Doctorine of Indoor Management
The 'indoor management rule' explained
Introduction
At common law, a person dealing with a corporation – assuming that he or she is acting in good faith and without knowledge of any irregularity – need not inquire about the formality of the internal proceedings of the corporation, but is entitled to assume that there has been compliance with the articles and bylaws.(1)
This principle, known as the 'indoor management rule', was authoritatively laid down in the 19th century case of Royal British Bank v Turquand(2) and eventually codified in Section 19 of the Ontario Business Corporations Act(3) and Section 18 of the Canada Business Corporations Act.(4)
This update provides a survey of the law in respect of the indoor management rule. It begins by reviewing the common law origins of the indoor management rule (or the "rule in Turquand's case") and then examines the codified version of the indoor management rule under the Ontario Business Corporations Act and the Canada Business Corporations Act. The update also provides examples of the court's application of the rule.
Indoor management rule
It is a fundamental tenet of the law of agency that the actions of an agent bind the principal only where those actions are within the actual, apparent or deemed authority of the agent.(5)
In the context of business corporations, the indoor management rule provides that:
"a person dealing with a corporation has no obligation to ensure that a corporation has gone through any procedures required by its articles, by-laws, resolutions, contracts, or policies to authorize a transaction or to give authority to a person purporting to act on behalf of the corporation."(6)
Indeed, "[c]ompliance with such procedures", according to Professor J Anthony VanDuzer, "is a matter of internal or 'indoor' management with which outsiders do not have to concern themselves".(7)
This general principle was first articulated in the seminal decision in Turquand.(8) In that case, the company's
Introduction
At common law, a person dealing with a corporation – assuming that he or she is acting in good faith and without knowledge of any irregularity – need not inquire about the formality of the internal proceedings of the corporation, but is entitled to assume that there has been compliance with the articles and bylaws.(1)
This principle, known as the 'indoor management rule', was authoritatively laid down in the 19th century case of Royal British Bank v Turquand(2) and eventually codified in Section 19 of the Ontario Business Corporations Act(3) and Section 18 of the Canada Business Corporations Act.(4)
This update provides a survey of the law in respect of the indoor management rule. It begins by reviewing the common law origins of the indoor management rule (or the "rule in Turquand's case") and then examines the codified version of the indoor management rule under the Ontario Business Corporations Act and the Canada Business Corporations Act. The update also provides examples of the court's application of the rule.
Indoor management rule
It is a fundamental tenet of the law of agency that the actions of an agent bind the principal only where those actions are within the actual, apparent or deemed authority of the agent.(5)
In the context of business corporations, the indoor management rule provides that:
"a person dealing with a corporation has no obligation to ensure that a corporation has gone through any procedures required by its articles, by-laws, resolutions, contracts, or policies to authorize a transaction or to give authority to a person purporting to act on behalf of the corporation."(6)
Indeed, "[c]ompliance with such procedures", according to Professor J Anthony VanDuzer, "is a matter of internal or 'indoor' management with which outsiders do not have to concern themselves".(7)
This general principle was first articulated in the seminal decision in Turquand.(8) In that case, the company's