Law Indoor Man Rule

Explain the indoor management rule and how this rule has been incorporated into the Companies Act 2006. Under what circumstances will this general rule not be followed by the courts?

Once incorporated, contracts made by the company are binding against the company. In practice, these contracts are made by individuals who may or may not have authority to bind the company. A general rule in agency law is that an agent can only act within the agent’s authority and any transactions outside this authority will not be binding through the company though the company may choose to ratify it retrospectively, thereby providing the authority.

Rules to determine have developed in common law through the case of Royal British Bank v Turquand (1856). It was held that while there is an obligation to read the constitution, it would be too onerous to expect more of outsiders to be bound to more. Hence, the courts developed the indoor management rule whereby a decision is made to enter a contract, with no actual authority will still be binding. This rule was later firmly endorsed by the House of Lords in Mahony v East Holyford Mining.

Now, the indoor management rule is regulated by the company’s act 2006 s40 and s161. S40 works in favour of persons dealing in a company in good faith not being bound to the limitations of the company and s161 states that the acts of a person acting as a director are valid despite no actual authority. Good faith is assumed in s40 bii, and knowledge that an act is ultra vires is insufficient to defend a claim s40 2biii.

However, when good faith is not found, Sir Peter Gibson of the Court of Appeal in Wrexham v CrucialMove 2008 upheld judge Norris’ verdict that in an event of bad faith, s40 will not bind such contracts.

Where individuals entering into contracts are not directors, authorisation is evaluated to determine if the contract is binding. There are 3 forms of authorisation, actual authorisation, implied actual authorisation and ostensible authority. Actual authorisation is created by consensual agreement where the agent is authorised by the directors. Implied actual authorisation is authorisation by way of position held by previous appointments. Ostensible authority is the authority a reasonable third party would expect the agent of a company to have when entering a contract with them. This is by way of representation by the principle and is irrelevant if the agent had actual authority as the principal of estoppel from claiming the agent had actual authority. This was held in the case by the court of appeal in Freeman and Lockyer v Buckhurst Park Properties (1964) where it held that apparent authority was sufficient to bind the company due to representataion.