A company must execute a contract correctly for it to be valid, binding and enforceable. Otherwise, a party wanting to get out of the contract may argue that it is not enforceable, leading to a drawn-out dispute. Although spending time on what seems like a minor formality might seem tedious, failing to correctly execute a contract can be disastrous.
This article explains how a company can execute a document correctly in four ways:
- two company directors sign the document, or one director and one secretary;
- by ‘common seal’;
- having an authorised agent sign the document; and
- by another way outlined in the company constitution.
Why is Correctly Executing a Contract So Important?
Companies usually discover incorrect execution when a dispute begins. Perhaps one party fell behind in their payments and is now refusing to pay (the ‘defaulting party’). Perhaps you have a well-drafted contract which sets out that the defaulting party is required to pay once you have provided your services. You have provided your services and there is no doubt that you have fulfilled your side of the bargain.
However, the contract was signed incorrectly and now the defaulting party is arguing that the contract is unenforceable and they can’t be forced to pay your fees. The defaulting party might be unlikely to win an argument that they was no obligation to pay your fees. However, the simple step of correctly executing 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. The Corporations Act allows each party to 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 these days. 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 (i.e. is the authority to sign only one document, or for documents relating to one transaction, or only a certain type of contract, or can the person 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 holding themselves out as having such authority.
Execution by 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.
Furthermore, 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 Corporations Act 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 would also likely want to review the document granting the agent their authority to execute on behalf of the company.
Company officers, common seals with the right witnesses and agents can all be 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’re 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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