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Question 1
1. Johannes, Phineas and Beauty are Mnandi CC’s members. Beauty has discovered that
Phineas concluded a contract on behalf of Mnandi CC for the purchase of a yacht without
consent of any of the other members. She is of the opinion that Mnandi CC should not be bound
to the contract because the corporation’s main business is catering. In addition, she shows you
the association agreement which stipulates that only Johannes is authorised to conclude
contracts on behalf of Mnandi CC. Advise Beauty whether or not Mnandi CC is bound to the
contract concluded by Phineas. Refer to relevant case law in your answer.
To determine whether Mnandi CC is bound by the contract Phineas concluded, we need to consider
the provisions of the Close Corporations Act and relevant case law.
Authority of Members in a Close Corporation
According to section 54 of the Close Corporations Act, every member of a close corporation (CC) is
considered an agent of the CC in relation to any third party dealing with the CC. This means that any
act of a member binds the CC, regardless of whether the act was performed for carrying on the
business of the CC. However, if the member had no actual authority to act for the CC in that specific
matter, the CC is still bound unless the third party knew or ought to have known that the member
lacked such authority.
Constructive Notice and Internal Restrictions
There is no constructive notice of the provisions of an association agreement. This means that third
parties dealing with the CC are not assumed to be aware of internal restrictions on members' powers
contained in such agreements. Consequently, they are entitled to assume that each member has the
necessary authority to act on behalf of the CC.
Relevant Case Law
In the case of Point 2 Point Same Day Express CC v Stewart, it was held that a close corporation can
be bound to a contract outside its business scope if the third party did not have, or reasonably should
not have had, knowledge of the member's lack of authority.
Application to Mnandi CC
Phineas' Authority: Phineas concluded a contract to purchase a yacht. According to the
association agreement, only Johannes is authorized to conclude contracts on behalf of Mnandi
CC.
Internal Restrictions: Since the third party (the yacht seller) is not assumed to know about the
internal restriction (i.e., that only Johannes is authorized), the third party can reasonably
assume that Phineas had the authority to conclude the contract.
