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This question requires candidates to consider the authority of company directors to enter into binding contracts on behalf of their companies.
Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.
Article 3 of the model articles of association for private companies provides that the directors of a company may exercise all the powers of the company. It is important to note that this power is given to the board as a whole and not to individual directors and consequently individual directors cannot bind the company without their being authorised, in some way, so to do. There are three ways in which the power of the board of directors may be extended to individual directors.
(i) The individual director may be given express authority to enter into a particular transaction on the company’s behalf. To this end, Article 5 allows for the delegation of the board’s powers to one or more directors. Where such express delegation has been made then the company is bound by any contract entered into by the person to whom the power was delegated.
However, in the present situation it does not appear that Hope has been expressly given the power to enter into the contract with Ima, and so the company cannot be made liable on this basis.
(ii) A second type of authority that may empower an individual director to bind his company is implied authority. In this situation, the person’s authority flows from their position. Thus, although the board of directors may expressly confer any of their powers on a director as they see fit under Article 5, the mere fact of appointment to a particular position will mean that the person so appointed will have the implied authority to bind the company to the same extent as people in that position usually do.
Whereas the previous model articles of association specifically provided for the delegation of the board’s general authority to one or more managing directors, the new model articles make no such reference, other than the general power under
Article 5. However, as implied actual authority to bind a company could always arise as a consequence of the appointment of an individual to a position other than that of managing director that previously specific rule now becomes the general rule in relation to implied authority. For example in Hely-Hutchinson v Brayhead Ltd (1968), although the chairman and chief executive of a company acted as its de facto managing director, he had never been formally appointed to that position. Nevertheless, he purported to bind the company to a particular transaction. When the other party to the agreement sought to enforce it, the company claimed that the chairman had no authority to bind it. It was held that, although the director derived no authority from his position as chairman of the board, he did acquire such authority from his position as chief executive and thus the company was bound by the contract he had entered into on its behalf.
Once again, however, it would appear that Ima cannot make use of this method of fixing Goal Ltd with liability for her contract, as Hope has not been appointed to any executive office in the company.
(iii) The third way in which an individual director may possess the power to bind his company is through the operation of ostensible authority, which is alternatively described as apparent authority, or agency by estoppel.
This arises where an individual director has neither express nor implied authority. Nonetheless, the director is held out by the other members of the board of directors as having the authority to bind the company. If a third party acts on such a representation, then the company will be estopped from denying its truth.
In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964), although a particular director had never been appointed as managing director, he acted as such with the clear knowledge of the other directors and entered into a contract with the plaintiffs on behalf of the company. When the plaintiffs sought to recover fees due to them under that contract, it was held that the company was liable: a properly appointed managing director would have been able to enter into such a contract and the third party was entitled to rely on the representation of the other directors that the person in question had been properly appointed to that position.
The situation in the problem is very similar to that in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd. The board of Goal Ltd has permitted Hope to act as its chief executive, and he has even used that title. The board has therefore acquiesced in his representation of himself as Goal Ltd’s chief executive and, consequently, they and Goal Ltd are bound by any contracts he might make within the scope of a chief executive’s implied authority. As entering into a contract to draw up plans would clearly come within that authority, Goal Ltd will be liable to pay Ima or face an action for breach of contract.