Execution of Contracts (including Contracts for Sale of Land & Leases) by Companies & Pitfalls to be Aware of.

A South Australian case has highlighted issues which can arise if a contract has not been correctly signed. It raised the question of whether a director who purported to sign a contract on behalf of a purchaser company can be personally liable for damages to a vendor due to the purchaser’s failure to complete a contract.

The Corporations Act (the Act) contains two significant provisions relating to the execution of documents by a company.

Firstly, Section 127 of the Act provides that a company may validly execute a document by:

• two directors of the company signing.
• one director and a company secretary of the company signing.
• for a company which only has a sole director who is also the sole secretary, by that sole director/sole secretary signing.
• affixing the common seal of the company to the document which is witnessed by two directors of the company, a director and a company secretary of the company, or for a company which only has a sole director who is also the sole secretary, witnessed by that sole director/sole secretary signing.

If execution is in accordance with Section 127 of the Act, then other parties contracting with the company can assume (pursuant to Sections 129(5) and (6) of the Act) that the document has been duly executed by the company.

It is important to note, that as there is no longer a requirement for a secretary to be appointed to a company. Therefore some companies are established with a sole director who is not appointed as the secretary. In such circumstances, the company is unable to sign a contract in accordance with Section 127. We therefore recommend that in companies where only a sole director has been appointed, the sole director also be appointed as the sole secretary to ensure that documents can be signed in accordance with Section 127 of the Act and the corresponding assumptions in Section 129 can be relied upon.

Secondly, a company can also bind itself to a contract by having an agent of the company execute on its behalf. Section 126 of the Act provides for execution by an agent acting on behalf of the company. Formally this can be done by appointing an authorised representative of the company or granting a Power of Attorney.

Contracts which do not require registration, such as a contract for the sale or purchase of land or business, can be executed by an agent acting on behalf of a company. However, any deed or other document which needs to be lodged for registration, for example at the Department of Lands to record a company’s interest in land, needs to be executed in accordance with Section 127 of the Act or under a registered Power of Attorney.

In the recent South Australian case, a contract for sale made provision for the contract to be signed by the purchaser pursuant to Section 127 of the Act, or by way of an agent acting on behalf of the company pursuant to Section 126 of the Act. The company was a multi-director company. Only one director signed the document where the document noted it was to be signed in accordance with Section 127 of the Act.

The Court found that the contract had not been validly executed by the purchaser under Section 127 of the Act and accordingly, the Court found that the contract was not enforceable against the purchaser.

The vendor subsequently sought to pass personal liability onto the director who signed the contract and seek damages. The Court found that the director was not personally liable due to the fact that the director signed in the execution panel relating to execution in accordance with Section 127 of the Act. By doing so, the Court held that an objective person in the vendor’s position would be incapable of determining that the purchaser had validly entered into the contract, as the director’s signature needed to be countersigned by a second director in order to be duly executed in accordance with Section 127 of the Act.

The Court held that if the director had executed within the second execution panel and signed the contract in accordance with Section 126 of the Act by purporting to sign as agent of the company:

1. the company would have been bound by the terms of the contract as, in signing the contract, the director would have been implicitly warranting that he had authority to enter into the contract on behalf of the company; and
2. if the director did not have such authority, then the director would have been liable to the vendor for damages for a breach of that warranty of authority.

Thus, if a party to a contract is a company and a person is signing purportedly as agent on behalf of that company, it is advisable for the other contracting party to obtain some confirmation that the signatory had authority to sign on behalf of the company. Such authority would usually be implied where the person signing on behalf of the company is a director. For persons signing on behalf a company as agent, it is important to ensure they have written evidence stating they are authorised to enter into the contract on behalf of the company.

For further information, do not hesitate to contact our Commercial & Property Team