Required reading

1. EU: First Company Law Directive, art. 9

2. D: AktG, §§ 37(3), 39(1), 78, 81, 82, 112, 246(2)

3. UK: CA 2006, secs. 39–41, 43–48, 270–271, 273, 275, 280

4. US: DGCL, §§ 122(3), 141(a), (c), 142

Capacity, authority and reliance in contracting

This chapter addresses one of the “topical” areas of law discussed in Chapter 1 that are not formally “company law,” but are nevertheless integral to the operations of the company. All corporations enter into contracts with third parties, beginning with the purchase or lease of their means of production and ending with the sale of their goods or services. These relationships are governed by contract law, not corporate law, and whether the person purporting to act for the corporation can bind it when entering into such contracts is primarily a matter of the law of agency.

Three concepts are central to this topic: capacity, authority and good faith reliance. If a five-year-old child were to appoint a neighbor to the position of chief negotiator with her parents regarding all future “disciplinary proceedings,” the grant of authority may be formally valid, but it would nevertheless be without effect because the child does not have capacity to make it. Corporations have much in common with small children, as they can do nothing on their own. Companies depend fully on the agency of humans and have only the capacity that the law and their constitutional documents give them.