Corporate and Business Law (Global) · The formation and constitution of a company

Company Capacity, Authority and Contracts Explained

Updated 11 October 2026 · Fact-checked

Capacity is whether a company can legally make a contract. Authority is whether the person who acted can bind it. In the Global variant, a company is treated as having wide capacity, and outsiders who deal in good faith are usually protected by apparent authority and the Turquand rule. Check capacity, then authority, then the third party's position.

Understand Company Capacity, Authority and Contracts

A company is a separate legal person. It can own property and make contracts in its own name. But it is not a human being. It can only act through people: directors, officers and agents. So two questions arise whenever a company signs a contract. Could the company make it at all (capacity)? And did the person who signed have the right to act for it (authority)?

Historically, the ultra vires doctrine said a company could only do what its objects clause allowed. A contract outside the objects was void, even for an innocent outsider. This was unfair to third parties. Modern company laws have largely removed the problem. In most systems, a company now has unrestricted objects unless its constitution says otherwise, and a restriction does not make a contract invalid against an outsider. Always apply the law of the variant you are told to use, and remember that the Global variant tests general principles, not one country's statute.

Authority is the bigger exam issue. A director or agent can bind the company in three main ways. Actual express authority is given in the constitution, a board resolution or a contract. Actual implied authority comes from the position, for example a managing director's usual powers. Apparent (ostensible) authority arises when the company, by words or conduct, represents that someone has authority, and the outsider relies on it. The company is then bound even if the person had no real authority.

The rule in Royal British Bank v Turquand protects outsiders. A person dealing in good faith with a company is entitled to assume that its internal procedures have been followed. For example, they can assume a required board resolution was passed. They cannot rely on the rule if they know of the irregularity, are put on inquiry by suspicious facts, or if the person acting is an insider who should know the internal position. Forgery is also a classic limit: a forged document does not bind the company.

One more point. Where a person acts for a company with no authority at all, and the company does not ratify, the agent may be personally liable for breach of warranty of authority. Ratification, where the company adopts the act afterwards, can make the contract binding, but only if the company existed and could have made the contract when it was made.

Key formulas to remember

Capacity (modern rule): Company capacity = unrestricted, unless the constitution restricts it; A restriction in the objects clause generally does not invalidate a contract with a good-faith outsider. It may expose directors to liability to the company.
Actual authority: Actual authority = express authority + implied authority; Express comes from the constitution, resolution or contract. Implied comes from the role or the usual course of dealing.
Apparent authority test: Representation by the company + reliance by the outsider + outsider unaware of lack of authority = company bound; The representation must come from the company, not from the agent alone. A person cannot create their own apparent authority.
Turquand rule (indoor management): Outsider in good faith may assume internal rules were followed; Does not apply if the outsider has knowledge or suspicion, is an insider, or the document is forged.
Breach of warranty of authority: No authority + no ratification = agent personally liable to the third party; Remedy is damages against the agent, not against the company.

How to solve Company Capacity, Authority and Contracts questions

Use this order for any scenario question on capacity or authority. It keeps your answer short and complete.

1Identify who made the contract and on whose behalf: the company, a director, an employee or an agent.
2Test capacity first. Does the constitution restrict the company's objects? State that the restriction usually does not void the contract against an outsider.
3Test authority. Decide whether the person had actual express authority, actual implied authority, or neither.
4If no actual authority, test apparent authority: did the company make a representation, did the outsider rely on it, and was the outsider unaware of the lack of authority?
5Test the Turquand rule where an internal procedure was not followed. Check for knowledge, suspicion, insider status or forgery.
6Consider ratification if the company later adopts the contract.
7State the result for each party: is the company bound, is the agent personally liable, and do directors face liability to the company?

Quickest way: Capacity, authority, outsider

When to use it: Use this for Section A and Section B objective questions where you have under two minutes per question.

Read the last line first to see whether the question asks if the company is bound, or who is liable.
Ignore objects clause details unless the question asks about director liability. Capacity rarely stops an outsider's claim.
Look for the key fact: a missing internal approval (think Turquand), a title like managing director (think implied or apparent authority), or a forged signature (company not bound).
Check the outsider: did they know of the problem? If yes, the protection is lost.
Eliminate options that say the contract is automatically void for ultra vires, or that the outsider must always inspect the constitution.

