Corporations Law: Separate Legal Entity, Authority of Agents, and Contract Enforcement

Corporations Law 1
Corporations Law
Instructor’s Name
Name of University

Corporations Law 2
Introduction
Corporations are guided by the principle of separate legal entity developed in the celebrated
decision in the case of Salomon vs. Salomon1. There is a veil that is created upon incorporation
that separates the company from its members and directors. One of the advantages derived from
incorporation is that corporations are capable of entering into valid contracts in their own name
as well as being capable of suing and being sued2. But since a corporation is not a natural person,
there are agents (mostly directors) of the said corporation who are the driving soul and mind of
the company. The corporation therefore conducts its businesses including contract negotiations
through the use of agents. The agents should always put the interests of the corporation ahead of
their own interests in all their dealings.
The principle of separate legal entity makes it possible for a corporation to recognize and be
bound by agreements that the company’s agent enters into with third parties. The corporation
appoints officials and officers to contract on its behalf, mostly directors with a scope of authority
detailing the extent of their actions and the type of contract that would bind the corporation3.
The authority of an agent of a corporation is guided by the law of agency and they are required to
act in the interest of the company. They stand in a fiduciary position in relation to the company4.
1. Question 1
(a) Whether EngCo can enforce the contract with Buildco
Issue
1 Salomon vs. Salomon
2 Montrose JL. The apparent authority of an agent of a company (LQ Rev. 2004) 22
3 Tomasic R, Bottomley S, McQueen R. Corporations law in Australia (Federation Press; 2002) 15
4 Davies PL, Gower GL. Davies: Principles of Modern Company Law (London, Loweet and Maxwell. 2003) 63

Corporations Law 3
The main issue is whether Matt had the authority to contract and negotiate a binding contract on
the company’s behalf with EngCo. Additionally, is EngCo entitled to enforce the contract, if
any?
Rule
Transactions by corporations are governed by Corporations Act. Common law rules have also
been applied in certain cases to resolve the issue of authority of a corporation’s agent5. For
instance, the Turquand’s rule in the case of Royal British Bank vs. Turquand (1856) 119 ER
8866 did provide the circumstances when a corporation’s agent can act without authority. The
rule aims at offering protection to third parties who have no knowledge of an agent’s lack of
authority. It makes an assumption that all the internal rules of a corporation including grant of
authority has been complied with.
Though the rule has been incorporated into the Corporations Act at sections 128-129, they are
applied as the last resort. Courts still explore on the issue of the agent acting with authority.
There are two main forms of an agent’s authority; apparent and actual authority. The act of an
agent of a corporation always binds the corporation if they are captured in the objects clause of a
corporation’s constitution.
Actual authority
This occurs where a principal gives the agent consent to do certain transactions on his or her
behalf. This type of authority can be given expressly on can be by implication in certain
occasions7. In a corporation, appointment to a certain position, say, a managing director gives the
5 Ford HA, Austin RP, Ramsay IM. Ford's principles of corporations law ( Butterworths; 2005) 18
6 Royal British Bank vs. Turquand (1856) 119 ER 886
7 La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny R. Investor protection and corporate governance (Journal of
financial economics. 2000) 29