A company must execute a contract correctly for it to be valid, binding and enforceable. If the company fails to do so, a party wanting to get out of the contract may argue that it is not enforceable. This can sometimes lead to an expensive and unpleasant dispute. A company can execute a document in four main ways. This article explains how a company can execute a document by:

  • having two company directors, or one director and one secretary, sign the document;
  • ‘common seal’;
  • having an authorised agent sign the document; and
  • another way outlined in the company constitution.

Why is Correctly Executing a Contract So Important?

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 is now refusing 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 is ultimately unable to argue that they should not have to pay your fees, recovering your payment could be a long, expensive process.

Ensuring that your company correctly executed the contract at the start would prevent the defaulting party being able to argue that the contract is unenforceable. Correct execution saves a lot of pain.

Company officers and agents can execute a contract on behalf of a company. They can do this in a number of ways.

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, will be able to 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.

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. Australian companies rarely use common seals today. More often, directors and secretaries sign documents as described above.

A representative of the company 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 he or she is also the company’s secretary.

Like signature by directors and secretaries, the Corporations Act allows the parties to assume a common seal means the company executed the document correctly.

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 such as Macquarie Bank 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.

Execution by a Method in Company Constitution

A company may also execute a document by 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 director or common seal, the law does not allow the parties to assume that execution by 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 their authority to execute on behalf of the company.

Key Takeaways

Company officers, 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 are unsure about whether your company has executed an important document correctly, call LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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