MRL2601 Assignment 2 Due 20 September 2024 (Detailed solution)
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Course
Entrepreneurial Law
Institution
University Of South Africa
Book
Entrepreneurial Law
Question 1: Is Mnandi CC Bound by the Contract Concluded by Phineas?
Scenario Overview: Beauty, a member of Mnandi CC, discovers that Phineas,
another member, has entered into a contract for the purchase of a yacht without the
consent of the other members. Mnandi CC's main business is catering...
, Question 1: Is Mnandi CC Bound by the Contract Concluded by Phineas?
Scenario Overview: Beauty, a member of Mnandi CC, discovers that Phineas,
another member, has entered into a contract for the purchase of a yacht without the
consent of the other members. Mnandi CC's main business is catering, and the
association agreement specifies that only Johannes is authorized to conclude
contracts on behalf of the corporation. Beauty is concerned about whether Mnandi
CC is bound to this contract.
Legal Context: The situation revolves around the authority of members in a close
corporation (CC) and whether Phineas had the power to bind the CC to the contract.
According to South African law, particularly under the Close Corporations Act 69 of
1984, the internal rules set out in the association agreement of a CC play a crucial
role in determining the authority of members.
Relevant Case Law: The case of Erasmus v Pentamed Investments (Pty) Ltd 1982
(1) SA 178 (W) is relevant, where the court held that where an outsider deals with a
company (or CC) and the outsider knows or ought to have known about limitations
on the authority of those purporting to act on behalf of the company, the company
may not be bound by the actions of the unauthorized party.
Advice to Beauty:
Lack of Authority: Since the association agreement clearly stipulates that only
Johannes is authorized to conclude contracts on behalf of Mnandi CC, Phineas
acted beyond his authority.
Ultra Vires Doctrine: Phineas’s actions could be considered "ultra vires" (beyond the
powers) as per the rules of the CC. Given the yacht purchase does not align with
Mnandi CC’s main business of catering, this further suggests that the contract was
outside the scope of what Phineas could validly do on behalf of the corporation.
Binding Nature: Considering the principles in Erasmus v Pentamed Investments, if
the other party to the contract was aware (or should have been aware) of the
limitations in the association agreement, Mnandi CC may not be bound by Phineas’s
actions.
Conclusion: Mnandi CC should not be bound to the contract as Phineas acted
beyond his authority, and the contract does not align with the corporation’s main
business. The other party's knowledge of these limitations is critical in determining
whether Mnandi CC can avoid the contract.
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