Deal or No Deal?
So you think you have a deal, but is it really enforceable?
The basics
The basic principles of contract law can be shown by way of an example. Andy has a lawnmower he plans to give or sell to Billy:
If Andy says he’s going to give the lawnmower to Billy, it’s a promise not a contract and Andy can change his mind.
If, however:
- it’s clear that one of them has made an offer and that offer has been accepted;
- each of them is providing something to the other (e.g. they’ve agreed a price or exchange);
- the main terms have been agreed;
- they both have mental capacity/authority; and
- it is clear that they intended to enter into a deal (it can be verbal, a handshake or even implied from their conduct, generally it doesn’t need to be in writing as long as it is clear that they intended to enter into a deal);
then they have a binding contract and they can hold each other to the deal.
Some contracts, such as a contract relating to land, must be signed and in writing.
But what if you are dealing with a company?
If you are dealing with a director of a company, do they have authority to bind the company? If the company only has one director, you can assume that they have proper authority to bind the company. But what if the company has two or more directors?
General Rule
The general starting point is the “indoor management rule” which says that a person dealing with a company is entitled to assume that the company’s internal requirements have been complied with, unless they have knowledge to the contrary.
But…The Autumn Tree case
The case of Bishop Warden Property Holdings Ltd v Autumn Tree Limited is an example of the fact that you cannot always rely on the indoor management rule. In this case, a property development company had two directors. Only one of the directors signed a sale and purchase agreement for the sale of the company’s property. The question was whether there was an enforceable contract. The court held that if there were two directors of a property development company you could not assume that one director had the authority to sign on their own. One of two directors of a property development company does not customarily have authority to unilaterally enter into a significant property transaction.
Conclusion
Unless a company has a sole director, it is unwise to assume that one director of the company has sufficient authority to enter into a significant contract on their own.
Our advice when dealing with a company is to check who the directors of the company are and if there is more than one director, then to make sure that the contract is signed by two directors. You could also ask your lawyer to request confirmation from the company’s lawyer that the signatory (of the company) had sufficient authority to bind the company.
For more information contact Joamari van der Walt joamariv@horsleychristie.co.nz
Joamari Van der Walt │ LLB │ BComm(Economics)-Law (Stellenbosch) │
LEGAL ADVISOR
Disclaimer: This publication should not be construed or acted on as legal advice. It is brief and general in nature. Specific advice should be sought.
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