Written by Juanice Jooste, Herman Bonnet & Jeanne-Mari Tromp
05 January 2024
What is the Meaning of the Turquand Rule in South Africa?
The vast majority of adults are employed in some way, whether they own a business or are employed by someone else’s company. Key employees are often clothed with various responsibilities and capabilities that authorise them to enter into transactions or agreements with third-party providers on behalf of the company.
Third-party providers (hereinafter “Third Parties”) are justified by law to assume that the necessary internal formalities of the company have been complied with by the authorised person (hereinafter the “Representative”) before they initiate the transaction or agreement. The onus to comply with the necessary internal formalities of the company before entering into an agreement or making a transaction, therefore, rests on the Representative. This arrangement leaves Third Parties vulnerable, as they have no control over the Representative’s compliance with the necessary internal formalities.
The question then becomes: Is a transaction or agreement still legally binding if a company’s Representative fails to comply with the company’s internal formalities? To protect a Third Party from unauthorised transactions of this kind, South African common law contains the Turquand Rule.
What is the Turquand Rule?
The Turquand rule is based on the concept that a Representative of the company does not have to confirm that the internal formalities of a business have been complied with for the transaction to be valid. Therefore, if a company enters into a contract and the internal formalities are not complied with, the contract will still be valid and enforceable.
It is important to note that Section 20(7) of the Companies Act is seen as a statutory version of the Turquand Rule as it states what we have established of the Turquand Rule above. However, Section 20(7) of the Companies Act does not replace the common law Turquand Rule, as Section 20(8) of the Companies Act clearly states that Section 20(7) must not be read as a substitute for any relevant common law rule.
What is the purpose of the Turquand Rule?
The Turquand Rule protects Third Parties who enter into valid transactions or agreements with a Representative of a company from the company, claiming the transaction or agreement is null and void due to their internal processes not being met.
Representatives of a company will likely enter into numerous verbal or written agreements or transactions that flow from the capacity the Representative is clothed with on behalf of the company. Transactions like these advance the company’s inner workings and are mostly need-driven and required for the company to deliver its services to customers. A simple task such as ordering office stationery from Waltons or a more complex transaction like purchasing a new company car from Ford are prime examples of the types of transactions Representatives may enter into on behalf of their company.
Third Parties, like Waltons or Ford in the above example, accept that the Representative has the ostensible authority to enter into the transaction on behalf of a company. Therefore, Third Parties do not require written approval or a written mandate from the company to prove that the Representative is authorised to act on the company’s behalf.
The Turquand rule, therefore, protects Third Parties from non-compliance with the internal formalities of the Representatives’ companies by the Representative; however, the rule does not protect:
- any director or directors,
- prescribed officers,
- shareholders who should have known of the internal requirements or
- Third Parties who rely on a forged document.
What are the exceptions to the Turquand Rule?
The Turquand Rule does not apply if:
- The contract was concluded under suspicious circumstances. For example, the Representative of the company you are entering into business with states that he is a director, but you can see in the email signature that it states the Representative is a manager.
- The Third Party knew that the internal formalities were not complied with but still concluded the contract. For example, the agreement was signed by an employee other than the manager, even though the Third Party has been made aware that the company in question required the manager to sign the agreement.
Under the above circumstances, the Turquand Rule will not be enforceable or of any use to the Third Party. It is, however, notable that section 20(7) of the Companies Act reads a little differently than the common law Turquand Rule as it states that the Turquand Rule will not apply if you, as the Third Party, knew or reasonably ought to have known that the internal requirements were not met when you entered into a contract with the specific company you are now seeking relief from.
What are the internal formalities of a company?
Each company has its own internal requirements, which can range from what the directors’ duties are, what shareholders can or cannot do, how investments will be dealt with or whether they will invest at all, who is allowed to invest or represent the company, and who is allowed to buy things on behalf of the company and who is not.
Where can one find a company’s internal formalities?
A company’s Memorandum of Incorporation is accessible to the public; however, due to the Turquand Rule, Third Parties do not need to make themselves aware of the internal formalities. Third Parties are justified to act in good faith and assume that all the internal requirements have been met by the company they are entering into business with by assuming that the company’s Representative is authorised to make a transaction on its behalf.
Contact Burger Huyser Attorneys’ contact law specialists and commercial lawyers for assistance with the validity and enforceability of your business’ agreements with Third Parties or if a company claims their agreement made with your business via a company Representative should be deemed invalid!
DISCLAIMER: Information provided in this article does not, and is not intended to constitute legal advice. READ MORE
