Corporations are a separate legal entity, distinct from the people that manage or operate the company. The ability to insulate corporate wealth and assets from the personal wealth of those involved in the company is what makes the corporation such an attractive business model. Due to the separate legal entity status, the corporation has the legal capacity and powers of an individual, including the ability to enter into contracts on its own behalf. One way the company can exercise its legal capacity is through an agent to whom it grants authority.
If you are contracting with a corporation, it is common to conduct negotiations and dealings through an agent of that corporation. However, if that agent has not been granted the requisite authority by the corporation, your contract may be void. Therefore, it is important for parties dealing with potential agents to be certain of an agent’s authority before they do business. The authority of an agent can either be actual or ostensible as discussed below. In addition, there is commonwealth legislation which protects parties to a certain extent by allowing them to assume certain formalities have been complied with by the corporation unless there is evidence to the contrary.
Actual authority is imparted when an agent is expressly or impliedly granted authority by a company to act on its behalf.
An example of express actual authority is the passing of a resolution by a company, which empowers the agent to bind the company to certain contracts.
Implied actual authority occurs when, due to the position of the agent at the company, the agent is expected to have the power to enter into the contract. The implied authority of an agent will differ depending on their position in the company and the type of contract. For example, a Managing Director would be expected to have the power to enter into major supply contracts and would thus have implied authority to do so. The same could not be said of a company secretary, although they may have implied authority to enter into minor administrative contracts such as hiring company cars.
Even if a company has not granted an agent actual authority, a third party may still be able to enforce their contract made with the agent if they can show the agent had ostensible authority. Whether an agent has ostensible authority is largely dependent on how the agent was presented by the corporation to the third party.
Ostensible authority can be established if:
- the corporation made a representation to the third party that the agent had authority to enter into a contract of the type sought to be enforced
- the representation was made by a person with actual authority to manage the company’s affairs in the matter
- the third party relied upon and was induced into the contract by the representation
- the company is not deprived by its constitution of the ability to enter into the contract or delegate authority an agent.
For example, the Board of Company A (who has actual authority) might say to a builder for a potential project – ‘B is running the show – he has our full confidence’. This representation leads the builder to believe B has authority to enter into building contracts with him and decides to enter into the relevant contracts with B because of this assurance.
Another example might be where an agent turns up equipped with business cards, receipts, letterheads and forms given to them by the company. By doing so, the company has cloaked the agent in ostensible authority which a third party has relied on.
Third parties have been given the luxury of some statutory assumptions which they can make in relation to agents. These assumptions mean contracts won’t be void due to a company’s internal irregularities over which the third party had no control or knowledge. However, they will lose the benefit of these assumptions if they knew or suspected the assumption to be incorrect.
When contracting with a corporation, a third party is allowed to assume that:
- the company’s Constitution has been complied with;
- the director and secretary has been duly appointed and they have the usual authority of that position;
- anyone held out by the company to be its officer or agent has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of an officer or agent of a similar company;
- the officers and agents properly perform their duties to the company;
- all documents have been duly executed;
- an officer or agent of the company of the company who has authority to issue a document also has authority to warrant that the document is genuine.
When dealing with an agent of a company, it is important to be certain they have the requisite authority to be contracting on behalf of the company. Although there are some protections for third parties to protect their interests if an agent has gone rogue, if you have any suspicions it is better to err on the side of caution and verify their credentials directly with the corporation.
This article was written in October 2014 and the law may have changed since then. If you require any assistance in relation to anything discussed in this article, please don’t hesitate to contact us.