First of all, Sounds adopts the Replaceable Rules in the Corporations Act 2001, with an extra clause in its constitution. Under S 124, Sounds is capable of entering into contracts in its own name, and under S 126, an individual acting with Sounds' express or implied authority can exercise its power to enter into a contract on behalf of the company. Therefore, the question is on what authorities each agents had when entering into a contract with Audiophiles and Bill’s.
AUDIOPHILES
The first issue is whether Tim had the authority to enter into the contract on Sounds' behalf. Even though Tim was one of five directors on the boards, director has no apparent authority to bind the company unless it made some representation (Northside Developments), …show more content…
Furthermore, Sounds has not conferred actual authority to Tim, as he was never officially appointed as Managing Director (MD). However, Tim has been acting as if he was the MD, with business cards which stated his title as 'Managing Director of Sounds Ltd’, and entering into contracts on behalf of the company. Also, the conduct of the company implied Tim’s authority and his role as the company’s secretary. To support a claim of apparent authority, 4 points are raised (Freeman & Lockyer); the replaceable rule in S 198A gives the board of directors authority to exercise the powers of Sounds, and the rest of the board agreed that they were satisfied with the state of affairs. Therefore, Sounds represented Tim as a de facto MD with authority to enter into a contract of the …show more content…
The contract is worth $2million in total, and Sounds’ constitution states that when entering into any contract with a value of $1.5million or more, approval from the board is required. In the situation where Tim failed to follow the internal procedures Sounds expect to be followed, the law would try to protect the innocent third party dealing with the company in good faith, Mr Kaza, from suffering losses which are caused by Sounds. The indoor management rule, found in Turquand's case (Royal British Bank), is to overcome the outsider's difficulties of proving that a company authorized the contract. Accordingly, when acting in good faith, Mr Kaza may assume that internal acts such as requiring approval of board have been properly performed and that he is not bound to inquire whether such acts have been regular unless there are significant circumstances where he should be put on inquiry. If surrounding circumstances showed that Mr Kaza ought to have known of any discoverable defects where a reasonable person would have been prompted to be suspicious, further inquiry must have taken place before the contract will be presumed to be valid. On the other hand, S 128 entitles Mr Kaza to make the assumptions in S 129 in relation to the contract, even if Tim acted fraudulently in connection with the transaction. Assumptions in S 129 reinforce the indoor