AYB230 · Corporations Law
Corporate Liability
This Topic 8 chapter asks how an artificial 'person' becomes liable in crime, tort and contract, and how an outsider can safely contract with a company. It distinguishes direct liability (the directing mind & will — Lennard's; H.L. Bolton) from indirect/vicarious liability (Hollis v Vabu), covers proper execution under s127, and the indoor management rule with the statutory assumptions in s129. It is examined as an ILAC problem, often turning on whether an outsider can rely on the s129 assumptions despite an internal irregularity.
What this chapter covers
- 01A company can be liable in crime, tort and contract
- 02Direct liability: the directing mind & will (Lennard's Carrying Co; H.L. Bolton)
- 03Indirect liability: vicarious liability for employees' acts (Hollis v Vabu)
- 04Contracting directly: execution under s127 (with or without a seal)
- 05Contracting indirectly via agency: actual vs apparent (ostensible) authority
- 06The indoor management rule (Royal British Bank v Turquand) for outsiders
- 07The statutory assumptions an outsider may make (s129)
- 08The exception: where the outsider knew or suspected the assumption was false (s128(4))
Corporate liability & the indoor management rule (ILAC, s127/s129)
- +1Issue: Is Meridian bound by the $200,000 contract even though one signatory was not properly appointed?
- +2Law: A company may execute a document under s127 by two officers signing (without a seal) or with a seal witnessed by two officers. Under the indoor management rule and the statutory assumptions in s129, an outsider may assume that officers were duly appointed, had customary authority, and that the document was duly executed (s129(2),(5)). The exception is where the outsider knew or suspected the assumption was untrue (s128(4)).
- +1Application: The supplier dealt in good faith with a document that appeared correctly signed under s127 and had no knowledge of the defective appointment. It is therefore entitled to rely on the s129 assumptions, and the s128(4) exception does not apply.
- +1Conclusion: Meridian is bound by the contract; the indoor management rule and the s129 assumptions protect the outsider against the internal irregularity.
Key terms
- Directing mind & will (direct liability)
- The doctrine that a company is primarily liable for the acts and state of mind of the people who are its 'brain' or nerve-centre — the board and senior executives — so those acts are treated as the company's own. Authorities: Lennard's Carrying Co v Asiatic Petroleum; H.L. Bolton (Engineering) v T.J. Graham & Sons (the body analogy).
- Vicarious liability (indirect liability)
- Liability of the company for the wrongful acts of its employees committed in the course of their employment, even though the company itself did nothing wrong — the indirect counterpart to direct liability. Authority: Hollis v Vabu Pty Ltd.
- Execution under s127
- How a company validly signs a document: either two officers (two directors, or a director and the company secretary) sign without using a common seal, or, where there is a seal, two officers witness the fixing of the seal. Proper s127 execution lets an outsider assume due execution under s129(5).
- Actual vs apparent authority
- Actual authority is the authority a company has genuinely given an agent, expressly or by implication. Apparent (ostensible) authority is authority the company holds the agent out as having, even if not actually conferred — and a third party who reasonably relies on that holding-out can bind the company.
- Indoor management rule
- The common-law rule (Royal British Bank v Turquand) that an outsider dealing with a company in good faith may assume that its internal rules and procedures have been duly complied with, and need not investigate. It is now reinforced by the statutory assumptions in s129.
- Statutory assumptions (s129)
- The assumptions an outsider may make when dealing with a company: that the constitution and replaceable rules are complied with; that directors, the secretary and officers were duly appointed and have customary authority; that those people perform their duties properly; that documents are duly executed (including under s127); and that documents are genuine. They operate together, subject to the s128(4) exception where the outsider knew or suspected otherwise.
Corporate Liability FAQ
How can a company be criminally or tortiously liable if it isn't a real person?
Through two routes. Direct liability uses the 'directing mind and will' doctrine: the acts and intentions of the company's controllers — its board and senior executives — are treated as the company's own (Lennard's; H.L. Bolton). Indirect liability is vicarious: the company is liable for wrongs committed by its employees in the course of their employment (Hollis v Vabu), even though the company itself did nothing. The same routes underpin liability in crime, tort and contract.
How does a company validly sign a contract?
Under s127, either two officers sign without a common seal (two directors, or a director plus the company secretary), or, where a seal is used, two officers witness its fixing. A company can also contract indirectly through an agent acting with actual or apparent authority. Where a document appears to be executed under s127, an outsider may assume due execution by virtue of s129(5).
What is the indoor management rule and the s129 assumptions?
The indoor management rule (Royal British Bank v Turquand) lets an outsider dealing in good faith assume the company's internal procedures were properly followed, without having to verify them. Section 129 puts this in statutory form: an outsider may assume due appointment and customary authority of directors, officers and the secretary, proper performance of duties, due execution of documents (including under s127), and that documents are genuine. The assumptions protect the outsider from internal irregularities.
When can a company defeat the s129 assumptions?
Under the s128(4) exception: the assumptions cannot be relied on by a person who, at the time of dealing, actually knew or suspected that the assumption was incorrect. So an outsider who knew the signatory was not properly appointed, or who suspected the irregularity, cannot use s129 to hold the company to the contract. Absent that knowledge or suspicion, the company bears the risk of its own internal defects.
Exam move
Organise this topic as two questions. First, 'how is the company liable for the wrong?' — split into direct liability (directing mind & will; Lennard's, H.L. Bolton) and vicarious liability (employees in the course of employment; Hollis v Vabu), and note the company can be liable in crime, tort and contract. Second, 'can the outsider enforce the contract?' — work through s127 execution, then the indoor management rule and the s129 assumptions (due appointment, customary authority, proper performance, due execution, genuine documents), and finally the s128(4) exception (knew or suspected). Most exam problems live in the second question and turn on whether the outsider can rely on s129 despite an internal defect — so always check for knowledge or suspicion before concluding. Cite the section and the case.
