Case Study: Agency and Authority Issues in Buildco Ltd - CLAW2201 Law

This case study delves into the complexities of agency and authority within the framework of Corporations Law, using the scenario of Buildco Ltd as a practical example. It addresses whether EngCo can enforce a contract with Buildco, focusing on Matt's authority as an agent and the validity of his actions. The analysis considers both actual and apparent authority, referencing key legal principles such as Turquand's rule and conditions set out in Freeman and Lockyer v Buckhurst Park Properties. Furthermore, it examines whether Buildco can enforce a loan extension approved by Matt, considering the scope of his authority and the potential for ratification. The study concludes that due to Matt's lack of proper authority, EngCo cannot enforce the contract, and Buildco cannot enforce the loan extension. It suggests that Matt should have sought written confirmation of his authority to avoid these issues, highlighting the importance of clearly defined agency agreements within corporate structures. The document is available on Desklib, a platform offering a range of study tools for students.

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

Corporations Law 4
appointed person the implied authority to act on certain transactions on behalf and for the benefit
of the corporation.
An officer of a company who acts as a managing director acquires an implied authority to do
certain acts that the holder of such office would naturally be expected to do in the
circumstances. In Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10
ACLC 2538, Mr X who was a director at the time was held to have had implied authority to act
on behalf of the company when he had a majority shareholding and acted as the managing
director after seeking and acquiring the consent of the other remaining directors of the company.
He entered into transactions without seeking the consent of the Board of Directors but he was
found to have had implied authority.
Normal operations of a corporation may restrict circumstances where its officer may be held to
have had an implied actual authority9. In Bank of New Zealand v Fiberi Pty Ltd (1992) 10
ACLC 155710, it was held by the court that one of the directors did not consent into according the
other director an implied actual authority that is always given to the managing director. The
constitution of the company required all directors to give consent and as a result, the said director
did not possess any implied actual authority which could be used to bind the company.
Apparent Authority
This is also referred to as ostensible authority. It does not occur as a result of an agreement or a
prior agreement between the agent and the principal. An apparent authority may arise under any
of the following circumstances:
8 Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253
9 Tomasic R. The Modernisation of Corporations Law: Corporate Law Reform in Australia and Beyond’ (2006)
Australian Journal of Corporate Law.;19:2
10 Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557

Corporations Law 5
1) In circumstances where the agent has been permitted by the principal to occupy a certain
position.
2) The principal by his or her conduct allows the agent to perform certain tasks on his or her
behalf, acts which in the natural sense are beyond the agent’s usual natural authority.
3) It also arises in situations where the agent has no position he or she holds in the company
but the conduct of the principal makes outsiders believe that the said agent possesses the
said authority to act.
In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd11, Diplock set out the
conditions to be satisfied for a corporation to be bound by an agent who acts without actual
authority to do so. The set conditions include12;
1) Making of a representation to third parties and outsiders that the said agent possessed the
authority to negotiate and enter into it such similar contracts which the third party intends
to enforce,
2) The person making such representation must be an individual with actual authority to
engage in the actual management of the business of the corporation or possess the
authority that relates to the matters of the contract whose enforcement is sought.
3) The third party must have been induced to contract as a result of the representation and
made reliance on the said representation
4) The corporation’s constitution does not prohibit the negotiation and conclusion of such
contracts or a delegation to an agent to enter into the said contracts.
The conditions set out by Diplock LJ have been restated with approval in the case of Crabtree-
Vickers Pty Ltd v Australian Direct Mail Advertising Co Pty Ltd (1975) 133 CLR 7213.
11 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd
12 Farrar JH. Corporate Governance in Australia and New Zealand (Oxford University Press, USA; 2001) 40
13 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Co Pty Ltd (1975) 133 CLR 72

Corporations Law 6
Analysis
Matts is an assistant to Jenny at Buildco Ltd. On 10th February 2018, Jenny went to Tahiti for a
three week holiday. While leaving, she made it clear to Matt that he should take care of all issues
and not to disturb her on her holiday. The statement allowing Matts to take care of all issues in
her absence is a form of authority given to him to act and contract on behalf of the company.
Matt goes ahead and in consultation with Cath, they contract with EngCo Pty Limited for a
major project to build a shopping centre at Rosewood.
Conclusion
The fact that Jenny indicated to Matt that he could take care of all issues without disturbing her is
a true representation that he was given actual authority to run the affairs of the company while
she was away on holiday. Matt therefore had authority to do all the acts that Jenny could do in
her capacity as a managing director except those that required the prior approval by the Board of
directors of Builco such as entering into contract with EngCo Pty Limited to build a shopping
centre at Rosewood.
Therefore, the contract concluded between Matt and EngCo Pty Limited is invalid; EngCo Pty
Limited does not have the right to enforce the said contract and seek specific performance in the
circumstances due to lack of authority on the part of Matt.
(b)
Issue
The issue is whether Buildco can enforce the extension at the interest agreed to in the exchange
of emails by Matt.
Rule

