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Directors Incorrectly Signing Contracts – Where does the contract stand?

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

6/09/2017

By Law Central Legal

This article is part one of a two part series concerning the methods by which companies can validly execute documents pursuant to the Corporations Act 2001 (Cth) (‘the Act’). Part one will be on section 127 of the Act regarding companies executing contracts by their directors. Part two will be focused on companies executing contracts through their authorised agents.

Broadly speaking, section 127 of the Act states that a company can execute a document if the document is signed by its directors with or without a common seal. The method of executing documents with a common seal stamp is no longer widely practiced in Australia and is outside the scope of this article.

Companies have largely adopted the method established in section 127(1) of the Act.
Section 127(1) of the Act states:

“A company may execute a document without using a common seal if the document is signed by:

(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company secretary – that director.”

Executing documents in the prescribed way set out in s 127(1) of the Act is frequently adopted in business practice because it affords the parties the right to rely on statutory assumptions under s 129(5) of the Act. This allows a person in dealing with a company to assume that a document has been duly executed if the document appears to have been signed in accordance with section 127(1).

However, a person cannot make an assumption if they knew or suspected that the assumption was incorrect at the time of their dealings: s 128(4). The Court will look to understand whether an ordinary person in the circumstances would have had reason to suspect that the assumption was faulty: Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd & Ors [2005] SASC 335.

Therefore, if there is any doubt regarding the position or authority of the person signing the document, a search of ASIC’s records of the company you are contracting with should be conducted. The ASIC search will provide information regarding the number and identity of the directors of that company.

Section 127 of the Act does not limit the ways in which a company can execute a document. However, if another method of document execution is adopted, the statutory assumptions, including that the document has been duly executed, cannot be relied upon.

What if the contract has not been properly executed? When can you rely on section 127? Can you enforce your rights under the contract or sue for damages?

Case Study: Knight Frank Australia Pty Ltd & Anor v Paley Properties Pty Ltd & Ors [2014] SASCFC 103

In this case, a $1.5 million purchase contract for a commercial property had 3 execution clauses for the purchaser (De Chellis Homes Pty Ltd), 2 of which were set out to satisfy sections 126 and 127 of the Act. One clause had to be executed by the company in accordance with section 127 of the Act  and the other had to be signed by an authorised officer on behalf of the company (s 126). One director of the purchaser company signed the contract in the execution clause by the company in accordance with section 127 of the Act. In doing so, he struck out the words ‘sole director/sole secretary’.

The other director of the 2-director purchaser company didn’t sign the contract and ultimately the purchaser withdrew its offer. The Court was tasked with deciding whether there was an enforceable contract between the vendor and purchaser.

The Full Court of the Supreme Court of South Australia stated that the director of the purchaser made it clear by crossing out the words ‘sole director/sole secretary’ that the company had two or more directors.

The Court found that “[i]n the absence of a second signature by Mario De Chellis as the second director, it was manifest on the face of the execution page of the contract that it had not been executed by the company under section 127 of the Corporations Act.” [per Blue J at 83])

As such, the contract was unenforceable and the purchaser was not bound by its terms.

The purchaser could have authorised a single director to execute the contract by requiring the director to sign as an agent pursuant to section 126 of the Act. The purchaser company’s constitution allowed for the Board to resolve to authorise one director to execute documents on behalf of the company, but the Board of the purchaser company had not passed such a resolution. In any event, the director of the purchaser left the agency execution clause blank.

Gold and Platinum members read on for specific tips on ensuring the valid execution of contracts.

Platinum Members, click here to view content

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

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