Supreme Court sets limits of Turquand Rule with regards to former employees who are aware of the internal processes
Brief facts of the case
Emma Kundishora (the Appellant) was employed by Zimbabwe Red Cross Society (the Respondent) as the Secretary General. The Appellant was suspended from her employment pending investigation into and assessment of her performance. She chose to resign from the organisation. In acknowledging the resignation, the acting president of the organisation set out a list of what the Appellant was entitled to as termination benefits which included a Toyota Prado. The acting president did not make any pronouncement on the transfer costs for this vehicle.
Following the acting president’s communication on benefits, the honorary treasurer of the organisation wrote a letter to the Appellant to the effect that the Respondent organisation was going to meet the transfer costs for the vehicle. The honorary treasurer was reprimanded by the Respondent’s council for such communication as he had no authority to make such a pronouncement. Following such reprimand, the honorary treasurer retracted his communication on the transfer costs.
The Appellant sought to rely on the honorary treasurer’s initial communication and wanted the Respondent to meet the transfer costs. The main issue for determination by the Supreme Court was whether the Appellant could seek reliance on the Turquand Rule to entitle her to the transfer costs.
What is the Turquand Rule?
The rule has its foundation in the classical English case of Royal British Bank v Turquand (1856) 6 E&B 327, 119 ER 886. In terms of this rule an outsider contracting with a company in good faith is entitled to assume that the internal requirements and procedures have been complied with. Therefore, the company will be bound by the contract even though all matters of internal management and procedure required to enable the representative to act on behalf of the company have not been complied with.
The applicability of the rule in Zimbabwe is not novel. It was part of section 12A of the old Companies Act and has been applied in the High Court case Powerspeed Electrical Limited v Enfield Zimbabwe HH 107/14 and the Supreme Court case Ngatibataneyi (Private) Limited v Moyo & Anor SC 13/07.
The rule has been kept alive through the provisions of section 24 of the recently enacted Companies and Other Business Entities Act [Chapter 24:31]. The provisions of section 24 provide that a registered business entity shall be estopped from denying the truth if any person having dealings with that registered business entity or with someone deriving title from that registered business assumes that the internal regulations have been complied with, the person acting for the company has been duly appointed and a document has been sealed by the company if it bears what purports to be the seal of the company.
However, section 24 goes on qualify the reliance on the Turquand Rule. The exceptions are that;
(i) a person shall not be entitled to make such assumptions if he or she has actual knowledge to the contrary or if he or she ought reasonably to know the contrary;
(ii) a person shall not be entitled to assume that any one or more of the directors of the company have been appointed to act as a committee of the board of directors or that an officer or agent of the company has the company’s authority merely because the company’s articles provide that the authority to act in the matter may be delegated to a committee or to an officer or agent.
The Act thus by and large codifies the common law rule into binding statute which has the same effect as the principle of estoppel. One is thus expected to assess whether he or she passes the exception test before relying on the Turquand case.
The Supreme Court’s Ruling
The finding of the Supreme Court was that just because someone holds an important position within an organisation does not mean that he has authority to act in any manner he deems fit. It was further held that the honorary treasurer retracted the statement binding the organisation and the Appellant could not rely on it. More importantly, it was held that the Appellant knew how the organisation functioned including that the honorary treasurer had no authority to produce such a binding statement.
The ruling mirrors what is provided for in terms of the Companies and Other Entities Act which makes it the first port of call in such matters.
The Turquand rule protects only bona fide third parties.
Ex-employees who are reasonably presumed to be aware of the internal affairs of the erstwhile companies are not protected.
Before one seeks reliance on the Turquand Rule, he or she should assess whether there is compliance with section 24 of the Companies and Other Entities Act as explained earlier in this article.
For advice on employment contract issues and disputes, contact our Employment Law team.