Transcript CHAPTER 7 CORPORATE LIABILITY: CONTRACT, TORT AND CRIME At the end of this topic you should know: • how companies can be liable.

CHAPTER 7
CORPORATE LIABILITY: CONTRACT, TORT AND CRIME
At the end of this topic you should know:
• how companies can be liable in contract, with particular
references to ss 128-130; and
• how companies can be liable in crime and tort under the
organic theory, or vicarious liability.
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Contract – Overview
This topic looks at how liability can be imposed on the
company (as distinct from its officers or members) in
contract, tort and crime.
Most of the cases involve actions by financial
institutions against companies for enforcement of
security/loan agreements entered into by a director of
the company.
The company will argue that it is not bound by the
agreement on the basis that the director acted
without proper authority.
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Contract
There are many competing policy issues, which are
important to bear in mind when you try to reconcile
the cases.
need for commercial
certainty (ie that
contracts will be
enforceable)
fairness to outsiders
who have dealt with the
company in good faith
need to protect members
from unauthorised acts of
company officers
V
members’ rights to have
the company’s internal
rules complied with
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General Requirements
A contract will not be binding if:
• it is contrary to general law;
• it is contrary to a provision of the Corporations Act
which makes such a transaction either void or
voidable;
• it is contrary to the interests of the company and
other party knew this; and
• it was made at a time when the company was
insolvent or on the verge of insolvency and this was
known to the other party.
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How Does a Company Execute a Contract –
General Law Agency Principles
A company can either execute a contract:
• directly by one of its organs; or
• indirectly by an agent.
There are two kinds of authority:
• actual authority (express or implied); or
• apparent authority, also known as ostensible or held
out.
Also relevant to general law principles of agency is the
general law assumption called the “indoor management
rule”.
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Agents Authority: Contracts
AGENT’S AUTHORITY
express
implied
types of actual
authority
apparent
s 129
ratification
overlap
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How Does a Company Execute a Contract –
Statutory Provisions
An agent signs own name “for and on behalf of” the
company: s 126.
A document is signed by:
(a) 2 directors;
(b) director and secretary; or
(c) sole director (one-person company): s 127(1).
A company’s common seal is stamped on the document
and its affixation is “witnessed” by:
(a) 2 directors;
(b) director and secretary; or
(c) sole director (one-person company): s 127(2).
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How Does a Company Execute a Contract –
Statutory Provisions
A company may execute a contract by a document called
a deed where company appoints an attorney to execute
documents on its behalf.
If the contract needs to be executed as a deed, then it
must state that it is a deed and be executed in the manner
described in s 127(1), (2).
Section 127 is not a replaceable rule.
The internal rules can authorise additional methods by
virtue of s 127(4).
A company is no longer required to have a common seal:
s 123(1).
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Statutory Assumptions – ss 128-129
Who Can Rely on Assumptions?
If the general requirements are met and the contract has
been executed in the correct manner, the contract will be
binding unless:
• the agent lacked express or implied actual authority or
apparent authority to enter into the contract; and
• the statutory assumptions in s 129 do not assist.
A person may make the assumptions in s 129 in relation
to “dealings” with a company (s 128(1)) or “dealings” with
another person who has directly or indirectly acquired
property from a company: s 128(2).
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Statutory Assumptions – ss 128-129
To clarify:
agent had authority

binding (s 129 assumptions
may provide evidentiary
assistance)
agent did not have
authority

