A company must execute a contract correctly for it to be valid, binding and enforceable. If your company fails to execute a contract correctly, the other party can avoid their obligations. The other party may do this on the basis that your agreement is unenforceable. If this occurs, you will likely find yourself in an expensive and unpleasant dispute. This article explains the four key ways your company can execute a document.
Why Is Correctly Executing a Contract So Important?
Correctly executing a document is essential for establishing a binding agreement. Generally, companies only discover that they have incorrectly executed a document when a dispute arises.
For example, if one party falls behind in their payments and refuses to pay (the ‘defaulting party’), you may try to rely on your contract to enforce payment. If the contract was signed incorrectly, the defaulting party may argue that the contract is unenforceable, in which case you would be unable to claim your payment. Even if the defaulting party cannot argue that they should not have to pay your fees, recovering your payment could be a long, expensive process.
It is, therefore, important to ensure that your company has correctly executed the contract in the first instance. This would prevent the defaulting party from arguing that the contract is unenforceable, ultimately saving you a lot of pain!
Ways a Company Can Execute a Document
Company officers and agents can execute a contract on behalf of a company. They can do this in a number of ways.
1. Signed by Directors and Company Secretaries
The company can execute a document by having it signed by:
- two directors of a company;
- one director and one company secretary; or
- the sole director and secretary of a proprietary company.
If the company has more than two directors, then any two directors, or any one director and company secretary, can sign the contract.
This is the most common way to execute a document. Under the law, each party can assume that the document was executed correctly if it has the required signatures. This makes this method of execution very reliable, as the parties do not need to conduct additional due diligence into whether the company executed correctly.
2. Execution by Common Seal
A company can execute a document by ‘common seal‘. This is an inked stamp pressed onto a document, symbolising the company’s acceptance of the contract.
A company representative must press the seal onto the document’s execution page. This must be witnessed by either:
- two directors; or
- one director and one company secretary of the company.
If the company only has one director, then that director may witness the stamping of the seal onto the document, as long as they are also the company’s secretary.
This method of execution is much more rare among Australian companies today. Instead, directors and secretaries tend to sign documents using the method described above. However, similar to signatures by directors and secretaries, the Corporations Act allows the parties to assume a common seal means the company executed the document correctly.
3. Execution by Agent
Agents and other ‘authorised representatives’ may also execute documents by signing on behalf of a company. The company will often appoint agents as a practical measure. For example, larger companies like banks might use an agent for simplicity. These companies execute thousands of contracts each day, making it impossible for directors to personally execute them all.
Either a board resolution or a power of attorney can appoint an agent. At a minimum, the resolution or power of attorney must clearly state:
- the identity of the person appointed as the agent or authorised representative;
- the duration of the authorisation (e.g. just for one day, for a period of ‘x’ months or ongoing); and
- the scope of the authority (e.g. the authority to sign only one document, sign only documents relating to one transaction or sign multiple contracts provided they fall below a certain dollar value).
However, before an agent or authorised representative signs a document, they must be certain that they have the required authority. Otherwise, they may be personally liable for wrongly using such authority.
4. Execution by a Method in Company Constitution
A company may also execute a document using any alternative way outlined in the company constitution. However, this is not very common.
Executing a document through an agent or other method is less convenient to the other party (‘counterparty’) to the document. Unlike execution by the director or common seal, the law does not allow the parties to assume that execution by an agent or alternative method was correctly performed.
Therefore, you are more likely to find that a counterparty will want to make further enquiries into the validity and scope of the agent’s appointment. The counterparty may also want to review the document granting the agent the authority to execute on behalf of the company.
This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.
Key Takeaways
Company officers and common seals with the right witnesses and agents are all appropriate methods to bind a company to a contract and correctly execute a document. You should ensure that your company executes all important contracts correctly.
If you need help understanding how to execute a document as a company, contact our experienced contract lawyers 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.
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