In Malaysia, the principles governing binding contracts between companies are shaped by the Companies Act 2016 (CA 2016), common law, and case law. These principles ensure that companies enter into contracts in a valid, enforceable, and accountable manner.
Here are the key principles and relevant case law under Malaysian context:
- Capacity to Contract (Legal Capacity)
Company must have legal capacity to enter into a contract.
Under Section 21 of the Companies Act 2016:
A company has the capacity, rights, powers and privileges of a natural person.
This means a company can generally enter into any kind of contract unless limited by its constitution.
Relevant Case: Tan Sri Khoo Teck Puat v Plenitude Holdings Sdn Bhd [1994] 3 MLJ 777
- The court held that companies are legal persons and can enter contracts just like individuals.
- Reinforced the idea that companies can sue and be sued on contracts.
- Authority to Bind the Company
Contracts must be entered into by someone with authority (actual, implied, or apparent).
There are three types of authority:
- Actual Authority: Explicitly granted by the company (via resolution, delegation).
- Implied Authority: Authority assumed based on position (e.g., a CEO).
- Apparent/Ostensible Authority: Where a third party believes someone has authority, based on the company’s conduct.
Relevant UK Case: Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
- Widely cited in Malaysia.
- Held: Even if no actual authority exists, the company is bound if it created the impression of authority.
Malaysian Application: Hoh Kiang Ngan v Mahkamah Perusahaan Malaysia [1995] 2 MLJ 369
- Malaysian courts accept the concept of apparent authority.
- Directors and agents can bind a company when their actions are endorsed or not contradicted by the company.
- Formalities of Contracting
Under Section 66, CA 2016:
Contracts must be executed under common seal (if used), or signed by two directors or a director and a company secretary.
However, use of the common seal is no longer mandatory.
Contracts can be:
- Oral or written
- Made by authorized representatives
- Signed without a seal if the required officers sign
- Contracts Must Be Within the Scope of the Constitution
If a company has a constitution, any contractual terms inconsistent with it may be invalid or unenforceable internally, though may still bind the company to outsiders if apparent authority exists.
Relevant Case: Panorama Development (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711
- Secretary hired limousines for private use.
- Held: Although secretaries normally have limited authority, the hire was outside normal scope—company not bound.
This case is used to define the limits of implied authority.
- Doctrine of Constructive Notice Abolished
Previously, third parties were assumed to have knowledge of a company’s constitution (constructive notice), but this doctrine no longer applies in Malaysia.
This protects third parties dealing with companies in good faith, especially under apparent authority.
- Doctrine of Indoor Management (Turquand Rule)
Third parties are not required to ensure internal compliance within the company when entering into contracts.
Relevant Case: Royal British Bank v Turquand [1856] 6 E&B 327
- Recognised under Malaysian law.
- A person dealing with the company in good faith can assume that internal procedures (like board approvals) have been properly followed.
- Ratification of Unauthorized Acts
A company may ratify contracts entered into by an agent or director without proper authority.
Malaysian Reference: Swee Hong Ltd v Faiza Sdn Bhd [1983] 1 MLJ 326
- An agent entered into a contract beyond their scope.
- The company was held liable after it ratified the contract through later conduct.
Summary Table of Principles
Principle | Legal Source / Case Law | Summary |
Capacity to Contract | Section 21 CA 2016; Khoo Teck Puat | Companies can contract like individuals unless limited |
Authority to Bind Company | Freeman & Lockyer, Hoh Kiang Ngan | Valid if actual or apparent authority exists |
Execution Formalities | Section 66 CA 2016 | No need for seal; director(s)/secretary can sign |
Compliance with Constitution | Panorama Development | Constitution can restrict contracts internally |
Abolition of Constructive Notice | Company Law Principle (Modern Reform) | Outsiders not deemed to know company internal rules |
Indoor Management Rule | Turquand’s Case | Third parties need not check internal approvals |
Ratification of Unauthorized Acts | Swee Hong Ltd v Faiza Sdn Bhd | Contracts can be later approved by company |
Conclusion
In Malaysia, the Companies Act 2016 simplifies and modernizes company contracting.
It ensures companies are only bound when the contract is entered into with proper authority, in good faith, and in compliance with statutory requirements.
Courts lean toward protecting third parties in commercial dealings with companies, provided they act honestly and reasonably.
Ensuring a company has a constitution is vital to safeguard the interests and commercial dealings as an entity.