Corporate Liability –
Contract, Tort and Crime
Corporations and Trust Law ACACT301A
Week 5
Today
How the company can be liable for the acts of
it’s officers or members in:
Contract
Tort
Criminal
Companies are artificial legal persons
Historically, companies were limited by the businesses and activities for
which they had been established (objects clause or scope of business
clause). Anything outside of this, was ultra vires i.e. beyond the power of
the company and usually void.
Ashbury Railway Carriage & Iron Co ltd v Riche (1875) LR HL 653
The company’s objects clause provide it was formed to make, sell and
hire railway carriages and wagons. The company entered into a
contract to “finance” the construction of a railway in Belgium. The
contract was not binding because it was outside the scope of the
objects clause. The transaction had no legal effect. There was no
contract to be enforced. Riche could not sue for breach of contract.
Now, a company is an entity recognised by law but which is not a real
person. Section 124 ensures a company has all the powers of an
‘individual’ (ie. a natural person).
Company can employ people, own property, make contracts, and sue
and be sued.
BUT the corporate world is not so simple. Corporations
are inanimate (not alive) legal persons, which require
individual human beings (eg. Directors and employees) to
operate them on a day to day basis. S.198A says, “The
business of the company is to be managed by or under
the direction of the directors.” In the same way,
directors may delegate these powers to other individuals
(or employees).
Now you can see how quickly the waters can be muddied
as authority and responsibility are shifted from the
company to its individual directors and in turn down the
line to managements and lower level employees.
Practical matters
In seeking to determine where liability rests for acts of the
corporation it is important to understand:-
How does a company make decisions / enter contracts?through
their managers, directors,
Who has authority to bind a company? Whoever is considered a mind
and will of the company
How are “outsiders” protected in their “dealings” with a
company?
Who is liable if something goes wrong? The company or its
representatives (e.g. directors or employees)?
How is a company punished? Civil and criminal penalties
Contract, Tort and Criminal
Contract
Written or oral
Tort
Civil wrong . Liability
Criminal
E.g. Criminal Code Act
Overview of duties to different parties in
the company – p.505
Corporate liability
in Contract
How does a company enter a contract?
Common Law:
Directly – by one of its “organs” (e.g.
board of directors or general meetings)
i.e. directing mind and will of the
company
Indirectly – through an agent on behalf of
the company e.g. directors, secretary sign
with authority.(internal and external
agents)
Types of authority
In contract the question will focus on whether the individual had
the “authority” to enter into the particular contract on the
company’s behalf. More specifically the law of corporate
contractual liability focusses on the law of Agency. The rules
concerning actual and apparent authority apply where the Principal
is a company (or sometimes viewed as the Board of Directors)….see
p. 478/551
Actual
Express – stated orally or written (e.g. internal rules)
Implied – usually associated with the kind of role or position /
acquiesced (ie. accepted reluctantly & without protest)
Apparent (or implied or ostensible)
Company has “held out” or “represented” that a particular
person has authority
Tesco Supermarkets Ltd v Nattrass [1972] AC 153
Facts:
Tesco = chain of supermarkets.
One store advertised washing powder at a special discounted price (large poster).
Employee restocked the washing powder marked with the ordinary price after finding
there were no more specially marked packs. No one higher up was told.
Customer complained that the product was at the higher price not special price. Told
too bad – no more at special price even though advertised.
Tesco prosecuted under Trade Descriptions Act 1968 (UK).
Issue: whether employee and store manager were the directing mind and will of the
company.
Lower Courts – Tesco liable as it failed to exercise all DD through the decisions of its
servants.
House of Lords – Overturned. Court agreed employee and manager lacked discretion and
no power had been delegated to them. There actions were not on behalf of the company,
they did not have the controlling “mind and will” of the company. The directors are the will
and mind of the company unless they give authority to an employee.
Procedure and Authority to enter into the
contract
AGENT – S.126(1) a company’s power to make, vary, ratify or discharge a contract may be exercised
by an individual acting with the company’s express or implied authority and on behalf of the
company and without using a common seal. Means stamp.
Express authority – actual authority held by the agent above (can be conferred in writing)
Implied authority – incidental to the express authority and implies the agent can do certain
things.
Company bound if express or implied.
COMPANY ITSELF – S.127 – company execute documents in 1 of 2 ways:
If common seal –
Affix the seal and witness by 2 directors or director and company secretary
Or Sign by 2 directors or director and company secretary
Sole director/secretary.
If no common seal –
signed by 2 directors; or
director and company secretary; or
Sole director/secretary.
