The Economic Implications of Validating Unauthorised Contracts made by Corporate Agents

Abstract

This article examines the English law governing the legal effect of a contract made by the agent of a company who lacks the necessary authority to act on the company's behalf under its internal rules that confer power to make contracts on its behalf. The article focuses on what could be called an ‘overriding rule of attribution’, which ensures that such contracts can still be binding on the company in certain circumstances. It also considers the economic context of this rule, which can be viewed as allocating risk between companies and third parties contracting with those companies. In effect, the law strikes a balance between two conflicting sets of costs and benefits, and this can be analysed in terms of economic efficiency. This article shows that the English courts have taken two differing approaches in establishing the ambit of the overriding rule of attribution and evaluates each of these approaches in terms of their capacity for promoting an economically efficient allocation of risk. It argues that the special circumstances of corporate agency (as opposed to agency for a natural principal) demand a special approach and that the more flexible approach embodied in the so-called ‘indoor management rule’ is more satisfactory in this context and more likely to promote efficiency in the organisation of a company's management body. However, there need to be some modifications to this approach and a greater acknowledgement of its overall economic context.