CONTRACTING WITH COMPANIES. It is well known that contracting with companies is more hazardous than contracting with others. Nevertheless, some recent decisions have prompted this short summary of relevant law. Association with a company may give rise to special problems so that the subject has been divided according1y.l

Contracts before Incorporation. A company comes into existence on the date specified in the certificate of incorp~ration.~Promoters are sometimes anxious to impose an obligation to the company upon a person before this, for example, to sell property to the company. Of course, the difficulty is that the proposed company cannot contract at this time. No problem arises if the vendor is prepared to sell to a promoter on condition that he, the vendor, will rescind the agreement and enter into a contract -with the company when formed. However, such a transaction may not be attractive to vendor or promoter. A common form of contract has been for the vendor to contract with a person, A, as "agent" or "trustee" for the proposed company. Such an arrangement may not be altosether satisfactory from the point of view of the vendor. The company when formed cannot adopt or ratify the contract3 so that to describe A as an agent really has no meaning at all. The importance attached to the fact that A acts as trustee is that he constitutes himself trustee of his rights under the contract for the benefit of the proposed company. The important question for the vendor, then, is the liability assumed by A under the contract ~ Although there is a prcsumption that A agrrrs to p ~ r c h a s e ,the difficulty is that these contracts have containrd much the same terms as if the company was a party to it, the company, not A, agreeing to purchase. Nevertheless, Kelncr r . Baxter has been cited as authority for a rule of law whereby A will be substituted as purchaser. I t 1

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The State Companies Acts are referred to as "the Acts." The term outsider is used to refer to persons who are not promoters, directors, members or others closely associited with a company. Sec. 16(4) of the Acts. Kelner v. Baxter. (ISM) L.R. 2 C.P. 1'74; Natal Land and Colonization Co. v. Pauline Colliery and Development Syndicate, [1904] A.C. 120. Kelner v. Baxter, suprrr.

would be strange if this were so. In most cases a substitution could not be made without otherwise rewriting the contract5 and there is not, it seems, any such rule? Such a bargain is little more than an offer by the vendor to sell to the company. This will be revocable unless A has given consideration for it. But, if A has misled the vendor into believing that the company was formed at the time the agreement between them was reached, he could be liable in damages for deceit, if there has been such, or for breach of warranty of a u t h ~ r i t y . ~ Contracts after Incorporation. The effect of incorporation is to constitute the members a body corporate7 but it does not follow from this fact alone that the company can contract, for the simple reason that, though the company is an entity in law, it is not one in fact. The means of contracting are given by section 35 of the Actss It follows from the wording of this section that the problem of authority is always present when contracting with companies, that is to say, the authority to affix the seal, sign a contract or verbally agree to one as the case may be. Despite this, the law has been less favourable to persons dealing with companies than to those dealing with others. Under the general law, a person is bound by a contract entered into on his behalf by another who has been actually or apparently authorised by him to act provided that, in the latter case, the appearance of authority has been relied upon by the other party to the conSummergreene v. Parker, (1950) 80 C.L.R. 304. Black v. ~mallwood,'~(1965-66))39 A.L.J.R. 405. 7 Sec. 16 (4) of the Acts. Sec 35 (1) of the Companies Act, W.A., reads "35 (1) Contracts on behalf of a company may be made as follows:(a) a contract which if mad; between private persons would be by law required to be in writing under seal may be made on behalf of the company in writing under the common seal of the company; (b) a contract which if made between private persons would be by law required to be in writing signed by the parties to be charged therewith may be made on behalf of the company in writing signed by any person acting under its authority express or implied; (c) a contract which if made between private persons would by law be valid although made by parol only (and not reduced into writing) may be made by parol on behalf of the company by any person acting under its authority express or implied; and any contract so made is effectual in law and binds the company and its successors and all other parties thereto and may be varied or discharged in the manner in which it is authorised to be made." 5 6

