The Turquand Rule, although not a new concept, is still important today since it serves to safeguard bona fide third parties who are unaware of any internal irregularities of an entity that could influence the validity of an agreement with the entity.[1]
According to the Turquand Rule, a company that concludes transactions with third parties must ensure that all internal prerequisites and requirements that allow the company to enter into such transaction, that may affect the validity of the transaction, have been complied with by the company. It is important to note that there are exceptions to the application of the Turquand Rule and the protection it provides third parties, which are:
- Suspicion of Irregularity by the third party;
- Knowledge of Irregularity by the third party;
- Forgery; and
- Representation to Articles.
This means that a third party who intentionally chooses to turn a blind eye to possible non-compliance to internal prerequisites, despite knowing or even suspecting that internal formalities have not been adhered to by the company, will not be protected by the Turquand Rule. The exceptions to the application of the Turquand Rule extends to people who ought to have reasonably known that the company had not complied with its internal formalities.
A further exception to the application of the Turquand Rule is that it does not protect a third party who relies or attempts to rely on a forged document.
In addition, the Turquand Rule cannot be used by a third party to revive an agreement or transaction that is void. A void agreement means that it cannot be enforced by any of the parties due to a non-compliance with a legal requirement. Therefore a void contract is considered not to be executable.
In this regard, we refer to the recent Constitutional Court Judgment in Merifon (Pty) Limited v Greater Letaba Municipality and Another[2]. The matter pertained to an application for leave to appeal against the judgment and order of the Supreme Court of Appeal, which dismissed the applicant’s appeal against the judgment and order of the High Court of South Africa, Limpopo Division, Polokwane. The crux of the matter was the enforceability and validity of a property sale agreement that did not conform with Section 19 of the Local Government Municipal Finance Management Act.[3] The applicant attempted to utilise the Turquand Rule to validate the property sale agreement concluded with the Municipality and to force the Municipality to comply with the agreement.
In respect of the Turquand Rule, the Constitutional Court confirmed that the Turquand Rule is not applicable because void acts cannot be revived through the Turquand Rule. As a result, the Constitutional Court declined to grant Merifon leave to appeal.
Despite being a common law principle, an example of where the Turquand Rule has been given effect by legislation is the Companies Act (the "Companies Act"). Section 20(7) of the Companies Act stipulates that a person dealing with a company in good faith, other than a director, prescribed officer, or shareholder of the company, is entitled to assume that the company has complied with all formal and procedural requirements in terms of the Companies Act, its memorandum of incorporation, and any company rules. Specifically when making any decision in the exercise of its powers, unless, in the circumstances, the person knew or ought to have reasonably known of any failure by the company to comply with such requirements.
Conclusion
The common law principle of the Turquand Rule guards against persons being harmed by a company’s failure to comply with internal requirements relating to the legitimacy of its representations. The Rule can be used as a defence to allegations by the company that an agreement can not be enforced due to non-compliance with the company’s internal prerequisites, on the condition that the agreement is not void and that the innocent third party had no knowledge or suspicion that the company failed to comply with its internal prerequisites.
Therefore, the Turquand Rule cannot be invoked to cure an action that is beyond one’s legal powers. Instead when invoking it, the circumstances around the two parties needs to be carefully considered for it to be used as a legitimate and effective tool in litigation proceedings.
This bulletin was prepared by Partner Bianca Da Costa and Candidate Attorney Thabang Nthatisi.