may still be binding as a
result of the operation of
s 129
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The Assumptions
Assumptions that can be made under s 129:
1. Company’s constitution (if any) is complied with;
2. Person named in ASIC public records has:
• been duly appointed
• usual (customary) authority of director or company
secretary of similar company;
3. Person held out by the company has:
• been duly appointed
• usual (customary) authority of that kind of officer of
similar company (eg managing director);
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The Assumptions
Exceptions
4. Officers and agents properly perform duties;
5. Due execution without seal if signed per s 127(1);
6. Due execution with seal if signed per s 127(2); and
7. Officer or agent has authority to warrant authenticity
of documents.
People having dealings with companies can rely on
these assumptions, whether or not they actually made
them, and even if an officer of the company is acting
fraudulently, unless “they knew or suspected that the
assumption was incorrect: s 128(3) and (4).
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Application of Law to Pre-1 July 1998 and
Post-1 July 1998 Contracts
The statutory assumptions in ss 128-129 only apply
to contracts executed after 1 July 1998.
Contracts executed prior to 1 July 1998 are governed
by the provision (if any) that applied on the date the
contract was executed: Northside Developments Pty
Ltd v Registrar-General (1990).
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Usual (Implied Actual) Authority of Company
Officers – Individual and Sole Directors
Under the usual forms of internal rules, an individual
director does not have any actual or apparent authority to
act on the company’s behalf: Northside Developments Pty
Ltd v Registrar-General (1990).
Directors usually only have authority when acting
collectively as a board.
If the sole director is also the sole shareholder, then
s 198E(1) has the effect of conferring all the company’s
powers on that director.
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Usual (Implied Actual) Authority of Company
Officers – M.D. and Company Secretaries
Generally, a managing director has usual (implied
actual) authority to do all such acts as are necessary
to carry on the company’s business in the ordinary
way.
Generally, a company secretary will have usual
(implied actual) authority from the office he or she
holds to look after the administrative side of the
company’s affairs.
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Defects in Appointment –
Indoor Management Rule
Even if there is some defect in appointment, a
managing director’s or other director’s acts are still
valid according to s 201M.
Under the general law, if an outsider entered into a
contract with a person who purported to act for the
company but who had no proper authority, the
contract was (unless ratified) voidable at the
company’s option.
To overcome this problem, the general law developed
the “indoor management rule”: Royal British Bank v
Turquand (1856).
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Indoor Management Rule
Persons dealing with a company in good faith may
assume that acts within its constitution and powers
have been duly performed and are not bound to
inquire whether acts of internal management have
been regular.
A person will not be acting “in good faith” (and
therefore, will not be able to rely on the rule) if they
knew or were “put on inquiry” that the acts were not
regular: Northside Developments Pty Ltd v RegistrarGeneral (1990).
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Continued Role for the I.M. Rule –
Constructive Notice
Under the general law the indoor management rule
will continue to be relevant to companies for:
• actions by third parties;
• pre-1984 dealings; and
• dealings with any corporation that is not a
“company” within the definition in s 9.
Section 130 abolishes the general law doctrine of
“constructive notice”. Put simply, constructive notice
meant that an outsider dealing with a company was
deemed to have notice of all the company’s public
documents.
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How Can a Company be Liable in Tort or
Crime?
There are two theories of liability for torts – the organic
theory and vicarious liability.
Under the organic theory the important thing is to discover
who is the “directing mind” of the company. If the directing
mind has committed a wrong, the company will be liable:
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd
[1915].
Under vicarious liability principles, a company is liable for
acts of others such as an employee or agent who commits
a wrong within the scope of their employment.
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How Can a Company be Liable in Tort or
Crime?
Companies can be criminally liable under either the
organic theory or vicarious liability.
Under the organic theory, if the directing mind and will
committed the offence, the company is liable because its
“brain” committed the crime: Tesco Supermarkets Ltd v
Nattrass [1972].
Certain provisions of the Corporation Act may also deem
a wrong committed by the employee to be the wrong of
the company: see [7.320].
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How Can a Company be Liable in Tort or
Crime?
Vicarious liability occurs in those areas of law where
society wants to punish the wrongdoer without having to
prove the wrongdoer had the intention to cause harm.
Statutes may create “strict liability” offences, where the
prosecution will not have to prove a guilty mind. Usually,
no defence is available once the unlawful act is proved.
The Criminal Code set out in the Criminal Code Act
1995 (Cth) provides express, statutory attribution of
criminal liability to corporations in relation to any offence
created by Commonwealth laws (including the
Corporations Act): see [7.340].
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Civil and Criminal Penalties Under the
Corporations Act
Various sections of the Corporations Act impose:
• civil penalties on companies – that is, fines and
banning orders; and
• criminal penalties on companies – the fine for a
company convicted of such an offence can be as
high as five times the maximum for an individual:
s 1312.
Companies are denied the right to silence in criminal
proceedings and cannot claim the right to privilege
against self-incrimination or exposure to civil penalty:
s 1316A.
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