tract. This is qualified in the case of companies by the rule that a company is not bound by a contract entered into on its behalf by another who is acting in excess of the authority which he might have possessed under the constitution of the company. I t is well known that two characteristics of the general scheme of company legislation led the courts to adopt this view. In the first place, a company is formed with defined powers and it was thought to follow of necessity that it could not contract beyond those powers." Secondly, a company must register its constitution in a public registry. Accordingly, it was thought that a person ought not to be able to rely on authority inconsistent with the constitution.lO It is difficult not to agree with criticism of this departure from the general law and not to sympathise with the person who deals with a company on the basis that restrictions on powers are no concern of his unless he has notice of them and that he cannot reasonably be expected to examine the company's file at the Companies' Office in the course of normal business dealings. It is also strange that the courts themselves have not been consistent in applying the rule. For instance, despite articles empowering the directors to make an appointment of a managing director subject to determination ipso facto if he ceases from any cause to be a director, companies have been held bound by contracts not so subject." In the circumstances, legislation has sought to modify the rule. Section 20 of the Companies Act, W.A., provides that "No Act of a company (including the entering into of an agreement by the company) and no conveyance or transfer of property, whether real or personal, to or by a company is invalid by reason only of the fact that the company was without capacity or power to do the act or to execute or take the conveyance or transfer."12 I t is difficult to see precisely what effect this section has. There is no reason to believe that section 35 of the Acts could be affected so that a contract is only Ashbury Railway Carriage and Iron Co. v. Riche, (1875) L.R. 7 H.L. 653. Ernest v. Nicholls, (1857) 6 H.L.C. 401, 10 E.R. 1351. It will be appreciated that the actual authority of a particular person cannot normally be discovered from a perusal of memorandum and articles alone. One would have to ensure that the agent had been properly authorised in accordance with the procedures disclosed by the articles. The law has not gone so far as to impose a duty to do this: Royal British Bank v. Turquand, (1856) 6 E. Sc B. 327, 11 E.R. 886. 11 Shindler v. Northern Raincoat Co. Ltd., [I9601 1 W.L.R. 1038; Lincoln Mills (Aust.) Ltd. v. Gough, [I9641 V.R. 193. Compare the reasoning of Harman J. in Read v. Astoria Garage (Streatham) Ltd., [1952] 1 All E.R. 922. 12 See Sec. 20 of the Acts for the full text. 9

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the company's contract if it has been entered into on its behalf by. a person duly authorised. I t would appear that, as a result of section 20, an act of authorisation by the company cannot be disclaimed on the grounds that it was beyond the powers of the company. The difficulty is that the company does not normally authorise contracts beyond its powers. This will be done by the board of directors who are invariably given the general management of the company13 and it does not seem possible to read the word "company" in this section as embracing the board of directors.

Insiders. Contracts before Incorporation. The promoters of a company may be anxious to impose a range of special duties on the proposed company, for example, payment of preliminary expenses, the acceptance of one or more of them as directors for life14 or the duty to conduct the affairs of the company in a particular way. The same difficulty arises, namely, the inability of the proposed company to contract. I t is convenient, and usual, to insert such provisions in the articles of the company as well as the other provisions relating to the affairs of the company and the pmmoters may be satisfied that they will be carried out if only because they may continue to be associated with the company. The extent to which the articles bind the company after incorporation is discussed under the following heading. Contracts after Incorporation. Incorporation alone does not give any contractual force to the articles of a company. This results from section 33 of the Acts.16 Thus, the contract in the articles binds the company to members but not others, and, even so, there are difficulties in fitting this peculiar type of contract into the general law. In the first place, a narrow judicial interpretation of section 33 13 .I4 15

Compare Table A, art. 73. It can scarcely be argued that this is other than an authorisation to act within the powers of the company. A director of a public company can always be removed by ordinary resolution: sec. 120 of the Acts. Sec. 33 (1) of the Companies ~ c t W.A., , reads "33 (1) Subject to this Act, the memorandum and articles when registered, bind the company and its members to the same extent as if they respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles." It seems that the effect of the section is to create a contractual relationship not only between the company and the members but also between the members inter se: Rayfield v. Hands, [I9601 1 Ch. 1.

has sometimes prevented members from enforcing rights given to them by the articles. It is said that the section does not apply to rights given to a member "in a capacity other than that of a member, as, for instance, as solicitor, promoter, director . . ."la It is difficult to see what is meant by this. Whenever a member seeks to enforce a right which he claims under the articles alone, he must do so, of necessity, as a member because it is only as a member that section 33 gives him any standing. The interpretation placed on the section amounts to no more than that a member will not be accorded this standing if the right he seeks to enforce is associated with the occupation of a special position as opposed to a right associated with the occupation of the position of member. I t would only be proper to make this distinction if it were possible to say that, in the articles of companies, there is a category of rights associated with the position of member irrespective of the rights given by the articles in particular cases. Whilst it may be that certain rights are commonly associated with membership, the rights of a member, subject to the Acts, depend on the terms of his membership as disclosed by the particular articles of his company or otherwise.17 Of course, provisions in the articles must relate to the company and its affairs.18 The kind of problem which might be raised by the narrow interpretation of section 33 was illustrated by a recent case involving a home-unit company where the opinion was expressed that the articles were incapable of conferring a leasehold interest.19 In any event, the reasoning behind this interpretation is contrary to the reasoning in such cases as Salmon v. Quin & Axtens Limited.2o It is hardly surprising that the courts have not been consistent in applying it.21 16

