Common Law Position At Common Law Name of the Student Name of the University

Running head: COMMERCIAL AND CORPORATION LAW
Commercial and Corporation Law
Name of the Student
Name of the University
Author Note

1COMMERCIAL AND CORPORATION LAW
Table of Contents
Issue.................................................................................................................................................2
Rule..................................................................................................................................................2
Application......................................................................................................................................5
Conclusion.......................................................................................................................................8
Reference List..................................................................................................................................9
Bibliography....................................................................................................................................9

2COMMERCIAL AND CORPORATION LAW
Common law position
At common law, any person dealing with a corporation under the assumption that he or
she is acting in good faith and without any knowledge about irregularity, such person is not
required to make any inquiry about the formality of the internal proceedings of the corporation.
Such person must assume that the company is acting in compliance with all the relevant by-laws
and articles. This principle is called the ‘indoor management’ rule that was established in the
landmark case of Royal British Bank v Turquand1. The fundamental rule of law of agency states
the actions of the agents bind the principal if such actions are within the apparent, deemed or
actual authority of the agent.
Issue
Whether Two2’s Pty Ltd is bound by the contract made by Pauline
Rule
A contract has a binding effect on the parties signing the legal agreement and a valid
contract is enforceable in the court of law.
According to section 125 of the Corporation Act 2001 (Cth) (CA 2001), expressly
stipulates that the performance of an act, which includes entering into an agreement by a
company, shall not be considered as invalid merely on the ground that it is beyond the power of
the constitution of the company2.
1 [1856] 6 EL & BL 327
2 Corporation Act 2001 (Cth) at section [125].

3COMMERCIAL AND CORPORATION LAW
In Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103, the
court observed that a contract shall be binding upon the company only if such contract is
properly signed by both the directors of a company. A contract that is rendered as valid shall be
enforceable in the court of law. A contract that is not valid shall not be enforceable in court of
law and an invalid contract does not have a binding effect on the company signing such contract.
According to section 124 (2) of the CA 2001 states that the legal capacity of a company
to enter into a contract is not affected by the fact whether such contract would be in the best
interest of the company or not3.
According to section 127(1) of the CA Act 2001, a company is entitled to execute a
document without using a common seal provided such document have been signed by 2 directors
of the company or a secretary and a director of the company. In case of a proprietary company
having a sole director, who is also the company secretary, such director of the company may
execute a document. If a document is executed in the above manner, this would enable people to
depend on the assumptions stipulated under subsection 129(5) with respect to dealings with the
company4.
As per section 127 (2) of the Act, a company with a common seal may execute a
document if the seal is fixed to the document and the fixing of such seal should be witnessed by
2 directors of the company or a company secretary or a director of the company. In case of a
proprietary company where the sole director is the secretary as well, such director should witness
such fixation of seal. This would enable people to depend on the assumptions stipulated under
subsection 129(6) relating to dealings with the company5.
3 Corporation Act 2001 (Cth) at section [124(2)].
4 Corporation Act 2001 (Cth) at section [127(1)].
5 Corporation Act 2001 (Cth) at section [127(2)].