• 

Contractual Enforceability Of Constitutions.

Contractual Enforceability of Constitutions

The contractual enforceability of constitutions refers to the legal principle that a company's constitution—or its equivalent governing document—can create binding contractual rights and obligations between the company, its members (shareholders), and sometimes third parties. In corporate law, this principle is critical for ensuring that internal rules are respected, and disputes are adjudicated consistently.

1. Key Concepts

Company Constitution

The constitution is the internal governing document of a company, alongside or instead of the Companies Act provisions.

It may include articles of association (UK) or rules in the replaceable rules framework (Australia).

Contractual Effect

A constitution can be enforceable as a contract:

Between members and the company (statutory recognition).

Between members inter se, in some circumstances.

This gives members the right to enforce provisions like voting rights, dividend entitlements, and procedural protections.

Statutory Recognition

Australia: Corporations Act 2001 (Cth), Section 140: Constitution binds the company and its members.

UK: Companies Act 2006, Section 33: Articles of association bind company and members as a contract.

Limitations

Does not bind third parties who are not members.

Cannot override statutory provisions or public policy.

Certain provisions (e.g., ultra vires actions) may be unenforceable.

2. Principles Governing Enforceability

Binding Nature

The constitution binds the company and members to the extent it regulates their rights and duties.

Enforcement Rights

Members can seek injunctions, declarations, or damages if the company breaches the constitution.

Derivative vs Personal Actions

Some claims require a derivative action (company as plaintiff), while others are personal rights enforceable by individual members.

Contractual Interpretation

Courts interpret constitutions like contracts, giving effect to clear terms, but not rewriting the document.

Ultra Vires Limitations

Constitutional provisions cannot authorize illegal acts or acts outside the company’s powers.

3. Key Case Laws

1. Ashbury Railway Carriage and Iron Co Ltd v Riche

Facts:
Company entered contracts beyond its objects clause (ultra vires).

Held:
Contracts were void, and the constitution limited enforceable rights.

Principle:
Company constitution (and objects clause) creates binding contractual and statutory limitations on corporate action.

2. Hely-Hutchinson v Brayhead Ltd

Facts:
De facto directors acted outside formal authority; members claimed breach of constitution.

Held:
Company was bound where de facto authority existed; contractual enforceability considered.

Principle:
Constitution binds company and members, but acts by officers may invoke enforceability if consistent with member expectations.

3. Eley v Positive Government Security Life Assurance Co Ltd

Facts:
Member claimed the company breached a provision in the constitution relating to officer appointments.

Held:
The constitution binds the company but not members in their capacity as officers unless expressly stated.

Principle:
Contractual enforceability is limited to rights as members, not as external office-holders.

4. Foss v Harbottle

Facts:
Minority shareholders attempted to sue for mismanagement.

Held:
Rule: Proper plaintiff is the company; members cannot sue for breaches of the constitution unless exceptional circumstances exist.

Principle:
Constitutional breaches may require derivative action unless personal rights are affected.

5. Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame

Facts:
Shareholders tried to force directors to act contrary to board discretion under constitution.

Held:
Directors’ powers under the constitution were enforceable; members could not override.

Principle:
Contracts embodied in the constitution respect internal governance structures.

6. Greenhalgh v Arderne Cinemas Ltd

Facts:
Minority shareholder challenged transfer of shares in violation of constitution.

Held:
Court enforced constitution provisions; shareholders’ rights under articles were contractual.

Principle:
Company constitution creates enforceable contractual rights between members.

7. Russell v Northern Bank Development Corp Ltd (Bonus Case)

Facts:
Dispute over voting rights under constitutional provisions.

Held:
Constitution enforced as binding contract between members.

Principle:
Confirms contractual enforceability of constitutional provisions among members.

4. Practical Implications

For Companies

Must comply with constitutional provisions in decision-making, share transfers, and member rights.

For Members

Rights under constitution are contractually enforceable, but may be limited to personal rights, not derivative rights.

Drafting Recommendations

Clearly distinguish member rights vs company powers.

Include dispute resolution clauses.

Ensure compliance with statutory provisions to avoid unenforceability.

5. Summary Table of Case Laws

6. Conclusion

The company constitution operates as both a statutory and contractual instrument, binding the company and its members. Courts consistently enforce these provisions:

To uphold internal governance

To protect member rights

To ensure compliance with statutory limitations

Case law such as Ashbury Railway, Eley, Foss v Harbottle, Greenhalgh, and Russell illustrates that the constitution functions as a contractual framework but its enforceability is subject to statutory constraints and derivative action rules.

RELATED Blog

Corporate Law at Afghanistan

Corporate Law at Albania

Corporate Law at Algeria

Corporate Law at American Samoa (US)

Corporate Law at Bangladesh

Corporate Law at Andorra

Corporate Law at Angola

Corporate Law at Antigua and Barbuda

Corporate Law at Anguilla (BOT)

Corporate Law at Argentina