CAPACITY TO CONTRACT

CORPORATIONS

1.0       Introduction

2.0       Objective

• Main Content
• Corporation
• The Capacity of Corporations

4.0       Conclusion

5.0       Summary

6.0       Tutor-Marked Assignment

7.0       References/Further Readings

 INTRODUCTION

A corporation usually has the rights, powers and privileges to enter into contracts concerning the purchase and sale of real property, unless specific restrictions are located in the articles of incorporation or the corporation has not enacted empowering provisions in its by-laws.

A corporation can be described as a business entity created by statute law and established by articles of incorporation. Corporations vary from small privately-held operations to large or public companies that actively trade shares in the marketplace.

 OBJECTIVES

At the end of this unit you should be able to understand

• What the status of a corporation under the Companies and Allied Matters Act 1990
• The contractual capacity of a
• Under capacity can a company enter into a contract?

 MAIN CONTENT 

• Meaning of Corporation

A corporation is an artificial person created by law, separated and distinct from the individuals that make it up. Therefore, every company incorporated under the provisions of the law enjoys a legal personality and has a separated legal existence and perpetual succession different from those of the individual shareholder who compose it. A corporation is created by registration, and no company can operate in this country unless it complies with the law for the time being in force in relation to the establishment of companies.

A corporation, being an artificial legal entity enjoys the capacity to contract and be bound in contract. But, because of its artificial nature, and therefore lacking some of the attributes of personality, a corporation cannot enter into certain contracts of a personal nature. For example, a corporation cannot be born, but it can be amalgamated with another company; a corporation cannot bear children, though it can have subsidiaries; a corporation cannot die though it can be wound up or dissolved. Because of the artificial nature of its existence, a corporation can only act through agents. 

To determine the contractual capacity of a corporation, one has to look at the instrument creating it. Thus, in the case of a corporation created by Act of Parliament, e.g., Electricity Corporation of Nigeria, or the Nigerian Railway Corporation, its contractual capacity is governed by the statute creating it. As regards those incorporated under the Companies Act, 1968, Act No. 51 of 1968, their contractual capacity is governed by the terms of their memoranda of association which must set out the companies’ contractual powers. In fact, the general rule is that the contractual powers of a corporation registered under 1968 Act is limited to those expressly or impliedly authorized by its memorandum of association. Any contract authorized, are ultra vires (i.e., beyond the powers of the corporation) and therefore, void and enforceable; consequently, it will not bind the corporation even if all its members ratify it. By this ultra vires doctrine, the activities of the company are brought under control, so that the officers of the company who exercise the power of the company on behalf of the shareholders are in consequences prevented from engaging in activities contrary to the objectives if the company. Thus, in the leading case of Ashbury Railway Carriage and Iron Co. v Riche (1895) L.R. 7 H.L. 653, a company which was empowered by its memorandum and articles of association to make and sell railway carriage embarked upon purchase of a railway concession, in Belgium, at the bidding of its directors. The company attempted to ratify the transaction

The court held that, the concession agreement was void being ultra vires the company  and therefore void to that extent.

Also, in London County Council v Att-Gen (1902) A.C. 165, the London City Council had statutory powers to purchase and work tramways.

It was held that, they could not work omnibuses, the omnibuses not being incidental to the tramway business.

However, a company can enter into a contract though its authorized officers if the contract is executed in the same way as would by law be done if the contract was being executed by a private individual (Companies Act, 1968, S. 32(1)(c)). Therefore, under section 32(1) of the Companies Act, 1968, directors/managers of a company can enter into contracts on behalf of the company by word of mouth, in writing or under seal, depending on the nature of the contract, just as in the case of natural persons. The common law requirement for seal is no longer good law, except that it may be noted that where the law prescribes that a contract should be executed under seal and in writing if made by a private individual, it will sufficient if such a contract is executed in writing under seal on behalf of the company. Companies Act, 1968, S. 32(1)(a); see Achike, op. cit., p. 39; Adesanya and Oloyede, op. cit., pp. 37-8.

 Unincorporated Associations

Unincorporated associations, with the exception of trade unions, have no contractual capacity and, therefore, cannot enter into a contract nor be bound contractually. The general practice is that such associations can only be sued or sue under representative action made through its principle officials.

However, trade unions can enter into contracts, and actions can be maintained against them like other entities. See Trade Unions Act, Laws of the Federation, 1958, Vol. VI. Section 13(1) of the Trade Unions Act (Ibid) makes it mandatory for trade unions to be registered. See Achike, op. cit., pp. 39-40

Corporations

Specific or general statutes create a corporate entity such as the Companies and Allied Matters Act, 1990, National Insurance Corporation of Nigeria Act, 1969. In law, a corporation is regarded as an abstraction. It is a legal person that has the capacity to enter into any contract that is within the limit of the object clause of the company in the Memorandum of Association. The powers in the object clause enables the corporation to exercise implied power, which is reasonably incidental to the exercise of the express power. 

At common law, where the corporation exercises its power outside the power, it acted ultra vires, and any transaction entered into is void. However, in certain circumstances,  an ultra vires contract may be enforceable against a company by a person dealing with  the company in good faith provided the directors had approved the transaction. The corporation is an artificial person it can only act through its agents.

 (a)  Statutory Corporations

These are incorporated bodies created either by Act of Parliament, or essentially by statute, which in the Nigerian case are decrees or edicts. The decree usually charges the corporation with some functions and this normally involve nearly all the functions of corporations incorporated under Companies and Allied Maters

Act, 1990. Such corporations arre sometimes referred to as quasi-corporation. The principle underlining the recognition of the right to sue and be sued is stated in English case of Taff Vale Railway Co. and Amalgamated Society of Rly Servants, Ashbury Railway Carriage and Iron Co. v. Riche (1875) L R. 7 HL 563, where Lord Hailsbury L.C. stated.

