Starting a ltd company UK by contract

Organizations collaborate largely with different companies for business deals in business world. After starting a ltd company UK, companies sign a legal memorandum of association known as Contract in business language to keep a record of the proceeding and to avoid any inconvenience in future. Contract is a legal entity containing all clauses which are concern with the deal in hand and it is a crucial document for both the companies taking part in a deal and it is mandatory for both the companies to be well aware and agreed on all the clauses. There are many types of Contracts which are used for various type of deals and these can be range for small as well large corporate deals and thousands of contracts are get signed every day in corporate and social meetings. There is a significant importance of Contract in corporate world as it is the evidence and proof of a particular deal or proceeding.  Organizations should follow various rules and regulations which are stated in a specific document called ‘Contract Law’ while signing a contract. To cover up the details of these rules in a single article is not possible so, we will cover these rules in two articles.

In the first article, we will have a look on the old and modern definition regarding the contract for England formation and will see in details the Actual Authority of a company in regarding contract signing.

Older and Modern View about Contract for England formation

In view of old definition regarding a contract signing for companies, it is mandatory for companies to include clauses related with the concerned objective in the contract otherwise one company may act against law. Modern view regarding the contract is described in the light of two sections: According to section 31, companies have unlimited powers and authority and under section 39 acts done by company except those of restricted ones are not contradictory to law and third party can rely on them and it is not possible to challenge the acts even they are not according to company’s constitution. According to Contract Law, the restrictions are imposed on Director’s power and his authorities. Companies sign a contract on the basis of Principle of Agency thus it is important to observe who is entering the contract on behalf of company. Principle of Agency states that company is principal and a director or an individual is an agent.

Starting with the Actual Authority of company in the light of contract law under England formation rules and practices.

Actual Authority in the Light of Contract Law

By Actual Authority we mean, company has made someone an agent to participate in a contract on behalf of company. Actual authority is of two types. It can either be Expressed Actual Authority or Implied Actual Authority.

Implied Actual Authority

Implied authority means that director has no authority to enter into contract according to articles than he is authorized to imply the authority on the basis of conduct of parties and case circumstances. Few examples where actual authority is implied are described next:

  • Director present at a specific position has power to do anything which that position authorizes him to do.

Let X be a Managing Director. He has authority to do something within the scope of authorities bestowed to him but not has certain power e.g. to suspend other members. The actual authority is dependent on the appointment, the actual authority is only restricted to the areas for which he is appointed. If he is a sales director he has implied authority to do anything which his position allows.  If he is a company’s secretary, he has implied authority to administrative matters.

Courts does not accept implied authority for positions lower than that of director’

  • If he is an ordinary director, the director does not possess implied actual authority to enter into contracts as long as board approved this. But other directors entering into contracts on company’s behalf since long time have implied authority to enter into contracts.

There is a large similarity between implied authority and ostensible authority (discussed next).

Express Actual Authority

 Express Actual Authority means that company has authorized someone under Company’s Articles or   delegated powers to someone by someone who has possession of power to enter into contract on company’s behalf. The company’s articles and power delegation detail is described below:

  • Company’s Article
    Board of Director’s as a whole has a power to enter into contract on company’s behalf and an individual director cannot enter into contract unless otherwise he is permitted to do so.
  • Delegation of Power
    Under the context of Model Articles 5 and 6, Power delegation can be done by Board of Director’s to someone and article 3 authorizes them to delegate their one of their power on validly to someone or an individual director and in this case can delegate power to enter into contract. This power delegation authorizes the person to enter into contract on behalf of company within the specified limits of powers delegated.

What Limits the Actual Authority?

 If a director acts contradictory to the restrictions mentioned and has bad purposes and bad intentions he cannot possess actual authority. By bad purposes, we infer that the director had authority to enter into contract on company’s behalf but he did it for bad purpose. This thing leads to lose the actual authority.

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