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Hickman v. Kent or Romney Marsh Sheep-Breeders' Association, i19151 1 Ch. 881, at 900. See, also, Beattie v. E. & F. Beattie Limited, [1938] 1 Ch. 708. See, for example, Re Paulin, [I9351 1 K.B. 26, at 57. Sec. 29(1) of the Acts. There would be scope for a strict interpretation of of the requirement that articles prescribe "regulations for the company". See Heron v. Port Huon Fruitgrowers Co-operative Association Ltd., (1922) 30 C.L.R. 315, at 338 et seq. Per Macfarlan J. in H. H. Halls Ltd. v. Lepouris. (1964) 82 W.N. (Pt. 2) (N.S.W.) 87. T h e decision of the Supreme Court of New South Wales was affirmed on appeal to the High Court, (1965-66) 39 A.L.J.R. 259, but this point was not dealt with in the judgments. See, also, Jenkins v. Harbour View Courts, injra. [l909] 1 Ch. 311; aff'd sub nom. Quin & Axtens Limited v. Salmon, [1909] A.C. 442. Although the action appears to have been brought in the form now known as a derivative action, this is not necessary when the rights of a member have been invaded because the Rule in Foss v. Harbottle is inapplicable. See, for example, Pender v. Lushington, (1877) 6 Ch.D. 70. Rayfield v. Hands, supra; Re Richmond Gate Property Co. Ltd., [I9641 3 All E.R. 936.

Secondly, the terms of a contract in the articles are subject to , alteration by a special resolution of the ~ o m p a n y . ~ V o w c v e rthe alteration must be made in good faith for the benefit of the company as a whole23 and, in a recent decision granting an injunction to restrain a home-unit company from acting on a resolution purporting to alter the articles in such a way as to affect the plaintiffs rights, the view was expressed "that the taking away of the rights peculiarly attached to shares, or substantially affecting those rights, is a fraud on the holder of those rights unless good reasons for so doing are established very clearly indeed."24 I t is usual to insert a modification of rights clause in the articles of companies limited by shares whereby, if at any time the share capital is divided into different classes of shares,26 the rights attached to any class may be varied by a special procedure and the practice is recognised by the I t seems that the effect of such an article is to prevent a variation of rights otherwise than in compliance with the procedure laid down.27 In these circumstances, members, as well as others associated with companies, may need a contract apart from the articles even in respect of those matters which may be included therein.28 But whatever may be the form and content of the contract, a company cannot properly make a payment, in cash or in kind, to a 22 23 2.1 25

Sec. 31 of the Acts. Allen v. Gold Reefs of West Africa Limited, [1900] 1 Ch. 656. Crumpton v. Morrine Hall Pty. Ltd., [I9651 N.S.W.R. 240, at 244. Interesting questions may arise as to when the share capital is to be regarded as divided into different classes of shares. In Crumpton v. Morrine Hall Pty. Ltd., the view was expressed "that when you have a home-unit company and the shares divided up into different groups so that one group has quite different rights from another group it makes no difference that the Articles avoid the use of the word 'class'. In fact the groups of shares are different, the rights attaching to them are different, with the result that the capital is divided into different classes . . ." The test, then, is whether different rights are attached to the shares. For example, a proprietary company might have a class of life governor's share with general powers of control over the company including the right to remain a director for life. It would be strange, then, if a member could not enforce a right to be director for life given by the articles merely because it was not, in terms, attached to the holding of shares. Compare the interpretation of section 33 of the Acts already discussed. Sec. 65 and Table A, art. 4 of the Acts. Crumpton v. Morrine Hall Pty. Ltd., supra. Cf. Fischer v. Easthaven Ltd., [I9641 N.S.W.R. 261. Breach of a contract, the terms of which are not subject to change by an alteration of the articles, cannot be justified by a resolution altering the articles and may give rise to an action for damages: Southern Foundries (1926) Ltd. v. Shirlaw, [I9401 A.C. 701.

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member out of the capital of the company.29 The general scheme of company legislation is to maintain the capital fund in the interests of creditors and the rule follows from this. Of course, capital may be lost in the proper pursuit of the company's objects so that the rule must be subject to the qualification that the payment is not made in the course of business unless members are to be inhibited from dealing with their company altogether. In this regard, it is well known that the courts have held that a company cannot assume the power to deal in its own shares because this would empower the company to return capital to its shareh~lders.~~ It may sometimes be difficult to determine when a transaction is in the normal course of business. It seems, for instance, that the granting of leases pursuant to the articles to members of home-unit companies is not in the normal course of business."' A claim for damages may be caught by the rules2

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See, for example, Australasian Oil Exploration Ltd. v. Lachberg, (1958) 101 C.L.R. 119. Trevor v. Whitworth, (1887) 12 App. Cas. 409. Jenkins v. Harbour View Courts, [1966] N.Z.L.R. 1 . But see the Companies Act Amendment Act, 1966, SA. Houldsworth v. City of Glasgow Bank, (1880) 5 App. Cas. 317. LL.B. (Western Australia), J.D. (Chicago), LL.M. (London); Barrister and Solicitor of the Supretrre Court of Western Australia.