan. The Court held that the company was liable because the resolution was a matter of internal regulation for the company and the Bank could not know whether such resolution had in fact been passed, it was presumed that the resolution had been passed. Under the indoor management rule, “an outsider dealing with a company in good faith and without any notice or reasonable grounds for suspicion of irregularity or impropriety is not affected by any actual irregularity or impropriety in a matter of internal regulation or management” . This means that the outsider or the third party does not need to check whether internal action has been taken and may assume that all company’s steps have been fulfilled. As a result, based on the indoor management rule, the third party or contractor can assume that “There have been no procedural defects in the appointment of directors; a directors’ board meeting has been properly called and held; and any board (or general meeting) approval required under the company’s constitution or the CA’s replaceable rules has been obtained” .
However, there are some exceptions for the usage of indoor management rule. The third party has an actual knowledge about an irregularity at the time of entry into transaction such as case Northside Development Pty Ltd v Registrar – General . In addition, if the outsider does not make inquiries that would normally or customarily be made by an outsider in their position, the court could also deny the indoor management rule which is applied to this case . In Northside case, there was an argument between liabilities of Northside in the contract. A contract was signed by Mr Sturgess who is a director and his son who was appointed to become a company’s secretary. However, the other two directors of Northside did not know about the contract and a purported appointment of the secretary. As a result, the court stated that Northside company was not be bound into the contract because the affixing of common seal was not valid. In this case, the third party should have made further inquiries about the common seal of Northside. However, indoor management rule protects the third party more than the principal because this doctrine allows the third party to sign contracts without knowledge of the internal regulation.
Lastly, the Corporation Act sections 128 129 seem balanced in favour of third party because they ensure that the outsider who deals in good faith with persons who can be reasonably supposed to have the authority of the company is protected against later claim by the company. Furthermore, section 128 129 Corporation Act “provide added protection to outsiders by allowing outsiders to make an assumption in relation to dealings with a company” . By that provision, the company can not argue the assumptions are whether correct or incorrect. The case Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd is a popular case about the assumption made from Corporation Act 2001. In this case the defendant company had been formed to buy and resell a large estate by two persons: Kapoor, a property developer and Hoon, who had contributed half of the capital but he did not get involved in the business. The business ran very well and Kapoor decided to develop the estate by engaging the architect’s firms to make a planning permission.
However, the company after that refused to pay the fee to the architect’s firms because they pointed out that Kapoor had no authority to engage them. The court held out that the company must pay the fee to the architect’s firms because the third party can make an assumption about the company and an assumption does not need to be correct. However, in section 128 (4), there is an exception for making an assumption, if the third party knew or suspected the assumption is incorrect, they cannot rely on section 128 129 Corporation Act 2001 . For example, if the third party has knowledge about the company’s internal resolution, or the transaction which is made by the company and the third party is not usual or normal, so that the court can held out that the assumption made by the third party is not enforceable. If the contract which was signed by the principal and the third party do not bring any benefit to the principal, the court can state that the assumption will not be enforceable . An example of the assumption is not enforceable is the case Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd . In this case, the court decided that the agent’s knowledge may be taken to represent the actual knowledge of the outsider, so that the assumptions can be known or suspected by outsiders.
Finally, each provision favours the company and the third party in different ways. In actual authority, the company is more protected by the law than the outsider because if the agent works exceed their authority, the company will not be bound into the contract. Further, the agent will be responsible for the loss of the transaction and must pay the third party if they can prove the fault of the agent. The third party sometimes must accept their loss because it is usual that the agent does not have enough money or they disappear. However, in ostensible authority, the law seems to have favour more the third party than the principal because the third party can claim the loss by proving that there is an agent who is acting on behalf of the company.
Moreover, under the indoor management rule and Corporation Act 2001 section 128 129, if the agent is the only guilty party, the third party also receive more advantages from these doctrines because they allow the third party to make an assumption about the company’s internal management. If the outsiders do not know the company’s resolution, they still can make an assumption when they are dealing with a company and the company can not argue whether the assumption is correct or incorrect. By contrast, if the company can show or point out that the assumption was known or suspected by the third party, the company will not be bound in the contract.
In conclusion, the law is not balanced between the company and third party. The actual authority states that if the agent is the only guilty party, the company or principal will not be bound in the contract. However, in ostensible authority the third party will be more protected when they prove there is an agent acting on behalf of the principal and make the principal liable for the loss. Furthermore, the laws also allow the third party to make an assumption in indoor management rule and Corporation Act 2001 section 128 129 about the company’s internal constitution when they are dealing with the company, and the company can not argue against the assumption. A current legal issue is how to get a balance between the rights of the principal and the third party with respect to the losses from transaction when the agent is the only guilty party.
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