Failing to properly execute a document may mean that it cannot be legally enforceable, as it can be argued that it indicates that the parties did not intend to be legally bound. The ramifications of a defect in the execution of a document depends on the nature of the document in question – for example, whether the document is an agreement or a deed.

The major difference between an agreement and a deed is that no consideration is required for a deed to be binding. A deed has much more stringent requirements that must be complied with in order for it to be binding.

Defective Execution of a Contract or Agreement

A defect in the execution of a contract or agreement is not necessarily fatal to the agreement. Failure to execute a document may still mean that a legally binding agreement is created as there is a rebuttable presumption in commercial agreements that the parties intend to create legally binding relationship if the parties begin to perform the obligations under the agreement, but have not signed it.

If there is evidence that the parties signed the contract, but have not complied with the requirements contained in section 127 of the Corporations Act 2001 (Cth) (the Act) this may be sufficient to establish that the parties had an intention to be legally bound by the agreement. If there is an intention to be legally bound by the agreement, then it can be enforceable.

Defective Execution of a Deed

In contrast with a contract or an agreement, a deed has much more rigid execution requirements. Failing to duly execute a deed means that the deed will be unenforceable. The reason underlying the more stringent requirements for the execution of a deed stems from the fact that a deed is a promise that is not supported by consideration, unlike an agreement. Therefore, the intention for the parties to be bound by the deed cannot be inferred.

Failing to Affix the Common Seal

A company can execute documents by affixing the company common seal. If a document is held out to be executed with the common seal of a company, but the common seal is not affixed, the document will still be valid if the requirements for signing under section 127 of the Act are complied with.

Defective Execution under Section 127 of the Act

If a company does not comply with the requirements set out in section 127 of the Act regarding execution of documents, the document will not be duly executed and no legally binding agreement is created. No remedial provision exists in the Act.

However, a legally binding document may still be created if the company executes a document in accordance with the company constitution.

Conclusion

It is crucial that companies execute documents either in accordance with the requirements set out in section 127 of the Act or as the company constitution requires. Failure to properly execute a document can, at worst, mean that the document is not enforceable. The best-case scenario is that the document may still be enforceable but there may be delays and disputes as to what was agreed upon.

 

Lachlan McKnight

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