For a contract to be valid, binding and enforceable, it needs to be executed correctly. This article provides a short refresher on contract execution by companies. Whilst execution is a seemingly simple process, if the basic rules are not followed, it can potentially undo the intended result of weeks or months of negotiations.
Execution by a company
The most straightforward way of validly executing an agreement or deed as a company is to execute in accordance with Section 127 of the Corporations Act 2001 (Cth) (â€œCorporations Actâ€). Section 127 provides statutory methods by which a company may validly execute a document. These include:
- signing by two directors of the company;
- signing by one director and a company secretary of the company; and
- affixing the common seal of the company to the document and the fixing of the seal is witnessed by two directors of the company or a director and a company secretary of the company.
If execution is in accordance with s127, then the other contracting party can assume (as a result of sections 129(5) and (6) of the Corporations Act) that the document has been duly executed by the company.
A company can also bind itself to a contract by having an agent of the company execute on its behalf.
Formally, this can be done by appointing an authorised representative of the company or granting a power of attorney.
Section 127(1) and counterparts
Under s127(1) of the Corporations Act, a document is validly executed if signed by two directors, or one director and a company secretary of the company.
Sometimes, the two persons signing under s127(1) from the same company wish to sign different counterparts of the document. The question arises as to whether this constitutes valid execution by the company. Despite conflicting authority on this point, the better view is that execution of separate counterparts by each signatory of the same company does not constitute valid execution. Each signatory of the company should sign on the same physical document or counterpart.
To do otherwise, leaves a company exposed to argument from the other party/parties to the contract, that the contract is not binding and enforceable.
The ramifications of defective execution are more pronounced when the document being executed is a deed. For commercial agreements, other than deeds, there is a rebuttable presumption at general law that the parties intend to create legally binding relations. The fact that the directors/secretary have signed the document, albeit it counterparts, will probably be sufficient to establish that the parties intended to be legally bound by the contract at general law. The downside is that the contracting party will not be able to rely upon the assumptions under sections 129(5) and (6) of the Corporations Act.
If the relevant document is a deed, the presumption at general law does not apply and the defective execution is more likely to have the consequence that the deed is not enforceable.
Power of Attorney
For convenience, corporations often appoint an attorney to execute a document on their behalf. An instrument executed by an attorney must show that the attorney executed as attorney for its principal. If an attorney fails to disclose that they are acting in their capacity as an attorney, it is likely that they will be personally liable under the contract. This is the case even if the other party to the contract is aware the attorney is acting in capacity as agent for the principal.
Attesting witnesses are not required where a company executes an instrument in accordance with s127 of the Corporations Act. However, a witness is required when a corporation does not execute under s127, for example, when executing by power of attorney.
In circumstances where a document must be witnessed, the witness must be present when the authorised person is signing. Importantly, signature pages with original signatures of both the person signing the document and the witness on the same counterpart are required in order for the documents to be correctly executed under Queensland law.