The nature and effect of the Articles of Association have finally

reached the point where they reflect the contractarian perception of

the company. Discuss.

An interpretation of the question would lead one to understand that a

discussion on whether or not the nature and effect of the Articles of
Association (AA) of a company have reached a point whereby they accurately
reflect the contractarian perception of a company. Arguments will be given in
support and in contrast of this statement, before a conclusion is formed.
Generally, the AA are defined as the by-laws or rules and regulations that
govern the management of the companys internal affairs and the conduct of
its business. According to s18(1) Companies Act 2006, all companies are
required to have them, and they are either custom-made for the company
or they are to apply the model articles by default under the Companies
(Model Articles) Regulations 2008. However, any gaps in custom-made
articles are filled by the model articles unless stated otherwise.
The contractarian perception essentially sees the company as a 'nexus' of
contracts between those various parties who are involved in a company's
affairs, which asserts that corporations are nothing more than a collection of
contracts between different parties - primarily shareholders, directors,
employees, suppliers, and customers.
It can be said that the AA does reflect the contractarian perception of the
company. One of the main ideologies of the contractarian perception is that
the ultimate relationship between the company and others (be it another
company or members of the company) is based on the simple theory of a
contract, and one of the important elements of a contract is that the parties
to it have the freedom to contract. Freedom to contract is defined as the
freedom of private or public individuals and groups (of any legal entity) to
form contracts without interventions or restrictions from the State. Through
this, individuals possess a general freedom to choose with whom to contract,
whether to contract or not, and on which terms to contract.
As such, by allowing companies to draft their own AA, this enables them to
create a contract with their own terms, as well as terms that specifically suit
their form of business rather than a general set which may not be able to fit
accurately with their form of dealings. It also enables companies, as well as
those who contract with them, to impose freedoms and limitations into their
contracts as deemed fit, based on whatever is stated in their respective AA.
Moreover, it also provides the company room to include how much or how
little flexibility they would allow when contracting with other parties. All in all,
the allowance for companies to draft and legislate their own AA permits one
of the very crucial elements to the contractarian perception to be realised.
Secondly, the AA of a company is a public document, meaning it can be
accessed by anybody, regardless of whether they are associated with the
company or otherwise. An important element of the contractarian theory is
that contracts and those relying on contracts should not have any level of
uncertainty, as uncertainty can lead to confusions and dissatisfaction to the
parties of a contract.
It can be said that the AA of the company eliminates this element of
uncertainty as those who wish to contract with the company, or even those
who are already in contract with the company, can access this document
beforehand (or anytime) to clearly identify the position, contents and essence
of management and business of the company. This creates certainty for those
who intend on contracting with the company, and they can be clear as to
what extent the company runs its powers and business.
Additionally, another important basis of the contractarian principle is that the
relationship of the company and all other parties that deal with it is based on
a contract. As such, the AA can be said to be the basis of their contract, as it
states all the powers and limitations of the company and its members. This is
important and relevant as if one of the parties acts in contrast of what the AA
permits, then this would be a breach, and since the AA is part of the basic
contract, they would be in breach of it. Under the contractarian approach,
when there is a breach of contract, appropriate remedies under common law
shall follow. Hence, the AA does reflect the contractarian approach, and if it is
breached then damages can be claimed.
However, it must be noted that not all elements of the AA under the
Companies Act 2006 accurately reflect the contractarian perception. Firstly,
unless the company explicitly states that its AA is definite and conclusive,
any gaps in their own drafted AA will be filled by the Model Articles as set up
under the Companies (Model Articles) Regulations 2008.
The issue with this is that it may limit the freedom the parties within the
contract are entitled to in terms of freedom of contract. There may be
instances whereby the company does intend on not governing a certain
matter and hence dont address it in their AA, but the Companies (Model
Articles) Regulations Act 2008 assumes this as a mistake on their part
and they go ahead to fill in the void. This may come across as a limitation to
the parties freedom to contract in the sense of the terms to their respective
contracts.
Secondly, The Companies Act 2006 was fully implemented on 1st October
2009 and it provided a new form of AA and Model Articles for companies
incorporated in the United Kingdom. Under the new legislation, the AA
became the single constitutional document for a company, and subsumed
the majority of the role previously filled by the separate memorandum of
association. A company registered before the above date will have both
memorandum and articles drafted under the old law until such time as it
decides to adopt new articles. If it does decide to adopt the new Articles, it
must pass a special resolution, and unless it does so, will still be governed
under the old law.
Since the companies incorporated before the passing of the new Companies
Act 2006 have the option of whether or not to adopt the new Articles, this
may create an issue of uncertainty as individuals or other companies
intending on contracting with them will be unsure of which law is governing
them. It may also create legal complications, as the contents and scope of
the old and new articles do differ. Hence, the allowance towards companies
incorporated prior to this latest legislation does contravene with the
contractarian principle of certainty.
Conclusively, although the AA which was introduced in the Companies Act
2006 does move towards attempting to cover some of the aims and
objectives of the contractarian theory such as by introducing more certainty
and comprehensiveness as well as championing parties rights to freedom of
contract, there are still various loopholes that exist and should be addressed
if the aim is to completely reflect the nature of the contractarian approach to
its maximum potential and ability without jeopardising other aspects of the
company.