The High Court has held that employees can bind a corporation to a contract on the basis of what is referred to as the Indoor Management Rule.
Handing down judgement in a case in which Infotrac demanded P110 million from Debswana Mining Company for allegedly failing to pay for services rendered, Justice Abednego Tafa said certain factors which led to his determination that the indoor management rule applied in the case by Infotrac against Debswana.
Tafa noted that having found that “it is more probable than not that the plaintiff (Infotrac) entered into a contract with defendant (Debswana) represented by the latter’s executives (Group Head of Security based in Gaborone, Kewakae, Head of security at Jwaneng, Keitumetse and Senior Human Resource Manager, Mazwigila) that be the end of the matter.”
The judge also noted that, “It has however been argued, on behalf of the defendant (Debswana), in the alternative, that should the court find that Kewakae and company did enter into the contended contract with the plaintiff (Infotrac), such contract would be binding on those Executives to the exclusion of the defendant (Debswana).
Tafa said, “This brings me to what has been commonly referred to as the Indoor Management Rule which is referred to also as the TURQUAND Rule.”
The judge explained that the rule stipulates that each outsider contracting with a company in good faith is entitled to assume that the internal requirements and procedures have been complied with.
According to Tafa’s explanation, the company will consequently be bound by the contract even if the internal requirements and procedures have not been complied with.
In practice, the judge further explained, “a company will usually enter into a contract with outsiders through its officers.”
“The Indoor Management Rule allows outsiders dealing with a company to make assumptions about the international consistency of decisions made by a company with its rules.
The Indoor Management Rule was first articulated in the English case of Royal British Bank V TURQUAND (156) 119 ER 86, and has not only been adopted in our courts but has since 2007 been codified in our law,” said Tafa.
The judge recognised that, “Clearly the rule has served to qualify the harsh implications of the “constructive notice” doctrine under which all persons conducting business with a corporation were deemed (or construed) to have knowledge of any restriction on the authority of an agent contained in the corporation’s articles and by laws.”
“It has been stated over and over again that wheels of commerce would indeed not turn if outsiders dealing with companies were forced to conduct an investigation of the internal procedure and manners of the company to see if something is not wrong,” Tafa said.
He said Section 27 (1) of the companies Act on the other hand affirms and extend the common law principle of the “indoor management rule.” The judge said it restricts the circumstances in which a company can assert that the company or a person the company held out as acting on its behalf, lacked authority to enter into a relevant transaction.
The judge explained that the justification behind the rule is that a person dealing with a company is entitled to assume that the company’s international requirements have been complied with and that the company’s officers are acting lawfully.
However, Justice Tafa led that Sections 27(2) of the Act provides exceptions to the indoor management rule. He added that the exceptions apply where there is actual knowledge and forgery.
Turning to Infotrac and Debswana legal dispute, Tafa said, “In the case instant, the judge said Debswana cannot assert against Infotrac that its general manager and or head of security/human resources manager did not have the authority to engage it when the customarily have such authority.”
He held that Section 27 does not, on its face require a finding that Debswana held out these executive officers as being its authorised agent.
“Rather, it prevents a company from asserting that a director was not a director or that he/she was not duly appointed or that he had no authority to exercise a power a director of such a company would customarily have authority to exercise,” the judge said.
In this way, Tafa found that, it does to require a third party have relied on any outward representation by Debswana.
“On the basis of the above, I am satisfied that the plaintiff (Infotrac)was, entitled to assume, that the officers of the defendant (Debswana), who are part of the Executive were authorized to conclude a contract of this nature with it,” said Tafa.
The judge found that, “On the evidence before me, I have no reason to hold that the plaintiff’s director must have known, or at least, have had good reason to believe that the necessary steps had not been taken i.e. the internal procedures relating to procurement.”
Tafa also found that, “There is not a scintilla of evidence that PW2 (Motshidi, managing director of Infotrac) acted in bad faith.”
Tafa’s rejected Debswana’s lawyer‘s argument counsel, John Carr-Hartely that the Group Head of Security (Kewakae) would not be expected to enter into contract of this nature.
The judge recognised that, “A contract to provide classified services is within the scope of his apparent authority.”
He also placed weight on the existence type relationship between Infotrac and Debswana.
“At any rate, there evidence that the plaintiff had previously dealt with the security department of the defendant,” said Tafa as he ruled in favour of Infotrac.