‘’if the legislature has created a thing which can own property, which can employ servant, and which can inflict injury, it must be taken, I think, to have impliedly given the power to make it suable in a court of law, for injuries purposely done by its authority and procurement.”

The judge went further and said “although a corporation and an individual or individuals may be the only entity known to the common law who can sue and be sued, it is competent to the legislature to give to an association of which individuals which neither a corporation nor a partnership nor an individual a capacity for owning property and acting by the agents, and such capacity in the absence of express enactment to the contrary involves a necessary correlative of liability to the extent of such property for the acts and defaults of such agents.

Nigerian case of Chief Andrew Thomas v Local Government Services board [1965] NMLR 310 the local government services board, though unincorporated was held to be capable of suing and be sued. Similarly, in Kpebimoh v The Board of Governors, Western Ijaw T.T.C (1966) NWLR 130 the court held that the Board of Governors of the collage, though an unincorporated body, empowered to perform certain statutory function, which could result in injury to have implied power to sue and be sued in a court of law.

 (b) Unincorporated Associations

Association such as clubs, or charitable institutions, in law has no legal entity than the members that compose it. It is nevertheless a legal person. Such association can neither sue or be used on contracts made in their names or on their behalf and they cannot authorize an officer to sue on their behalf for liability for the work done or goods supplied. Only the person who gave the order can be liable for the work or the goods supplied or who either gave expressly or impliedly or ratified the order after it had been given. In creditor and debtor situation, the creditor cannot pursue for payment on any of the members, but he can have recourse to the fund and not to the members even if all the members agree.

A corporation created by Royal Charter has always had the same contractual capacity as an ordinary person but a company incorporated under the Companies Act could, until recently, only make such contracts as were within the scope of the objects set out in its memorandum of association. Anything beyond that was ultra vires and void.

In the leading case of Ashbury Railway Carriage and Iron Co. Ltd v. Riche (1875) L.R. 7 H.L. 653 the objects set out in the company's memorandum were "to make and sell, or lend on hire, railway carriages and waggons, and all kinds of railway plant, fittings, machinery and rolling stock; to carry on the business of mechanical engineers  and general contractors; to purchase, lease, work and sell mines, minerals, land and buildings; to purchase and sell as merchants, timber, coal, metals, or other materials, and to buy any such materials on commission or as agents." The directors purchased a concession for making a railway in Belgium and purported to contract with Riche that he should have the construction of the line. Riche's action for breach of the alleged contract failed since the House of Lords held that the construction of a railway, as distinct from rolling stock, was ultra vires the company and that therefore the contract was void. Even if every shareholder of the company had expressed his approval of the act, it would have made no difference, for it was an act which the company had no power, in law, to do. Important changes were made by section 108 of the Companies Act 1989, substituting a new  section 35 of the Companies Act 1985. Under that new section it remains the duty of the directors to observe any limitations on their powers flowing from the company's memorandum (section 35(3)) and a member of a company may bring proceedings to restrain the doing of an act in excess of those powers (section 35(2)); but, by section 35(1): 

"The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's memorandum."

So, by applying the modern law to the Ashbury case, the directors committed a breach of duty by making the contract and might have been restrained by action by a member; but once the contract was made its validity could not be questioned provided that the making of the contract was "an act done by the company." It might be objected that it was not such an act because the directors had no power to make the contract. This objection is met by section 35A(1):

"In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company's constitution."

A person is presumed to have acted in good faith unless the contrary is proved and is not to be regarded as acting in bad faith merely because he knows the act is beyond the directors' powers. An ultra vires act by the directors may now be ratified, but only by special resolution which does not affect any liability incurred by the directors or any other person-any such relief must be agreed to separately by special resolution.

Formerly a corporation's contracts were invalid unless made under the corporate seal but, since the Corporate Bodies' Contracts Act 1960, a corporation may make contracts in the same manner as a natural person-that is the contract may be made orally unless a special rule requires a written contract-as in contracts for the sale or disposition of an interest in land-or evidence in writing-as in the case of a guarantee within section 4 of the Statute of Frauds 1677.

 CONCLUSION

They are juridical persons which have contractual powers limited to those expressly stated in their Memorandum and Articles of Association. In Salomon v. Salomon (1897) A.C. 22(H.L), however, it was held that a company was distinct and separate from its founders, hence the doctrine of corporate personality in company law and practice. Such contracts are, however, subject to the doctrine of “ultra vires” which renders void all contracts not authorized by the objects clause.

 SUMMARY

At common law, where the corporation exercises its power outside the power, it acted ultra vires, and any transaction entered into is void. However, in certain circumstances, an ultra vires contract may be enforceable against a company by a person dealing with the company in good faith provided the directors had approved the transaction. The corporation is an artificial person it can only act through its agents.

 TUTOR-MARKED ASSIGNMENT

1. Discuss the capacity of a Company under CAMA and the Common Law
2. Discuss and     state     what     the     court     held     in     the     following     cases:
   1. Ashbury Railway Carriage and Iron co. v. riche (1895) L.R. H.L. 653
   2. London County Council v. /att. /gen (1902) A. C. 165

 REFERENCES/FURTHER READINGS

OLUSEGUN YEROKUN, Modern Law of Contract, 2^nd ed., Nigerian Revenue Project Publishers (2004)

T.O DADA, General Principles of Law, 3^rd ed., T.O. Dada & Co. (2006)

PAUL RICHARDS, Law of Contract, 8^th ed., Pearson Education Limited (2007)

EWAN MACINTYRE, Business Law, 1^st ed., Pearson Education Limited (2008)

M.C. Okany, Nigerian Commercial Law, 2^nd ed., Africana First Publishers Plc., (2009)