Legal Advice on Corporations Act for Olive

Advise Raj and Alana:
Whether OW is bound by the supply contract with Seedy Vineyards
After going through the facts that have been given in this question, the issue arises regarding the
contract created by Priya with Seedy Wineyards Pty Ltd for supply of grapes at the price of
$500,000. It is worth mentioning that Seedy uses a lot of pesticides, and they don't follow
organic farming. However, there is a clause in the constitution of OW, which provides that the
company would be restricted to activities of organic farming of grapes. Therefore the question
arises if this contract is binding against the company.
For dealing with the situation that has been mentioned in this question, the indoor management
rule has been described by the common law. The court came up with this rule in Turquand's
case.1 According to this rule, the law allows the third-party to make an assumption that all the
internal rules of the company have been complied with, unless other party had actual knowledge
of the noncompliance of these rules. The Corporations Act, 2001 also adopted these rules. As a
result, sections 128 and 129 provide that any person, while dealing with the Corporation can
make certain assumptions regarding such transaction. The assumptions are present in s129 and
they deal with the internal procedures that have to be followed by the corporations.2
But it needs to be noted that the other party cannot make such assumption under the law if such
party.The third party cannot rely on the assumption if it has knowledge or reason to suspect that
the assumption was not correct. Hence, while dealing with the Corporation, the third-party is
allowed by the law to make an assumption according to which the rules concerning the internal
1 Royal British Bank v Turquand (1856) 6 E&B 327
2 H A J Ford and R P Austin, Ford and Austin’s Principles of Corporations Law (Butterworths, 7th ed, 1995) 262

management of the Corporation are complied with. In the same way, it may be assumed by the
third-party that any officer is appointed according to the rules of the company. Similarly, when a
document is purported to be signed by a director of the company, it can be assumed that such
person has signed according to the Constitution of the company.3 Therefore even if the indoor
management rule is not available but the assumptions that can be made under this rule are still
available under section 129. Sections 128 to 130 deal with the assumptions that may be made by
third parties while entering into transactions with the company (Jordan, 1997). It should also be
mentioned that these provisions are not the same as the provisions that have been laid down by
the law of agency. The objective test that is applicable in such cases is present in s128(4). This
test can be used to see if the third party had knowledge or reason to doubt the correctness of
these assumptions.
After going through the above-mentioned rules, it can be stated that in this case Priya was
formally appointed managing director of OW for a period of two years however, after this period
she was not formally re-appointed but she continued to work as the managing director. But in
this case, Seedy was aware of the fact that Priya had exceeded his authority to enter the contract
and at the same time, the company also new regarding the breach of objects clause of OW. The
objects clause of OW clearly mentions that company's activities will be limited to organic
farming of grapes and producing organic wines. As a result, this contract is not enforceable
against OW.
It can be stated in the end that the contract created by Priya with Seedy, cannot be enforced
against OW
3 R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 15th ed, 2013) 432

B. Whether Ted can enforce the clause in the constitution appointing him as company
solicitor and what type of remedy would be applicable.
The issue in this question is related with the enforceability of a clause mentioned in the
Constitution of OW according to which Ted cannot be removed as the solicitor of the company
except in case of misconduct.
The law that is applicable in such cases provides that the company's constitution has to be treated
as a statutory contract that is formed between the company and its members. However, there has
been a lot of controversy and confusion regarding this contract. The main issue of contention is
the question if such contract is enforceable by the members of the Corporation for the purpose of
making sure that any right granted to them in some other role can be enforced by them against
the company.4 Section 140, Corporations Act also provides that the Constitution is a contract
formed between the company and its members, directors and the members themselves. At the
same time, the Constitution can be varied by passing a special resolution. The resolution has to
be passed by the shareholders of the company in its general meeting.
On the basis of the facts that have been given in this question, the case of Eley v Positive
Government Security Life Assurance Co Ltd.5 needs to be discussed. The brief facts of this case
are that the constitution of the company provided that Mr. Eley was going to continue as the
solicitors of the Corporation for his life. Later on, he also became a member of the company.
After some time it was decided by the company that Mr. Eley should be removed from his
position as the company's solicitors. Even if he was a member but he decided to take action
against the company in his capacity as the solicitor. The action was taken to enforce the articles
4 H A J Ford, Principles of Company Law (Butterworths, 2nd ed, 1978) 345
5 Eley v Positive Government Security Life Assurance Co Ltd (1875) 1 Ex D 88