In Short
- A company can validly sign a contract through: (1) the signatures of two directors, one director and one company secretary, or a sole director who is also the company secretary; (2) use of the common seal with proper witnessing; or (3) authority granted via the company constitution or power of attorney.
- Companies must keep ASIC records up to date and ensure only authorised people sign contracts.
- Failing to follow correct procedures can make contracts unenforceable and lead to costly disputes.
Tips for Businesses
Put clear processes in place for contract execution and maintain an up-to-date list of authorised signatories. Regularly review your constitution, ASIC records, and delegations of authority to avoid uncertainty. Correct execution not only ensures enforceability but also saves time, money, and potential legal disputes later.
As a company, you have the same legal capacity as an individual and can enter into contracts with other parties. However, unlike individuals, you can only enter into contracts through the actions of your operators, such as directors or company secretaries. If they do not follow the correct procedures, the contract may not be enforceable. Therefore, you must ensure you are aware of the processes required to sign written contracts to ensure their validity. This article explains three ways for your company to sign a contract validly.
1. Signature of Directors and Company Secretaries
Companies usually execute agreements through the signatures of their directors and secretaries. The Corporations Act deems a contract to have been validly signed if:
- two directors of a company sign it;
- one director and one company secretary sign it; or
- the sole director, who is also the company secretary, signs it (proprietary companies only).
Proprietary companies are privately owned companies that do not offer their shares on the stock exchange. If the company does not follow any of the three methods when signing a contract, then the contract may not be valid and could be unenforceable. If you are signing as a director or company secretary, your signatures will appear at the end of the contract on an execution block.
2. Common Seal
Your company can also sign contracts by stamping the company’s common seal on the contract. A common seal is a stamp that companies use to execute documents. The seal usually contains:
- the company name;
- the words ACN or “Australian Company Number”; and
- the company’s ACN.
A valid signature by common seal happens when the seal is applied and is witnessed by:
- two directors of a company;
- one director and one company secretary; or
- the sole director, who is also the company secretary, for proprietary companies only.
3. Company Constitution and Power of Attorney
A company can set rules for executing a document through its constitution. Your company constitution can mirror the rules in the Corporations Act for signing with or without a common seal. You may also vary the rules to suit your business needs. For example, where a sole director is not the company secretary, the company constitution can grant the director the authority to sign on behalf of the company.
You can also use the constitution to provide for agents or representatives who can sign on behalf of the company. This arrangement is helpful for large companies that have a high volume of transactions. Otherwise, it can be impractical for a director or company secretary to sign off on every transaction. Whoever you appoint as a company agent or representative must have the required authority to sign on behalf of the company. You can provide for this authority through a board resolution.
Otherwise, a registered power of attorney provides transparency as to who has the authority to make decisions for the company. A power of attorney is a legal document that allows someone (in this case, a director of a company) to appoint someone who can make legal and financial decisions for them on their behalf.
The Importance of Validly Signing a Contract
If your company signs a contract using one of the above methods, external parties can assume the contract has a valid signature. Therefore, companies must ensure that the people who sign on their behalf have the proper authority. Failure to do so may result in the company being unable to avoid its legal obligations under the contract.
On the other hand, the other party may argue that your company needed to sign off the contract correctly, making it unenforceable. In case of dispute, arguing that the contract remains enforceable could waste significant time and money. Therefore, you may want to consider implementing a proper process to manage contract signing. For example, if you are a director of a large company, you may consider how to appropriately assign authority to others to sign contracts on behalf of your company.
Additional Considerations
ASIC Notification Requirements
Companies must understand their ongoing obligations when signing contracts, particularly regarding ASIC notifications. Under the Corporations Act, companies must lodge ASIC Form 484 within 28 days for most changes affecting the company, including appointments or cessations of company officers who have signing authority. This is crucial because if a director or company secretary who previously had signing authority leaves the company, their departure must be properly recorded with ASIC. Failure to update these records can create confusion about who has valid signing authority and potentially render future contracts unenforceable.
Companies should maintain current records of all authorised signatories and ensure these align with their ASIC registrations. The Corporate Key is required to lodge forms through ASIC’s online portal, and companies should ensure they have access to this for timely notifications. Directors must also maintain a Director Identification Number (DIN), and any foreign directors must apply through specific paper forms via the Australian Business Registry Services.
Constitution and Replaceable Rules Framework
The interaction between a company’s constitution and the Corporations Act’s replaceable rules significantly affects contract signing procedures. Many companies operate under replaceable rules by default, but these can be displaced or modified by adopting a constitution. Importantly, only the replaceable rules can be displaced by a constitution; all other mandatory requirements of the Corporations Act remain in addition to constitutional provisions.
When establishing signing procedures, companies should review whether their constitution provides specific authority for contract execution or whether they rely on replaceable rules found in sections like 198D for director delegation powers. Companies with shareholders agreements must also consider how these documents interact with constitutional provisions, as shareholders agreements typically take precedence between the parties but do not automatically grant signing authority unless specifically documented through proper board resolutions.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Key Takeaways
To validly sign contracts, a company must follow specific procedures as outlined in the Corporations Act or its company constitution. If your company does not follow those procedures, the contracts it signs may not be enforceable. It may also lead to lengthy and costly legal disputes over the validity of the contract. Therefore, it is important to ensure that all directors, company secretaries or any other person within your company are aware of the correct procedure to sign off on contracts.
If you have any questions about your company’s validity in signing a contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Generally no. Under section 127(1) of the Corporations Act, valid execution requires either two directors, one director plus one company secretary, or a sole director who is also the company secretary (proprietary companies only). However, exceptions exist where the company’s constitution provides alternative signing authorities or the board delegates authority through proper board resolutions, though deeds typically require a Company Power of Attorney. An individual may also sign on behalf of a company if they are acting with the company’s express or implied authority in accordance with section 126 of the Corporations Act.
The contract may be technically invalid due to improper execution, but courts might still enforce it based on the parties’ conduct if they have acted as if the contract were valid. However, this creates significant legal uncertainty and can lead to expensive litigation. The Corporations Act emphasises that companies must ensure signatories have proper authority, as disputes over contract validity can waste considerable time and money.
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