Article Authored by Boksburg Attorney: Celiwe Nkosi
The contention that section 20(7) of the Companies Act 71 of 2008 constitutes a codification of the common law Tarquand rule.
The basis of the Common Law Tarquand Rule
Simply put, the common law Tarquand rule means that an outsider contracting with a company in good faith is entitled to assume that the internal requirements and procedures have been complied with. This means that the company will be bound by the contract even if the internal requirements and procedures were not complied with. The rule in a way protects an outsider that contracts in good faith.
The Tarquand rule would not be applicable in instances where circumstances were suspicious, and where the outsider was aware of the non-compliance to internal requirements and procedures.
In order for the Tarquand rule to be effective, someone acting as the agent of the company, purporting to have the authority to commit such an act, with no such authority, will bind the company if the third party was not aware. The rule is applicable even if the third party was ignorant of the fact that this was provided for in the articles of association then, and MOI now.
The New Companies Act 71 of 2008 (“The Act”) position on the Tarquand rule
Section 20(7) of the Companies Act 71 of 2008 provides that: -
“A person dealing with the company in good faith, other than a Director, Prescribed Officer or Shareholder of the Company, is entitled to presume that the company, in making any decision in the exercise of its powers has complied with all the form and procedural requirements in terms of this Act, Its MOI and any rules of the Company unless, in the circumstances, the person knew or reasonably ought to have known of any failure by the Company to comply with any such requirement.”
The interesting thing is that Section 20(8) of the Act goes on to preserve the Tarquand rule and states that section 20 (7) must be “construed concurrently with, and not in substitution for the common law Tarquand rule”. This means that like the Tarquand rule, section 20 (7) will not apply to falsifiers.
Does this mean that section 20 (7) of the Act is the codification of the Tarquand rule?
There seems to be alignment between section 20 (7) of the Act and the common law Tarquand rule.
The Tarquand rule has never protected a third party who had suspected than an internal formality or procedure was not complied with, on the other hand Section 20 (7) of the Act excludes a third party who “reasonable ought to have known” of non-compliance with the formality.
The Tarquand rule applies if it is clear that a person has actual authority, but there is a pre-requisite for the provided act.
In the case of Vrystaat Milies v Niewoudt 2004 (3) SA 487 (SCA), the court confirmed that if the MOI provides that the Board can appoint a person to conclude a contract on its behalf, the Tarquand rule cannot be used.
The case of One Stop Financial Services P/L v Neffensaan Ontwekkelings P/L and another 20028/14)  ZAWCHC 89 had to deal with the same question that the assignment is posing.
The case of One stop confirms the application of the Tarquand rule where a third-party contracts with a Board of Directors or a Managing Director or someone who holds an executive position in the company which carries with it a representation of authority usual to that position. The assumption is that the requisite authority has been granted for purposes of binding the company. The same assumption does not hold though for individual directors. It is clear that even if there is a delegation of authority to a single director, the third party cannot assume that any director with whom he deals has authority to bind the company. If all this can be proved i.e that the individual director has authority to bind the company, then the Tarquand rule can be applied, and the third party can assume that there has been compliance with internal requirements of the company in authorising its representatives.
The court addressed the issue of the codification of the Tarquand rule by section 20 (7), and the preservation thereof by section 20 (8). The Act does not intend to change the common law Tarquand rule. Section 20 (7) does not also allow a third party to presume the authority of an individual Director.
The court further emphasised that for the third party to presume compliance with “formal and internal procedural requirements “of the company, the third party should have been dealing with the company.
The court found that both the common law Tarquand rule and section 20 (7) apply if the third party can establish that he was contracting with someone who had actual or ostensible authority to bind the company. In those circumstances, the third party can say that he was dealing with the company.
Therefore, in conclusion section 20 (7) of the Act codifies the Tarquand rule, and has further extended the authority to act from “internal or formal procedures” to “any formal or procedural requirement”.