Analyses: The Turquand Rule, Irregular appointments and Bypassing the disciplinary process

• Jurisdiction: South Africa
• Published date: 20 August 2019
• Author: Tumo Charles Maloka
• Date: 20 August 2019
• Pages: 527-542

THE TURQUAND RULE, IRREGULAR

APPOINTMENTS AND BYPASSING THE

DISCIPLINARY PROCESS

TUMO CHARLES MALOKA*

University of Venda

I INTRODUCTION

The extent to which the Turquand rule (or the ‘indoor management

rule’ as it is sometimes termed) operates to bar a company from lawfully

resiling from a contract on the ground that some internal requirements

were not observed, is a familiar problem encountered in seminal

company law cases. (See Royal British Bank v Turquand 1856 (6)E&B

37, 1843–60 All ER 435; Morris v Kanssen 1946 AC 459, 1946 (1) All ER

586 (HL); Hely-Hutchison v Brayhead Ltd 1968 (1) QB 549; Northside

Developments Pty Ltd v Registrar-General 1990 64 ALJR 427; Bayhold

Financial Corporation Ltd v Clarkson Company Ltd 1990 CanLII 4134

(NSSC); Glofinco v Absa Bank t/a United Bank 2002 (6) 470 (SCA);

Farren v Sun Service SA Photo Trip Management (Pty) Ltd 2004 (2) SA

146 (C); Nieuwoudt v Vrystaat Mielies (Edms) Bpk 2004 (3) SA 486

(SCA); One Stop Services (Pty) Ltd v Neffesaan Ontwikkelings (Pty) Ltd

2015 (4) SA 623 (WCC).) It has surfaced recently in decision-making

processes with profound employment and labour law ramif‌ications.

Among the most intriguing questions emerging from case law are

whether the Turquand rule may be invoked: to enforce employment

contracts concluded in breach of internal formalities and a standing

moratorium on appointments of new employees; or to validate a

settlement agreement entered into by an employee who has pleaded

guilty to dishonesty during the course of a disciplinary hearing; or to an

outgoing municipal manager ostensibly to circumvent a disciplinary

process. The issues that arose tell an intricate tale of Byzantine twists and

turns, from which neither those who acted ultra vires, nor the litigating

employees emerged unscathed. In this regard, a trilogy of judgments –

Blue IQ Investment Holdings Ltd v Southgate 2014 (35) ILJ 3326 (LAC);

Hudson v SA Airways Soc Ltd 2015 (36) ILJ 2574 (LAC); and Saldanha

Bay Municipality v SAMWU obo Wilschut 2015 (36) ILJ 1003 (LC) –

provide ample opportunity for discussion of the pragmatic and logistical

*BA LLB, LLM (UCT). Senior Lecturer, School of Law, University of Venda.

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diff‌iculties experienced by employees who resort to the Turquand rule

and estoppel to hold the employer bound to irregular appointments, or a

settlement agreement concluded during an on-going disciplinary hear-

ing. Each case in its own right brings home the practical realities of

dishonesty, malfeasance, and impropriety at the highest level of any

organisation, that will invariably impact negatively on the culture of

probity within the organisation.

II THE TURQUAND RULE AND ESTOPPEL

It is important to this discussion that the contours of the Turquand rule

and doctrine of estoppel are clearly outlined as they impact on one

another. There is strong authority for the proposition that the Turquand

rule ought to be treated no differently from estoppel, namely that the

claim of an innocent contracting party to enforce a contract cannot

make an ultra vires act by a state off‌icial intra vires (TEB Properties CC v

MEC Department of Health & Social Development, NW 2012 JOL 28203

(SCA) paras 32–33; Mbana v Mnquma Municipality 2003 JOL 12106

(Tk) paras 26–27; One Stop Services paras 23–29).

The indoor-management rule postulates that bona f‌ide third parties

should not be prejudiced by a company’s non-compliance with its

internal formalities and procedures, because to require third parties to

inquire into the company’s arcane internal affairs is impractical, if not

plain risky. The Turquand rule, in substance, prevents a company from

escaping liability under an otherwise valid contract solely on the basis

that an internal procedure was not adhered to. The rule is intended for

the protection of outsiders who have no means of establishing whether

the necessary formalities and procedures under the company’s constitu-

tion have been met (s 20(7) of the Companies Act 71 of 2008; see also

LAWSA vol 4 Part 2: ‘Companies’ para 184 at 331–332; Cassim et al,

Contemporary Company Law 2 ed (Juta 2012) 183; Delport, ‘Companies

Act 71 of 2008 and the ‘‘Turquand’’ rule’ 2011 THRHR 132; Sealy,

‘Companies – agency and Turquand’ 1991 Cambridge Law Journal 47;

Krawitz ‘Protecting outsiders to corporate contracts in Australia’ 2002

Murdock University Electronic Law Journal 22). If a person invoking the

Turquand rule knew that the off‌icial in question was acting beyond his

or her capacity, or if the factual circumstances are such as to put the

party dealing with the company on inquiry, there can be no further

question of applying the Turquand rule (Quintessence Opportunities Ltd

v BLRT Investments 2007 (6) SA 523 (C) 532F; FPW Engineering

Solutions (Pty) Ltd v Technicon Pretoria 2004 (1) All SA 204 (T) paras

37–38).

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