NOTE – S.123 – company may have a common seal, (rubber stamp with company’s name and ACN
– optional)
Statutory assumptions ss.128-129
These provisions (which we have previously
discussed) help outsiders because they cannot
always determine what type of authority is held
Help serve to enforce contracts
Who can rely on the assumptions?
S128(1) CA – a person dealing with a company
(e.g. a creditor), is entitled to make certain
assumptions in relation to those dealings. A
company is not entitled to assert(responds) that
the person’s statutory assumptions are incorrect.
S.129 – Assumptions by a person in dealings
with company
The company’s constitution (if any) and any provisions of the Act that apply to the company
as replaceable rules have been complied with
That anyone who appears, from the information provided by the company that is available
to the public from ASIC (by way of a company search) to be a director or company secretary,
“has been duly appointed” and has the “authority to exercise the powers and perform the
duties customarily exercised or performed by a director or company secretary by that kind
of officer or agent
That anyone who is “held out” by the company to be an officer or agent of the company has
been duly appointed and has authority to perform the duties customarily exercised of that
kind. See more next slide…..
Document properly executed by company if it appears to be signed in accordance with
s.127(1) (and that the roles are occupied by those people).
Document with common seal affixed has been properly executed.
“Holding out” … by the company s129(3)
S.129(3): That anyone who is “held out” by the company to be an
officer or agent of the company has been duly appointed and has
authority to perform the duties customarily exercised of that
kind.
Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd
(1990) 9 ACLC 324 – while the board of directors can pass
resolutions that are binding on the company, individual directors
do not usually have the power to bind the company. Where the
company has more than one director, the courts have said that a
director acting alone has no implied actual authority to bind the
company with outsiders….unless the authority is expressly granted
to them OR the authority flowed from conduct of the board as a
whole.
Exceptions – if person knew or suspected
If the person dealing with the company knew or suspected at the
time of the dealings that an assumption in s.129 was incorrect,
that person is not entitled to make that assumption (s.128(4))
E.g. If the person dealing with the company held a suspicion that a
director or company secretary signing a document on behalf of the
company has not been properly appointed to that position – the
person would not be entitled to make that assumption under
s.129.
Practical implications
Does this mean outsiders will turn a blind eye? No
Burden of proof on company to prove person seeking to rely on
the assumption knew or suspected otherwise
Timing i.e. relevant time is when the person entered into the
contract (if they find out later – doesn’t prevent reliance on
assumption)
Actual knowledge – is a subjective test
Knew or suspected
ANZ Banking Ltd v Frenmast Pty Ltd [2013] NSWCA 459
A director’s signature had been forged. A person is entitled to make certain assumptions
in relation to their dealings with the company. Those assumptions may be made even if
the company officer acts fraudulently or forges a document with regard to those dealings.
A person is entitled to assume that the directors of the company properly perform their
duties and that a document has been properly executed by the company if it appears to
have been signed in accordance with s.127(1). In effect, it can be taken at face value. The
court was not prepared to find that ANZ was on notice that Robert (a Director) was acting
beyond his authority. The decision is of some comfort to those negotiating with a director
of a company that the director has authority to negotiate for the company.
Correa v Whittingham (No 3) [2012] NSWSC 526
The Board of the Club did not comply with the requirements as to the minimum number of directors
specified in its Constitution at the time of the purported appointment of Mr Whittingham as
administrator. Despite this, Mr Whittingham was entitled to rely on the statutory assumptions under
s.128 and s.129 of the Corporations Act with the consequence that the appellants could not rely on any
failure to comply with the requirements of its Constitution in respect of the minimum number of
directors or the quorum requirements for directors’ meetings to invalidate Mr Whittingham’s
appointment as administrator.
Indoor Management Rule – Good faith
Common law
Royal British Bank v Turquand (1856) 119 ER 886 –a person who
contracts with a company in good faith may assume the company
is acting within its constitution and that its powers have been duly
performed, and is not bound to enquire whether acts of internal
management have been regular or irregular.
Stated by HCA in Northside Developments Pty Ltd v
Registrar-General (1990) 170 CLR “persons dealing with a
company in good faith may assume that acts within its constitution
and powers have been duly performed and are not bound to
inquire whether acts of internal management have been regular…”
Remedies
Breach of contract
If in breach of contract 🡪 can sue for damages
But think 🡪 who gets sued?
Company or individual in breach?
Look at timing, role, powers/authority, any defences
available?
Corporate liability in Tort (p.472/545)
Civil wrong/liability
E.g. negligence (common law tort – breach of duty of care and
damage caused), wrongful death, trespass, defamation and
nuisance
Shifting financial responsibility on wrong-doer that caused damage
Organic theory
(Under the organic theory, the organs of a company,
namely the Board of Directors and the general
meeting,
when acting within the limits of powers
conferred on
them by the company’s constitution,
are regarded not
merely as the agents of the
company but as the
company itself)
Vicarious liability
Tort and company
A tort is a wrongful action that allows a person suffering injury to sue for
damages
A company is liable for torts committed by its management, employees
and agents on behalf of the company
A company must take responsibility for the actions of its employees
through the doctrine of vicarious liability
Alternatively a company may be liable where the company’s actions are
taken to be those of the company.