Corporations Law 7
An agent with actual authority should not engage in acts that are outside the scope of the
authority he or she has been given14. Where an agent exceeds his or her authority, the principle
has to ratify the acts of the agent for such acts to have a binding effect on the corporation 15. This
is referred to as agency by ratification. Where the principle does not ratify or approve the
contract entered into by the agent without authority, such contract becomes void and cannot be
enforceable by the third party against the corporation16.
Application
Matt is contacted by Sarah, an accountant in Buildco advising him that the company’s loan
facility with South Bank needed extension due to a temporary cash flow problem which Buildco
had at the moment. The facility was set to expire in 5 days time. Matt then told Sarah to make
arrangements for such extension and went ahead tom approve exchange of emails between the
company and the Bank. The Bank later refused to release the money on claims that the emails
had only been approved by Matt whom the believed to lack authority to approve such contract.
Conclusion
Builco cannot therefore enforce the extension at the interest agreed to in the exchange of e-mails
that had been approved by Matt. Matt did not have the authority to approve the extension of such
facilities. The argument that it was a contract of necessity cannot be applied since South Bank is
aware that Matt lacked the required authority. The said contract had also not been approved by
Jenny since she is the person who always approved such contracts.
14 Sealy L, Worthington S. Sealy & Worthington's Cases and Materials in Company Law (Oxford University Press;
2013) 20
15 Cheffins BR. Company law: theory, structure, and operation (Oxford: Clarendon Press; 2007) 9
16 Davies PL. Gower & Davies: the principles of modern company law (Sweet & Maxwell; 2008) 41

Corporations Law 8
Question 2
The facts have depicted Matt as someone who engaged in acts in which he did not have the
authority to engage in. though he had been given actual authority by Jenny, the authority did not
extend to the acts he engaged in.
1. The first step that Matt should have been done was to seek that the authority given by
Jenny be reduced into writing so that all the acts to be done in the absence of Jenny be
clear and in a written document. The document was to be issued by Jenny, appointing
Matt as an agent and listing all the acts and contracts he is allowed by the grant of such
authority to engage in and conclude on behalf of the company. By having a written
document signed by both the agent and the principal, there would be minimal problems
since all the acts that the agent could engage in are contained in the said agreement. This
would limit and minimize any claims that the agent acted outside his powers especially if
the type of contract illustrated by the above facts forms part of the agency agreement. The
document could be used by Matt as a defence to show that he actually had the authority.
2. The other step that could be open to Matt is to seek ratification of the contract by Jenny,
the principal. An agent who acts without authority can seek that the contract be ratified so
that it binds the agent and the company. Matt should have contacted Jenny immediately
she returned from holiday and briefed her on all the contracts he engaged in in her
absence and sought that Jenny ratifies them to avoid claims that he lacked the authority to
act and bind the company by his actions.
The application and use of the two actions/steps briefly discussed above would ensure that the
contracts conclude between Matt and third parties acquire a binding effect on both the principal

Corporations Law 9
and other third parties. Claims that Matt did not have the authority to enter into such contracts on
behalf of the company would therefore not arise.
Bibliography
Books

Corporations Law 10
Brian, Cheffins Company law: theory, structure, and operation (Oxford: Clarendon Press; 2007)
Paul, Davies. Gower & Davies: the principles of modern company law (Sweet & Maxwell; 2008)
Paul, Davies, Gower, Lone. Davies: Principles of Modern Company Law (London, Loweet and
Maxwell. 2003)
Hickman, Farrar. Corporate Governance in Australia and New Zealand (Oxford University
Press, USA; 2001)
Ford A, Austin P, Ramsay I. Ford's principles of corporations law ( Butterworths; 2005)
La Porta , Lopez-de-Silanes , Shleifer , Vishny. Investor protection and corporate governance
(Journal of financial economics. 2000)
John, Montrose. The apparent authority of an agent of a company (LQ Rev. 2004)
James Sealy &Paul, Worthington. Sealy & Worthington's Cases and Materials in Company Law
(Oxford University Press; 2013)
Ron, Tomasic, Mark, Bottomley & Roy, McQueen. Corporations law in Australia (Federation
Press; 2002)
Ron, Tomasic. The Modernisation of Corporations Law: Corporate Law Reform in Australia and
Beyond’ (2006) Australian Journal of Corporate Law; 19:2
Case Law
Salomon vs. Salomon
Royal British Bank vs. Turquand (1856) 119 ER 886
Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253
Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Co Pty Ltd (1975) 133 CLR 72