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

Karim is the managing director of Orchid Ltd. The board has expressly told Karim not to sign any contract above 50,000 without board approval. Karim signs a 200,000 supply contract with Delta Supplies, which is unaware of the limit. Karim had been held out by the board as managing director. Which statement is correct?

The contract binds Orchid Ltd. Although Karim lacked actual authority for the 200,000 deal, the company held him out as managing director, and Delta relied on that appearance in good faith, so apparent authority applies.

  1. AThe contract is not binding because Karim exceeded his actual authority
  2. BThe contract binds Orchid Ltd because Karim had apparent (ostensible) authority and Delta relied on it in good faithCorrect
  3. CThe contract binds Karim only
  4. DThe contract is binding only if the shareholders vote to approve it

Explanation

Where a company holds a person out as having authority and a third party relies on it without knowledge of the limit, the company is bound under apparent authority. Secret internal restrictions do not defeat the outsider. Option A ignores apparent authority.

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