If the “will and mind” of the company intended a wrong action, then this
is taken to be the company’s intention: Lennard’s Carrying Co Ltd v
Asiatic Petroleum Coy (1915)….see earlier extract
If the directing “will and mind” has committed the wrong, the company
will be liable
Vicarious Liability
Where the actions of its human agents do not personify
the company, but are sufficiently connected to the
company, this would be adequate to make the company
liable through the concept of vicarious liability.
“Liability for the acts of others”
Example: employers are liable for the acts of their
employees who commit wrongs within the scope of their
employment.
Corporate Criminal liability (p.471/543)
Criminal Code Act
Civil and criminal penalties under Corporations Act
Organic theory (Tesco)
Vicarious liability – stricter
Company and crime
Company can be liable for any crime, unless it is a crime only a
human could commit, for example, perjury or swearing a false
oath (??)
**
Courts have recognised that corporations can commit offences such as
manslaughter. Once establish that a company is deemed to be a person, must then
consider the act. If an employee, agent or officer of the company commits the physical
elements of the crime, the act must be attributed to the company so long as the
employee was acting within the scope of their employment.
Crimes can be committed by the company, its directors and
officers, or employees and agents
Remember the Board of Directors are the “mind and will” of the
company
R v Denbo Pty Ltd (1994) VIR 157 (p.471/543)
Was the first Australian conviction of a corporation
for manslaughter.
Employee was allowed to drive vehicle with defective
brakes
Company and directors were convicted of
manslaughter
Fined $120,000 for criminal negligence
Determining criminal liability of
corporation
Need to establish:
Company committed wrongful act or omission(who
made the decision?)
Examine the statute to determine who exactly is
liable for the crime i.e. the company, individual or
both
Determine whether any defences are available and
criteria satisfied
Vicarious liability
The employer (ie. company) is made liable for the criminal act
of the employee
Occurs where society wants to punish the wrongdoer without
having to prove the wrongdoer had the intention to cause
harm
If the directors authorise or knowingly allow a wrongful act to
occur, that will supply the mental element (mens rea (or
criminal intent or guilty mind) – criminal liability should only
be imposed on those who know what they are doing)
necessary for the commission of a crime.
Where a company gives decision making power normally
reserved for directors to employees, it is then the employees
who can then form the wrongful intention of the company
Example: Criminal Code Act 1995 (Cth)
Codifies much of the general law
Is the main piece of legislation relating to commonwealth
(federal) criminal offences in Australia, which are crimes across
the country.
Overcomes difficulties of imposing criminal liability on a
corporation
Allows for the conviction of a company on any commonwealth
offence. The legislation recognises that a company can have a
wrongful “corporate culture” that promotes crime; the company’s
culture and the pressure it puts on employees to commit wrongs
may be assessed by the actions of those who control the
company; that is, the company’s “high managerial agents”.
Example: Criminal Code Act 1995 (Cth)
Bodies corporate can be found guilty of offences punishable by
imprisonment (ie. directors) and fines
Physical element of an offence is to be attributed to a corporate principal
where the offence is committed by an employee, agent or officer acting
within the actual or apparent scope of their employment
Attributing fault to corporation:-
Look at the corporate culture
Corporation can be liable where it has expressly, tacticly or impliedly
authorised or permitted the commission of the offence
If element of negligence required – attributed even where no single
act of any individual employee, agent etc. amounts to negligence –
corporation can be liable if conduct viewed as a whole was negligent Group Discussion Questions
Discuss the ways in which a company can enter into a contract.
Discuss why an understanding of the statutory assumptions are important in assessing
whether or not a company is liable for the acts of directors, agents and employees
(especially s 128(3))
Assume that a person who appears on ASIC records as a director, and whom everyone
(including the company) thought was validly appointed as a director, is not, in fact,
validly appointed. The notice requirements for the convening of the board of director’s
meeting at which she was appointed were not complied with. Does this fact alone
invalidate a contract signed by her in the capacity of director?
Brett and his wife Dina are the only shareholders and directors of BD Pty Ltd (BD) which
owns a service station. BD employs Brett as manager of the service station. One night
Brett shot and badly injured an intruder who was attempt to steal the week’s takings.
Brett has been charged with attempted murder. Could BD also be charged with a
criminal offence? If so, on what basis?