The Director Who Signed Alone
Bahraini company Najd Trading WLL has three partners holding 50%, 30% and 20%. Its memorandum of association provides that the manager (the 50% partner) has authority to bind the company, but that contracts exceeding BD 50,000 require a partners' resolution. In January 2025 the manager signed a BD 120,000 supply contract with a foreign supplier without any resolution. The supplier dealt with the company for years, always through the manager, and had no notice of the internal limit. The company now refuses delivery and payment, saying the contract is beyond the manager's authority and therefore not binding. Meanwhile the 20% partner discovers the manager has been paying himself a monthly 'management fee' of BD 1,500 not authorised in the memorandum, for 18 months.
1. Is the company bound to the BD 120,000 supply contract? Analyse the tension between the internal authority limit and the protection of third parties.
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The company is very likely bound. The manager's power to bind the company is measured, as against third parties, by the authority that the company has outwardly conferred, not by secret internal limits. Where a manager is held out as the company's manager and habitually transacts on its behalf, a third party dealing in good faith is entitled to rely on that appearance. The internal requirement of a partners' resolution for contracts above BD 50,000 is an internal governance rule; it operates between the partners and the manager, and it does not automatically travel to the supplier unless the supplier knew or ought to have known of it.
Here the supplier had a course of dealing through the manager and no notice of the limit. Good faith is presumed; the company bears the burden of proving the supplier's actual or constructive knowledge. The mere fact that the contract is large does not put a supplier on inquiry, because size alone is not a red flag where the counterparty is a trading company and the signatory is its manager. The result is that the contract binds the company, and the company's remedy lies against the manager, not against the supplier.
The company's refusal to perform is therefore a breach. The supplier may claim the price, or damages, and may consider suspension for anticipatory breach. The company should not litigate the authority point as a defence; it should perform and pursue the manager internally for exceeding his mandate.
2. What are the partners' remedies against the manager in respect of both the unauthorised contract and the BD 27,000 in management fees? Consider the position of the 20% minority partner.
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Two distinct breaches arise. First, exceeding the internal authority limit is a breach of the manager's mandate and of his duty of loyalty to the company. Second, paying himself an unauthorised BD 1,500 monthly fee for 18 months (BD 27,000) is a misappropriation of company funds and a conflict of interest: a manager may not vote or act on a matter in which he has a personal interest, and any profit derived from his position belongs to the company. The company can recover the BD 27,000 with interest, and may also claim any loss caused by the unauthorised contract - though if the contract is performed profitably, loss may be nil and the claim reduces to the fees.
The 20% partner is the key actor. As a minority partner he can (i) demand an account and inspect the company's books and records; (ii) requisition a partners' meeting and, if the manager-partner's 50% blocks decisions, apply to court for the appointment of an auditor or, in serious cases, for the manager's removal or for dissolution on just and equitable grounds; and (iii) bring a derivative-type claim in the company's name where the company's organs refuse to act, because the wrong is done to the company. He should also check whether the memorandum contains a deadlock or reserved-matter clause that gives him a veto over related-party transactions.
Practical sequencing: written demand to the manager to repay, a partners' resolution (the 30% partner will likely join the 20% to outvote the 50% on this issue if the memorandum permits simple majority), then court proceedings if repayment is refused. Document everything, because the manager will argue the fee was agreed.