The Turquand rule in South African company law: A(nother) suggested solution

• Jurisdiction: South Africa
• Published date: 22 May 2020
• Pages: 1-28
• Citation: (2019) 5(2) JCCL&P 1
• Date: 22 May 2020
• Author: Olivier, E.A.

1

THE TURQUAND RULE IN SOUTH

AFRICAN COMPANY LAW:

A(NOTHER) SUGGESTED SOLUTION

Etienne Aubrey Olivier*

LLD candidate, University of the Western Cape

ABSTRACT

The common-law Turquand rule in South African law protects

persons from being affected by a company’s non-compliance with an

internal formality pertaining to the authority of its representatives.

The Turquand rule should not be regarded as an independent rule

of South African company law, but as part of the law of agency,

particularly the principles of agency by estoppel. Section 20(7) of the

Companies Act 71 of 2008 attempts to protect bona fide third parties

dealing with companies. However, this section is likely to create

uncertainty as it fails to clarify its impact on other provisions in the

Act that prescribe requirements for company decisions. It is argued

that s 20(7) of the Act is unnecessary and potentially dangerous, and

should be repealed.

Keywords: company; agency; authority; contract; Turquand rule;

third party

I INTRODUCTION

Authority and representation rules are important components of

any corporate law framework.1 The law should clearly outline the

circumstances under which a corporate agent’s conclusion of a

juristic act is binding between his principal and third parties.2

Unfortunately, the task of identifying and regulating those

circumstances may be complicated by the fact that the existence of

a company representative’s authority is often conferred subject to

compliance with some internal formality.3

* LLB LLM (cum laude) (Western Cape).

1 P Delport ‘Companies Act 71 of 2008 and the “Turquand” rule’ (2011) 4 THRHR

132 at 132.

2 D H Bester ‘The scope of an agent’s power of representation’ (1972) 89 SALJ 49 at

49.

3 M J Oosthuizen ‘Aanpassing van die verteenwoordigingsreg in maatskappy-

verband’ (1979) Journal of South African Law 1 6. Locke remarks that the law on

authority of company representatives has been complicated further by the

(2019) 5(2) JCCL&P 1

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(2019) 5 (2) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

This article addresses South African law pertaining to contracts

purportedly entered into by a company’s representative in the absence

of compliance with an internal formality to which his authority is

subject. The common-law Turquand rule is an important part of that

legal framework.4

Section 20(7) of the Companies Act 71 of 2008 (the Act) introduces

into South African company law what appears to be a third-party

protection mechanism similar to the common-law Turquand rule.

However, s 20(8) of the Act confirms that the common-law Turquand

rule remains applicable.5

The Turquand rule is targeted at a situation where a company fails

to fulfil one of its internal requirements regarding the authority of

its agents to contract.6 In terms of the rule, third parties dealing with

the company are entitled to presume regularity, or at least, are not to

be affected by the company’s non-compliance with its own internal

formalities. In other words, the Turquand rule prevents a company

from avoiding liability on an unauthorised contract due to non-

compliance with an internal requirement. The operation of the rule

will be excluded if the third party knew that the internal requirement

had not been complied with.7 In addition, the Turquand rule cannot

be used by a third party that had failed to make further enquiries in

circumstances that are so suspicious that they should have prompted

him to confirm the agent’s authority by making further enquiries.8

The nature and scope of the common-law Turquand rule in South

African company law has often been addressed by academics.9 The

provisions of the Companies Act 71 of 2008 (the Act). N Locke ‘The legislative

framework determining capacity and representation of a company in South

African law and its implications for the structuring of special purpose companies’

(2016) 133 SALJ 160at 169.

4 The Turquand rule was established in Royal British Bank v Turquand (1856) 6 E&B

327.

5 Locke op cit note 3 at 181.

6 The Turquand rule does not apply to contracts between natural persons acting in

their personal capacities. See Wolpert v Uitzigt Properties (Pty) Ltd & others 1961 (2)

SA 257 (W) at 23.

7 The Mine Workers’ Union v JJ Prinsloo; The Mine Workers’ Union v JP Prinsloo;

The Mine Workers’ Union v Greyling 1948 (3) SA 831 (A) at 845; JJ Du Plessis

‘Maatskappygebondenheid vir die optrede van ongemagtigte maatskappy-

funksionarisse’ (1991) 3 SAMLJ 281 at 301; Delport op cit note 1 at135.

8 Houghton and Co v Northard, Lowe and Wills 1927 (1) K.B. 246 at 266–7; Wolpert

supra note 6 at 20; Delport op cit note 1 at 135; Du Plessis op cit note 7 at 301–2;

Locke op cit note 3 at 169.

9 R Jooste ‘Observations on the impact of the 2008 Companies Act on the doctrine

of constructive notice and the Turquand rule’ (2013) 130 SALJ 464 at 465;

Oosthuizen op cit note 3 at 1; M J Oosthuizen ‘Die Turquand-reel as reël van die

verenigingsreg’ (1977) Journal of South African Law 210 at 219; J S McLennan ‘The

ultra vires doctrine and the Turquand rule in company law – a suggested solution’

(1979) 96 SALJ 329at 344–57; Du Plessis op cit note 7 at290–305; F H I Cassim

& M F Cassim ‘The authority of company representatives and the Turquand rule

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