Common mistakes in Company Capacity, Authority and Contracts

Saying a contract outside the objects clause is automatically void.
Older textbooks teach the strict ultra vires doctrine as current law.
Fix: State that modern law protects good-faith outsiders. The issue is usually the directors' breach of duty, not the validity of the contract.
Confusing actual and apparent authority.
Both lead to the company being bound, so they seem alike.
Fix: Actual authority comes from the company to the agent. Apparent authority comes from the company's representation to the outsider. Name which one you are testing.
Letting an agent create their own apparent authority.
Students focus on the outsider's belief and forget who caused it.
Fix: The representation must come from the company or someone with actual authority to speak for it. The agent's own claim is not enough.
Applying the Turquand rule when the outsider knew of the irregularity.
Students remember the rule but forget its conditions.
Fix: Always check for good faith, knowledge, suspicion and insider status. Also remember forgery is outside the rule.
Forgetting the agent's personal liability.
Students stop once they decide the company is not bound.
Fix: Add that an agent without authority may be liable for breach of warranty of authority unless the company ratifies.

Worked examples

Example 1

Delta Ltd's articles require board approval for any contract over ₹50,00,000. Rohan, a director, signs a ₹80,00,000 supply contract with Apex Traders without board approval. Apex knew nothing of the articles and had no reason for suspicion. Delta refuses to perform. Advise whether Delta is bound.

Show the solution

Capacity: nothing suggests Delta lacks capacity to buy supplies. This is not a capacity problem.
Actual authority: Rohan lacked actual authority above ₹50,00,000 because board approval was required and not given.
Apparent authority: Delta, by allowing Rohan to act as a director dealing with outsiders, represented that he could make such contracts. Apex relied on this.
Turquand rule: Apex may assume the internal requirement of board approval was met. Apex was in good faith, had no knowledge and no reason for suspicion.
Result: the protection applies and the limit in the articles does not defeat Apex's claim.

Answer: Delta is bound by the contract. Apex can enforce it, relying on apparent authority and the Turquand rule. Delta may have a claim against Rohan for breach of duty.

Example 2

Meera, a company's finance clerk, signs a lease of a warehouse for Zenith Ltd. She has no authority to sign leases. The directors never told the landlord she could. Zenith later learns of the lease and its board votes to accept it. Advise on the position.

Show the solution

Actual authority: Meera had none, as a clerk has no usual power to grant or take leases.
Apparent authority: there is no representation by Zenith to the landlord that Meera could sign leases, so apparent authority fails.
Without authority, Zenith is not bound at the time of signing.
Ratification: the board has voted to accept the lease after learning of it. Zenith existed and could have made the lease when it was signed, so ratification is possible.
Effect: ratification makes the lease binding on Zenith from the outset, so Meera has no personal liability for lack of authority.

Answer: Zenith was not bound when Meera signed, but its board's ratification makes the lease binding on it. Meera is not personally liable.

Exam tips

Scenario questions usually hinge on one key fact. Find it: a title, a missing resolution, a forged signature, or the outsider's knowledge.
Use the exact terms: actual express, actual implied, apparent authority, Turquand rule. Examiners match your wording to the options.
For multi-task Section B questions, answer who is bound first, then who is liable. Do not mix the two.
Remember all-or-nothing marking. If two options both sound right, check the conditions: good faith and no knowledge of the irregularity.
Name Royal British Bank v Turquand only when asked about the rule. Do not cite other cases unless you are sure of them.

Practice questions from The formation and constitution of a company

Company Capacity, Authority and Contracts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ExecutiveDoctrine of Ultra Vires and Constructive Notice

Company Capacity, Authority and Contracts: frequently asked questions

What is the ultra vires doctrine in company law?

It was the old rule that a company could only act within the objects in its constitution, and acts outside them were void. Modern law has largely removed its effect, so companies generally have unrestricted capacity. A good-faith outsider is normally protected.

What is the Turquand rule in simple terms?

It lets an outsider assume a company has followed its own internal procedures. If the outsider acts in good faith, the company cannot say a required resolution was missing. It does not help someone who knew or should have suspected the problem, or where a document is forged.

What is the difference between actual and apparent authority?

Actual authority is what the company has really given the person, expressly or by implication. Apparent authority is what the company has led an outsider to believe. In both cases, if the test is met, the company is bound.

Can a company be bound by a director who exceeded their powers?

Yes, in many cases. If the outsider acted in good faith and relied on apparent authority or the Turquand rule, the company is bound. The director may then be liable to the company for breach of duty.