Company and business processes are complex – knowing what to do, how to apply and follow certain procedures and instructions adds on to the process of complexities. Business law serves as a bridge between business processes and their relationship to the people who enforce and apply them, and ensures that they are followed prudently. For the protection of parties who would be involved in them, internal processes are established in the likeness of ensuring that members of a company follow these processes when engaging with people existing outside the company. This essay explores and focuses on the scope and importance of the establishment of the Turquand rule, which was is a defense for contracting people from outside a company.
The history of how the Turquand rule emerged began with the case of Royal British Bank v Turquand, where the Bank contracted with Turquand on an issue of a bond, and upon issuing the bond, Turquand was reprimanded for issuing a £2000 bond without the consent of the shareholders. The Bank was then aware of this, and upon contracting, the dispute arose. It was said in the case that outsiders dealing with a company in good faith can assume that acts within the company’s constitution and powers have been properly and duly performed and are not bound to enquire whether acts of internal management have been regular. In this instance, the Bank was protected by the held conclusion. This case has since been authoritative in many similar cases.
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The application of this case to any other case focuses on how internal processes are executed and whether stringent discipline was followed. The Turquand rule follows a more stringent ‘Doctrine of Constructive Notice’ which implicates that third parties seeking to contract with a company are aware and have notice of the public documents that a company filed with the Commission or that are available at the company’s premises. The Doctrine is however abolished by the new Companies Act.
The adoption of the Turquand rule has changed the Doctrine’s process, as it supports the third party seeking to contract in good faith. The third party can now assume that the company, or its agents, has followed the internal processes and procedures that it had to follow according to procedure. The placement of this rule seeks not to prejudice the third party from the company’s errors and short falls of following its internal formalities and procedures.
The scope of the Turquand rule extends to when a third party seeks to contract with a registered body or corporation, and does not apply to individuals dealing with other individuals or a committee of persons in their personal capacities, even if they are officials of a company.
An important aspect of the Turquand rule is that the outsider (third party) seeking to contract must do so in good faith. This extends to the point made earlier, that the third party seeking to contact does so assuming that all internal processes are followed. In the absence of their awareness that these requirements are lacking, or if any irregularities are found, considering procedure, then the mandate binding the third party to the company would be defective. In Uitzigt case, a director signed off four promissory notes without the authority of two other directors whom are deemed necessary for authorization of such. As there was an implied authority by one of the directors, the third party sought to contract in good faith and when these promissory notes were duly presented, they were dishonoured. This case was favoured for the plaintiff, to whom the worth of the promissory notes were paid out, as the plaintiff had contracted in good faith and was confident that all internal procedures were followed.
The common law view of pre-registration contracts was that the company did not exist for legal purposes until it had been formally incorporated (registered). This common law view resulted in company's being unable to enter a binding contract until they had been registered. However "given the delays which can be encountered in the registration process, the promoter of a company may wish to enter ...
The Rule does however have exceptions to it. Those exceptions are to stop third parties from invoking the Turquand rule where the third party would have known about the non-compliance of a company, considering the company’s internal formalities and procedures. Knowing of such non-compliance and proceeding to contract is an exception to the rule as the contract was concluded in bad faith, and also where the circumstances are suspicious. In the Yalecase, the plaintiff contracted on the transfer of shares to the directors of the company in the knowledge that no meeting, as it was an internal formality when the company contracts with its directors, was held with regard to this transfer. The judge stated that the case was not of a normal defect as the plaintiff was aware that no meeting was held with the shareholders. The case was dismissed on the ground of the bad faith and suspicious circumstances of which the plaintiff was aware.
In retrospect, it can be seen that the scope and importance of the Turquand rule seek to protect third parties from scrupulous activities by the company, its director, or any of its official agents. Estoppel, where the Doctrine of Estoppel can be used, is a further extension to the Turquand rule, however, that is another topic in itself.
HS Cilliers et al Entrepreneurial Law 2ed (2001) Butterworths: Durban.
[ 1 ]. Royal British Bank v Turquand (1856) 6 E&B 327
[ 2 ]. 42
[ 3 ]. 41; Act No. 71 of 2008
[ 4 ]. 42
[ 5 ]. Wolpert v Uitzigt Properties (Pty) Ltd and Others  1 All SA 16 (W)
[ 6 ]. HS Cilliers et al Entrepreneurial Law 2ed (2001) 168
[ 7 ]. Wolpert v Uitzigt Properties (Pty) Ltd and Others  1 All SA 16 (W)
[ 8 ]. 42
[ 9 ]. HS Cilliers et al Entrepreneurial Law 2ed (2001) 168
[ 10 ]. Burstein v Yale  1 SA 288 (W)