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Procurement Perspectives: Municipalities are a particular form of corporation

Stephen Bauld
Procurement Perspectives: Municipalities are a particular form of corporation

Like all corporations, municipalities must act through agents if they are to act at all.

In particular, any contract a municipality enters into can only be made through an agent, whether that person be an individual councillor, the mayor, an officer or employee of the municipality, or a special agent appointed solely in connection with the formation of the contract.

Generally speaking, municipalities operate under the same general rules of contract law as other types of corporations, but this general rule is subject to one important exception with respect to the question of apparent authority.

The principle of apparent authority may be summarized as follows: Where a person by words or conduct, represents or permits it to be represented that another person has authority to act on his (or her) behalf, he is bound by the acts of that other person with respect to anyone dealing with him as an agent on the faith of any such representation, to the same extent as if such other person had the authority that he was representation to have, even though he had no such actual authority.

If a person deals with an individual officer of a corporation rather than the board, he or she must establish that the board has held out that individual director as having the relevant authority. There must, however, be a holding out by the company.

Moreover, there is no protection, even in such a case, for a third party who has notice of the lack of authority or is put on inquiry by the facts of the transaction.

These principles are substantially qualified in the case of a municipality. There is no rule in municipal law akin to the indoor management rule, as codified in legislation such as s.19 of the Ontario Business Corporations Act.

In other words, neither a statutory nor a common-law version of the indoor management rule applies with respect to municipal corporations.

The case law in Canada with respect to the question of the non-application of the indoor management rule to a municipality can be traced back to the 19th century.

One of the most important cases was the decision of the Supreme Court of Canada in The Waterous Engine Works Co. V. Palmerston.

It was found in that case the council of the Town of Palmerston had adopted a resolution: “That this council recommended the fire and water committee to ask for the lowest price and terms from the Waterous Works Company, the Ronald Company, or any engine offered for sale for a fire engine, and report at the next meeting of council.”

The committee reported back to council and sought leave to enter into a purchase contract. The report was received and adopted.

A contract was signed and entered into under the corporation seal of the plaintiffs and of the defendant municipality for the construction of a steam fire engine.

The contract was signed by the mayor and countersigned by the clerk, and the seal of the corporation was attached.

However, no bylaw was ever passed sanctioning the purchase of the fire engine or sanctioning the contract.

The town received the engine on June 19, 1890. On July 21, a resolution was passed by the council that all negotiations with the plaintiffs for the purchase of the engine be dropped, and that the plaintiffs be notified to remove the engine from the town hall.

The question to be determined by the Supreme Court was whether a town could be liable on a contract when there was no bylaw authorizing the contract.

Very large purchases must be approved by council directly. However, the bylaws usually expressly delegate a limited purchasing authority to the officers of the municipality.

Stephen Bauld is a government procurement expert and can be reached at Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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