Good Faith and Errors in Documents

If you enter into a business contract in good faith and it subsequently transpires that the contract was incorrectly authorised or otherwise invalid from the perspective of the other party’s internal regulations, where do you stand?

Two recent cases provide guidance on this contentious area.

In the first, a loan was advanced to a company by way of debenture, which is normal practice. When the lender wished to enforce the debenture, the company challenged its validity on the basis that the loan was authorised without the company’s internal regulations being followed. Necessary notices convening the board meetings at which the loan was authorised were not given and the board meetings were not held in the Netherlands, as was required by the articles of the company giving the debenture.

The company argued that the board resolutions authorising the debenture were not properly passed and could not therefore bind the company. In the view of the court, the lender had acted in good faith and it was thus protected by legislation that will bind a company ‘free of any limitation under the company’s constitution’. The debenture was therefore enforceable against the company.

In the second case, a bank found itself exposed under a debenture and cross-guarantee because only one director had signed the documentation. Two signatures were required and the director had counterfeited his co-director’s signature, this being usual practice for them when matters were agreed. However, on this occasion, there had been no agreement and the second director was unaware of the document. When the bank sought to appoint an administrator, after the company defaulted on its loan, the second director went to court to have the appointment set aside on the ground that the documentation for the loan had been forged.

Again, the court decided that the bank had acted in good faith. The forged document was enforceable against the company because the director who placed both ‘signatures’ on it had the ostensible authority of the other director to do so.

 

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