Three classic doctrines govern contracts executed between third parties and a company.
1. The Doctrine of Ultra Vires
Ultra Vires means "beyond powers." A company is a legal creation with capacity limited strictly to the objects defined in its MOA. Any transaction beyond this scope is void ab initio and cannot be ratified, even by unanimous consent of shareholders.
- Landmark Case: Ashbury Railway Carriage & Iron Co. v. Riche (1875): A company incorporated to make railway carriages entered a contract to finance a railway line in Belgium. The House of Lords held the contract void because financing railways was outside the object clause of its MOA.
2. The Doctrine of Constructive Notice
A protective doctrine for the company. Once the MOA and AOA are registered with the ROC, they become public documents. Every person dealing with the company is presumed to have read and understood these documents. (Constructive notice of any limitation of power is imputed to the third party).
3. The Doctrine of Indoor Management (Turquand's Rule)
A protective shield for bonafide third parties, acting as a mitigation to the harshness of Constructive Notice.
🛡️ Turquand's Rule: Third parties dealing with a company are only bound to verify that the proposed transaction is consistent with the public MOA and AOA. They are not bound to inquire into the regularity of internal administrative procedures.
- Landmark Case: Royal British Bank v. Turquand (1856): The directors of a company issued a bond to the bank. The AOA authorized directors to issue bonds provided a resolution was passed in a general meeting. No such resolution was passed. The court held the bond valid; the bank was entitled to assume that the internal resolution had been duly passed.
- Exceptions to Turquand's Rule:
- Knowledge of Irregularity: If the third party had actual knowledge that the internal rules were violated.
- Suspicion / No Inquiry: If the transaction is so unusual that it triggers a duty to inquire, and the third party fails to do so.
- Forgery: The rule never validates a forged document (Ruben v. Great Fingall Consolidated).