Friday, June 4, 2010

Ostensible Authority and Indoor Management: Possible Implications of MRF v. Parrikar

In MRF Ltd. v. Manohar Parrikar (Civil Appeals No. 4219 and 4220 of 2010, decided on May 3, 2010), the Supreme Court of India highlighted some aspects of the operation of the indoor management rule (or the rule in Turquand’s case). While the issue before the Court was a matter of public law and reference was made to indoor management only as an analogy, the decision is noteworthy as it is perhaps the first time that the Supreme Court has analysed the rule in some detail.

The case before the Supreme Court arose from an appeal against a decision of Panaji Bench of the Bombay High Court, which involved a public interest petition questioning the legality of two notifications issued by Government of Goa in respect of grant of 25% rebate u/s 23 of the Electricity Act, 1910 to certain industrial consumers of electricity. The indoor management rule became relevant because of a contention taken that the conduct of some governmental authorities in the course of their activities is within the indoor management of the authorities; and the procedure must be taken to have been properly complied with. The analogy is somewhat far-fetched; and in fact, the Court cited its previous judgment in S. Dhawan v. Shaw Bros., (1992) 1 SCC 534, on the dangers of private law analogies before commencing its discussion on the point. The Court did go ahead and examine the nature of the indoor management rule to conclude that the analogy was in any case inapplicable. 

After discussing the leading judgment of Royal British Bank v. Turquand, the Court said, (The rule of constructive notice) prevents the outsider from alleging that he did not know that the constitution of the company rendered a particular act or a particular delegation of authority ultra vires. The doctrine of indoor management is an exception to the rule of constructive notice. It imposes an important limitation on the doctrine of constructive notice. According to this doctrine, persons dealing with the company are entitled to presume that internal requirements prescribed in memorandum and articles have been properly observed. Therefore doctrine of indoor management protects outsiders dealing or contracting with a company, whereas doctrine of constructive notice protects the insiders of a company or corporation against dealings with the outsiders. However suspicion of irregularity has been widely recognized as an exception to the doctrine of indoor management. The protection of the doctrine is not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry…” On facts, the Court held that the ‘suspicion of irregularity’ threshold was satisfied in the case; and reliance on analogies of the indoor management rule was inapplicable. 

What is significant about the decision from a company law perspective is that it recognizes explicitly that indoor management operates as an exception to constructive notice. It must follow from this that indoor management does not have any authority-granting power on its own. Even before invoking the rule, it must be shown that the agent was acting within the scope of his ostensible authority. Unless this is shown, the question of constructive notice does not arise at all – and if the question of constructive notice does not arise, then there is no scope for invoking an exception to constructive notice.

Consequently, indoor management operates only when – once authority is established – the company pleads it is not bound under the constructive notice rule. In other words, the indoor management rule is a presumption that ostensible authority has not been curtailed by the principal’s instructions (this presumption can arise with constructive notice in some cases) – it is not a presumption that ostensible authority exists in the first place. As a leading authority on the law of agency, Prof. Peter Watts, notes, “there is a fallacy among lawyers that there is a presumption of regularity that automatically operates with company contracts… reference was usually made to ‘the rule in Turquand’s case’, or the ‘indoor management rule’. But this misunderstands that rule… The presumption of regularity kicks in only once the plaintiff has established that there was a holding out of the relevant agent as having authority to make a contract of the relevant sort …” See: Peter Watts, “Company Contracts and Reckless Trading: Re Global Print Strategies Ltd.”, 15 New Zealand Business Law Quarterly 3 (2009).

This position – which on first principles appears to be the correct one – has been explicitly recognised in other jurisdictions. For instance, it has been held in Northside Developments Pty Ltd v Registrar-General, (1990) 170 CLR 146 that the rule “only has scope for operation if it can be established independently that the person purporting to represent the company had actual or ostensible authority to enter into the transaction. The rule is thus dependent upon the operation of normal agency principles; it operates only where on ordinary principles the person purporting to act on behalf of the company is acting within the scope of his actual or ostensible authority…”

There are however some observations of some High Courts in India holding that indoor management can be used for raising a presumption as to the existence of authority itself. The remarks of the Supreme Court could serve to clarify the position of law on this point; that being an exception to constructive notice, indoor management only gives back what constructive notice takes away. It cannot give back more than what constructive notice took away.

1 comment:

Anonymous said...

The article was extremely helpful. good work.