A Purchase Order Signed by a Director Beyond His Board Authority
Ravi is a director of Sunrise Foods Private Limited, which has three directors. The articles do not expressly authorize a single director to bind the company. In March 2025 Ravi signed a purchase order for 5,000 kg of basmati rice at ₹130 per kg from a supplier, GrainHub LLP, using the company's letterhead and email. The board had earlier passed a resolution authorizing Ravi to negotiate and sign contracts up to ₹5 lakh only. The purchase order value is ₹6.5 lakh. GrainHub delivered the rice; the company accepted delivery and used part of it, but the new managing director now refuses to pay, saying the board never approved the purchase and Ravi exceeded authority. GrainHub points to the company's email signature and past dealings where Ravi had signed similar orders. The contract has an arbitration clause and a clause limiting damages to 10% of the order value. GrainHub has suffered a loss of ₹8 lakh because it had rejected another buyer.
1. Is the contract binding on Sunrise Foods? Analyse actual authority, apparent authority and ratification.
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Ravi had actual authority only up to ₹5 lakh. The purchase order is ₹6.5 lakh, so he exceeded actual authority. That does not automatically make the contract void.
GrainHub can argue apparent or ostensible authority. Ravi used the company's letterhead and email, and there were past dealings in which he signed similar orders. A board resolution restricting a director's authority is an internal document; an outsider is not generally expected to inspect board minutes. If GrainHub did not know of the ₹5 lakh limit and relied on the company's holding out, the company may be bound.
Ratification is the stronger point. The company accepted delivery and used part of the rice with knowledge of the transaction. Under the Indian Contract Act, ratification can be express or implied by conduct. A principal who accepts the benefit of an unauthorised act with full knowledge cannot later deny the agent's authority. The company cannot both keep the rice and refuse the price. Ravi may be liable to the company for any loss caused by exceeding authority, but that is a separate internal claim.
2. How much can GrainHub recover for its ₹8 lakh loss, and is the arbitration clause enforceable?
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GrainHub can first claim the unpaid price of ₹6.5 lakh if the goods were accepted and not paid for. The ₹8 lakh is a separate loss from rejecting another buyer. The contract limits damages to 10% of the order value, which is ₹65,000. A genuine limitation-of-liability clause is generally enforceable; it is not necessarily a penalty. If the clause is construed as a penalty or is unconscionable, a court may reduce it, but the starting point is the agreed cap. GrainHub's actual loss being higher does not by itself override the cap.
The arbitration clause is enforceable if it is in writing and covers the dispute. An arbitration agreement can be part of the contract, and the court should refer the parties to arbitration if one party applies and the dispute falls within the clause. GrainHub should give notice invoking arbitration and appoint an arbitrator in accordance with the clause. It should not file a civil suit for the price ignoring the clause, because the defendant can apply for reference to arbitration.
3. Could GrainHub rely on the doctrine of indoor management, and what difference would it make if GrainHub knew of the ₹5 lakh limit?
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The doctrine of indoor management protects an outsider who deals with a company in good faith against internal irregularities in the company's proceedings. GrainHub can argue that the board's internal resolution limiting Ravi to ₹5 lakh was not a public document and that it was entitled to assume that the company's internal affairs were regular.
But the doctrine does not protect an outsider who has actual notice of the restriction or who is put on inquiry. If GrainHub knew of the ₹5 lakh limit, it cannot rely on apparent authority. In that case the company would not be bound by Ravi's unauthorised signature unless it ratified the contract. Even then, the company's acceptance and use of the rice could amount to ratification, so GrainHub should lead evidence of delivery, acceptance and use. The practical lesson is that a company should clearly communicate signing limits to regular suppliers and should require board authorisation for contracts above the limit.