UNDERSTANDING “IMPROPERLY” EXECUTED CONTRACTS BY COMPANIES IN 9.MINUTES (Nigeria)

Introduction

Section 15 Part II of the regulations for the management of a private company limited by shares as provided under the Companies and Allied Matters Act (CAMA) provides that “any instruments bearing the company seal shall be signed by two directors of the company (or a director and company secretary, or some other person appointed by the directors)”.

What happens in commercial transactions when execution of documents falls short of this standard? Is this the standard for ALL company contracts?

This article explains the legal implications and workarounds in 9 minutes.

1. Contracting by an incorporated entity

A company upon incorporation assumes all the powers of a natural person, including the power to enter into contracts binding on itself. This power is however limited by the Memorandum of the company and any relevant enactment.[1]

The law also provides for how contracts are made, varied or discharged in Nigeria. The general underlying principle is that a company contract should conform to the requirements that would apply if the contract was being entered into by individuals (natural persons).

Contracts required to be under seal, in writing or made orally by individuals are valid if entered into by a company by being under seal, in writing or done orally, respectively[2].

Such contracts entered into by the company in the required form are for all intents and purposes, valid and enforceable against the company under the law.[3] A contract of sale between individuals would ordinarily be valid where it is signed by both parties with each party typically having a duly executed copy of the exact same document. Conversely, a contract of sale would ordinarily be enforceable where it is duly signed by two directors of the company (or a director and company secretary) with the company seal duly affixed as required, in line with any specific provisions of relevant company documents.

2. Legal protections to contract irregularities

Where a company enters into a contract with a person (or company) which is not validly executed by two directors with the company seal affixed, or in line with any internally approved contracting mechanism, the contract could still be valid and enforceable in certain circumstances;

a. Authorised Business

Under the law, no act of a company and no conveyance or transfer of property to or by a company shall be invalid by reason of the fact that the act, conveyance or transfer was not done or made in furtherance of the authorised business of the company or that the company was otherwise exceeding its objects or powers.[4]

b. Actual Knowledge

An act of the members in general meeting, the board or a managing director of a company while carrying out the business of a company shall be treated as an act of the company itself and the company shall be criminally and civilly liable as if to a natural person so long as the person (or company) dealing with the company had no actual knowledge at the time of the transaction that the act was conducted irregularly or without authority on behalf of the company[5].

In deciding whether or not a person dealing with the company ought to have known of the irregularity, the fact that the Memorandum and Articles of Association (MemArt) of the company or any other relevant particulars are duly filed and available for public inspection does not mean that the person is deemed to have knowledge of its contents.[6]

c. Special Knowledge

There is a legal presumption that a person dealing with a company is entitled to certain assumptions, including that the MemArt has been duly complied with and that a document is duly sealed by a company if it bears what purports to be the seal of the company, attested to by what purports to be signatures of two persons who can be assumed to be directors of the company.[7] By implication, except evidence of special knowledge to the contrary on the part of the person dealing with the company can be provided, the transaction is assumed to be valid and enforceable against the company.

d. Acts of Authorised Representatives

A company is also bound by the acts of an officer of agent of the company where the company acting through its members in general meeting, board or managing director has expressly or impliedly authorised the act[8]. This is also true where the company represented the officer or agent as having the authority to act in the matter, except special knowledge to the contrary can be provided against the person dealing with the company[9].

It must be noted that the authority of an officer or agent to act on behalf of the company may be conferred prior to the action or by subsequent ratification. Knowledge of such action by the officer/agent and the approval of the members of the company, the board or the managing director of the company for the time being shall be equivalent to a ratification by the company[10].

Authority to act on behalf of the company can be ratified subsequent to the act itself.

3. Conclusion

Company contracts are valid and enforceable where they conform to the provisions of the law and relevant company particulars.

However, where the form of the contract does not completely meet legal requirements including those of due execution, the company is still legally bound by the provisions of the contract in certain circumstances unless it is proven that the person dealing with the company had or should have had knowledge of the irregularities.

Notwithstanding the foregoing, a company can however subsequently ratify contracts entered into on its behalf.

[1] Section 38(1) Companies and Allied Matters Act 2004 (CAMA).

[2] Section 71 CAMA.

[3] Section 71(2) CAMA.

[4] Section 39 (3) CAMA

[5] Section 65(a) CAMA

[6] Section 68 CAMA.

[7] Section 69 (a&d) CAMA

[8] Section 66(1)(a)

[9] Section 66(1)(b)

[10] Section 66(2)