The object of the turquand rule is that bona fide third parties should not

be prejudiced in their dealing with a company simply on the basis that

the company has failed to comply with its own internal rules and formal
requirements.

Giving examples, explain the justification for the rule and discuss its legal
exceptions

Introduction

The Turquand Rule, also known as the 'indoor management rule' which is still
relevant for the purposes of modern company law today, originated in Royal
British Bank v Turquand. In South Africa, this rule was adopted in Mine
Workers Union v Prinsloo. The principle behind the Rule is that a person
dealing with a company, in good faith, is entitled to assume that all internal
procedures of the company have been complied with and are carried out, In
Dynamos Football Club (pvt0 Ltd and Anor v Chiminya and Ors (HC 2500
of 2007) [2009] ZWHHC 49 (31 January 2009) the turquand rule was defined
as a common law principle which is intended to protect the rights of third
parties dealing with companies. It is therefore a rule that a third party would
rely on when a company or office bearer of a company seeks to avoid liability.
See also the South African Judgement One Stop Financial Services (Pty)
Ltd v Neffensaan Ontwikkelings (Pty) Ltd and Another it was held that
The Turquand rule is applied by the South African courts when deciding
whether a company should be bound to a contract concluded with a third party
in the circumstances where the company’s representative concluding the
contract on behalf of the company is unauthorized to do so due to an irregularity
in the company’s internal procedures, or failure to comply with all internal
approvals before concluding the relevant contract. The rule protects third parties
and creates commercial certainty in that it presumes in favour of the third party
that all aspects of the company's internal governance have been duly fulfilled.

How do courts determine whether or not a third party is a bona fide

contractant?

The One Stop case confirmed the application of the common law Turquand rule
where a third party contracts with a board of directors as opposed to an
individual director or a managing director or someone who holds another
executive position in the company which carries with it a representation of
authority usual to that position.  In these scenarios a third party is ordinarily
entitled to assume that the requisite authority has been granted for purposes of
binding the company.  The same assumption does not hold true for an individual
director.  It is clear that just because the company's constitution permits the
board of directors to delegate authority to a single director, this does not entitle
the third party to assume that any director with whom he deals has the authority
to bind the company.  The Turquand rule only comes into operation once the
third party proves that the individual director purporting to represent the
company has authority (i.e. ostensible authority) to bind the company.  Once
this is proved, the Turquand rule will enable the contracting party to assume that
there has been compliance with the internal requirements of the company in
authorizing its representative.

The rule operates in both a narrow and a wide sense, in the narrow sense, the
rule is used to show whether or not the required person was appointed, in the
wide sense, the Turquand rule is used to consider whether or not the correct
internal procedures were followed in the appointment of such a person. by
way of example, if the articles contain a provision which permits the board to
delegate their powers to any third party, the Turquand rule will apply in the
narrow sense only if the person has been appointed by the board, if, however,
the appointment of the third party was made, but the validity of the
appointment is disputed because a quorum as an example was not present,
the Turquand Rule in the wide sense may also apply. In both instances the
company is unable to dispute, and a third party may assume, that the
appointment of the third party was correctly performed, in the first instance,
the bona fide third party could assume that they were contracting with the
rightfully appointed person thus narrow application of the Turquand Rule and
in the second, the third party could assume that all internal processes were
correctly completed which is wide application of the Turquand Rule. Internal
processes include, formal and procedural requirements deemed as inside
actions of the company (‘indoor management rule)
 Exceptions to the
rule

Knowledge of the flaws

It is trite at law that if a third party has knowledge of the flaws the applicability
of tarquand rule becomes difficult, The Turquand Rule is based on principle in
the sense that any outsider dealing with the company is entitled to assure that
as far as internal proceedings are concerned everything have been complied
with. Nevertheless one cannot take protection of that principle of indoor
management if he has actual knowledge that the procedure has not been
complied with the company, see the case of Emma Kundishora v Zimbabwe
Red Cross Society it was held that The tarquand rule was inapplicable
because the appellant knew or ought to have reasonably known that the
Honorary Treasurer was not an executive member and could not make
binding decisions on behalf of the respondent. The respondent also averred
that should the amount be due, it was payable to the commissioner or Zimra
and not to the appellant, the respondent also contended that the arbitrator had
cast upon it an obligation cast by law on a transferee of property, The court
held that the tarquand rule was inapplicable and neither could it be said that
Mr Gotosa had ostensible authority to bind the respondent, the court
reasoned that the appellant was not some innocent third party but occupied
the highest post in the respondent and was aware or ought to have been
aware of the authoritative communications in the organizations, the court
further explained that even if it was to be assumed that Mr Gotosa was acting
under delegated authority, there was no evidence of such delegation.

Forgery
The
Turquand Rule does not protect a person where forgery is involved. A
company cannot be held liable for forgeries committed by its officers. When a
document is forged it is considered null and void in the eyes of the law and
the Turquand Rule cannot be availed in such a case. For instance in the case
below,In Ruben v Fingall Consolidated Limited, 1906 AC439 case, where
the company secretary had sold the shares to the plaintiff by forging the
signatures of two directors. The plaintiff had contended that whether the
signature was forged or genuine comes under the purview of the internal
management of the company, therefore the company shall be held liable for
the same. I t was held that the company cannot be made liable in cases like
this where there has been an apparent forgery and fraud