Company Contracts

October 31, 2017 / Spring Report 2017

Is the company on the hook?

It is now 16 years since the Corporations Act 2001 (Cth) came into force on 1 July 2001. Those of us who can remember will recall that, prior to that, if a company had an important contract or document to sign, there was often a frantic search to locate the company seal to affix to the document. The Corporations Act changed all that.

Now a company may have a common seal (section 123), but it is not required to have one and few companies now do have a seal or, if they do, use it.

Section 127

Section 127 of the Act is the section that has led to the substantial demise of the common seal.  It provides, in subsection (1) that a company may execute a document, including a deed, without a common seal if a document is signed by:

• two directors of the company; or
• a director and a company secretary of the company; or
• for a proprietary company that has a sole director who is also the sole secretary, that director.

Subsection (2) of section 127 provides that if the company has a common seal it may (but does not have to) execute a document by affixing the seal if it is witnessed by the same individual(s) specified in subsection (1).

The effect of section 127 is that a document signed in accordance with the section is executed by the company itself. The signatories sign as officers of the company, not as agents of the company.

Section 127(4) expressly provides that section 127 does not limit the ways that a company can execute a document, which leaves open the ability of individuals with express or implied authority to sign on behalf of the company.

Relying on assumptions

Notes to section 127 advise that if a document is signed in accordance with the section, a person dealing with the company may rely on assumptions in section 129 (but these assumptions are not limited to execution of documents under section 127). The entitlement to make assumption arises under section 128.

If assumptions can be made:

• the company cannot deny the assumptions in proceedings (subsection 128(11)); and
• the company and another person who purports to have acquired title to property from the company cannot deny the assumptions (subsection 128(2)).

The assumptions apply even if there is fraud or forgery (subsection 128(3)) but not if the person seeking to rely on them knew or suspected that the assumption is incorrect (subsection 128(4)).

Section 129 assumptions

The assumptions set out in section 129 which affect the execution of contracts or documents are that:

• the company’s constitution and applicable replaceable rules have been complied with (subsection 129(1));
• anyone who appears from information obtained from ASIC to be a director or secretary has been appointed and has authority to exercise powers and perform duties customarily exercised or performed by a director or secretary of a similar company (subsection 129(2));
• anyone held out by the company to be an officer or agent of the company has been appointed and has authority to exercise powers and perform duties customarily exercised or performed by that kind of officer or agent of a similar company (subsection 129(3));
• officers and agents properly perform their duties to the company (subsection 129(4));
• a document has been duly executed by the company if it appears to have been signed in accordance with subsection 127(1), or the seal has been affixed under subsection 127(2) (subsections 129(5) and (6)); and
• if the document has been signed by a person with a statement that they are the sole director and sole secretary of the company under subsections 127(1) or (2), they hold both offices (subsections 129(5) and (6)). Perhaps somewhat oddly, this only relates to a sole director and secretary. There is not a presumption in relation to other directors and secretaries.

Contract by agents

As noted above, section 127 does not limit the ways a company can sign a document or enter into a contract. Section 126 provides that a company’s powers in relation to contracts “may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company”. This section also provides that it is not necessary to use a common seal.

This reflects the general law of agency. An agent may act on behalf of a principal with authority, which can be actual or implied, or may have ostensible authority to act on behalf of the principal.

Many day-to-day contracts of a company will not be signed under section 127 by directors or secretaries. The assumptions that may be made under sections 128 and 129 make it easier for parties dealing with companies by removing the need to establish actual or ostensible authority.

Customary powers

There are still, however, degrees of uncertainty.  The assumptions in relation to due appointment of officers and exercise of powers by directors, secretaries, officers and agents apply where these are “customarily exercised” for “a similar company”.  It will be a matter of fact and degree in each case to determine this.  A CEO of a company will obviously have more authority than a mere employee.  An IT Manager of a company may have customary authority to purchase a computer, but not necessarily an entire new management system.  Even a CEO may not have customary authority to contract on behalf of the company in substantial matters such as a contract to sell or transfer substantial assets such as real estate.

Section 127, agent or officer?

A case which illustrates some of the requirements for execution of a contract that is enforceable against a company is Knight Frank Australia Pty Ltd v Paly Properties[i]. A contract for purchase of a property for $1.5 million by a company was signed by only one director of the purchaser company, which had two directors. The director signed in a clause which stated that it was signed under section 127(1), and a note that the director was signing as sole director and shareholder was crossed out. There was an alternate signing clause for a duly authorised officer to sign as agent of the company which was not signed.

The Court held that it was clear that there was more than one director of the company and that, accordingly, the contract was not executed in accordance with section 127(1). There was no evidence of any actual authority for the director to sign as agent of the company and the contract was not enforceable against the purchaser.

Warranty of authority

The case also raised the issue of warranty of authority. It is a well-established principle that if a person purports to act as an agent for a party, and to have the authority of the party, and this is relied on by another party, the person who purports to act as agent is taken to warrant that there is authority and the purported agent can be liable for damages for breach of the warranty.

In this case, however, as the execution was specifically under subsection 127(1), although deficient under the section, the signature was as an officer, not as agent, and the director signatory was not liable for breach of warranty.

To avoid potential liability for breach of warranty of authority:

• For a director or a secretary signing a document on behalf of a company, it may be prudent to ensure that the document is signed under section 127 and that the requirements of the section are complied with.
• An individual acting as agent should ensure that there is a clear authority to act.

Powers of attorney

A company has the legal capacity and powers of an individual (section 124) and can appoint attorneys. A power of attorney may be useful to avoid any doubt as to authority of the attorney.  Powers of attorney may be general, to do all things the company may do or, more often, limited to specific matters.

A general power of attorney may be required to be made by deed under some State legislation (such as section 5 of the Powers of Attorney and Agency Act 1984 (South Australia)) and it is generally advisable that all powers of attorney be a deed.

As the grant of a power of attorney is an act by the company itself, the deed granting the power should be executed by signing under subsection 127(1) or by signing and affixing the seal under section 127(2).

A few practical tips

There are a few practical safeguards that a party looking to enter into a contract with a company, or a company wishing to ensure that a document is validly signed, may observe having regard to the Corporations Act:

• Signing under subsection 127(1) (or sealing it under subsection 127(2)) is the safest way to ensure a valid execution, allowing reliance on the assumptions in section 129.
• A signing clause for a company which is intended to take advantage of subsection 127(1) or (2) should state expressly next to the signature of each person signing whether the person is a director and/or secretary, or sole director and secretary.
• As subsections 129(5) and (6) only provide assumptions in relation to a sole director and secretary for the purposes of subsection 127(1) and (2), it may be prudent to search ASIC to confirm the appointments of other directors or secretaries, so as to rely on section 129(2) where a document is signed under subsections 127(1) or (2) by more than one director/secretary, or for purposes other than section 127.

If a company has a sole director but no secretary, a company, or any person dealing with the company, will not be able to rely on subsections 127(1) or (2). It may be worth considering the appointment of the sole director as the sole secretary.

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[i] Supreme Court of South Australia [2014] SASCFC 103.

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This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.