The Indoor Management rule basically says that 3rd parties dealing with someone in a company can assume that the company has followed its own internal processes. The Rule is found in the Alberta Business Corporations Act and the Canada Business Corporations Act. In The Alberta act, it is found at section 19:
Authority of directors, officers and agents
19 A corporation, a guarantor of an obligation of the corporation or a person claiming through the corporation may not assert against a person dealing with the corporation or dealing with any person who has acquired rights from the corporation
(a) that the articles, bylaws or any unanimous shareholder agreement have not been complied with,
…
(e) that a person held out by the corporation as a director, an officer or an agent of the corporation
(i) has not been duly appointed, or
(ii) has no authority to exercise a power or perform a duty that the director, officer or agent might reasonably be expected to exercise or perform
...
unless the person has, or by virtue of the person’s position with or relationship to the corporation ought to have, knowledge of those facts at the relevant time.
This issue was looked at in the case of Blankenship v Jenks-Cochrane Properties Ltd, 2016 ABQB 461. The Court said in that case at paragraph 147:
The indoor management rule holds that third parties dealing with a corporation are entitled to rely on the assumption that it has adhered to its own internal rules. A corporation's failure to do so cannot be used against the third party unless, by virtue of circumstance, the party either knows or ought to have known about the deficiency. This common law rule emerged in Royal Bank v Turquand(1856) 119 ER 886 (Eng Exch) and has now been codified in section 19 of the ABCA.
If you have questions about this concept, please feel free to contact us.
The information contained in this article is not legal advice. No solicitor client relationship is formed through this article. The reader is encouraged to retain counsel for advice in these matters.
