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WHAT AUTHORITY DOES AN INDIVIDUAL DIRECTOR HAVE TO BIND A COMPANY?

In the case of Ken Jones Building Supplies Limited v Edendale Investments Limited, one of the directors of the company entered into an agreement to mortgage as security to a supplier.  The supplier registered a caveat against the company’s land to protect that agreement.  The company later argued that the director did not have sufficient authority to sign the agreement to mortgage so the Company and was not bound by it.  This led the Court to examine the ordinary authority of an individual director.

The Court considered that the individual director had power and authority to bind the company to transactions that would be within the “usual authority” of a single director to do.  That was not to say that because a person is a director, they can bind a company to any contract they please.

The Court found that the usual authority of an individual director, unless a managing director, is very limited.  An individual director acting alone is assumed to be in no better position than any other person to represent the company.

Therefore there was no “usual customary authority” and no “implied authority” by which the individual director could bind the company unless the company had acted in a way to hold out that person as having that authority.

The fact that the individual director himself indicated that he had authority was insufficient, as an agent cannot hold themselves out as having authority:  It is the company which must give that authority.

What this means is that people dealing with companies need to take care to understand whether the company has one or more directors.

Where there is more than one director, a document signed by only one director may not be binding as that director may not have the authority to bind the company.

Under the Companies Act, documents which need to be signed by deed must be signed by two directors if there is more than one director and by the sole director whose signature must be witnessed if there is only one director.

Other contracts can be signed by a single director.  It is also possible for contracts to be made other than in writing and a company can be bound by verbal agreement as can any other person.

The issue is knowing whether or not the person you are dealing with has the required authority to bind the company.  That is different from whether a contract can be formed by them if that authority is in place.

If the contract is of significant value or where there is any form of security involved, it would be prudent to require the authority of a director to be confirmed.