Unauthorized Contracts:
It may sometimes happen that a company's agent, while entering into a contract on behalf of the company, exceeds his powers under the articles of association. To what extent is the company bound by the contract?
The Rule in Royal British Bank v Turquand
In Royal British Bank v Turquand (80) a company was ordered to repay a loan which its directors had borrowed on its behalf without the authority of an ordinary resolution prescribed by the articles of association. In the course of delivering his judgement Jervis, C J stated:
"The dealings with these companies are not like dealings with other partnerships, and there the parties dealing with them are bound to read the statute and the deed of settlement also. But they are not bound to do more. So therefore the party here, on reading the deed of settlement, would discover so thus not a prohibition from borrowing, other than a permission to do so on convinced conditions. Finding that the authority might be made complete by a resolution, so here he would have a right to infer the detail of a resolution authorizing that which on the face of the document appeared to be legitimately done".