A crucial aspect of ensuring your contracts and agreements are enforceable is to verify that the right people are signing on behalf of the other party. A company can involve many different individuals bundled together by different legal obligations, rights, and relationships and it is not always obvious that the signatory has authority to enter the agreement.
Risks of getting it wrong
Consider a scenario where you are securing a new customer for your business. The customer is company and you have been dealing with one of their employees, an “account manager”. The account manager signs your contract and you commence delivery of the services at your expense. When you issue your first invoice to the customer, you are advised that the account manager has been fired. You are advised by the customer that:
- pursuant to customers’ Company Constitution the shareholders of the company needed to approve the contract first, but did not;
- the account manager was not authorised to sign the contract under the terms of his employment;
- the account manager was a junior employee acting maliciously and outside the scope of his employment; and
The customer claims it is not bound by the contract and will not be paying for your fees. As third party, you had no knowledge about the above matters. Despite this, your legal position is now in doubt as a matter of practicality you may never recover your fees.
Sections 127- 129 of the Corporations Act 2001 (Cth)
The Corporations Act 2001 (Cth) includes provisions that, if followed, remove any uncertainty for third parties dealing with companies.
Section 129(5) of the Act includes:
(5) A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1).
Section 127(1) of the Act provides that:
(1) A company may execute a document without using a common seal if the document assigned by:
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director–that director, if:
(ii) the company does not have a company secretary.
What this means is that if the agreement is signed by two directors, by a director and a secretary, or by a sole director/secretary (where there is only one director/secretary), then you can rely on the agreement with confidence. If section 127(1) of the Act is complied with (and provided you do not have notice or knowledge to the contrary) it does not matter whether:
- the signatories did not have actual authority to sign the contact;
- the contract was not permitted under the company’s Constitution or internal governance protocols; and
- the signatories were acting fraudulently or dishonestly, you will still be entitled to rely on the assumption that the agreement has been properly executed.
What about signatures by agents and employees?
Agents and employees can in fact enter into contacts for the company if they have actual or implied authority to do so (refer section 126 of Act).
The issue is that as a third party dealing with the company, it may not be obvious or even ascertainable whether the employee has actual authority to enter into the contract at the time of signing. As a third party, you are instead relying on implied authority and assumptions under section 128 of the Act, specifically section 128(3):
(3) A person may assume that anyone who is held out by the company to be an officer or agent of the company:
(a) has been duly appointed; and
(b) has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.
Although in the right contexts it may be reasonable to rely on execution by an employee or agent, there is nevertheless the potential for counterargument that the company did not “hold out” the person as having the relevant authority. Furthermore, it leaves open argument whether agents and offers in the relevant position would “customarily” have the requisite authority.
In our view, for significant contracts, it is best to simply avoid these types of uncertainties.
The key takeaway is that for important contracts (if not all contracts) you should ensure that companies you engage with execute the documents under section 127 of the Act.
This is of course context dependent, and contracts for lower value or transactional work may not attract the same risk should the contract be dispute.
There are other options and considerations subject to legal advice.
Business should also consider their own internal policies with respect to execution of contracts – who in your organisation has the power to enter contracts on behalf of your company? At NB Commercial Law we can assist with processes to verify correct execution by third parties and internal governance documents.
Give NB Commercial Law a call, we offer an complimentary consultation and are happy to help.
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About the Author
Daniel Dash has over ten (10) years of experience in commercial and corporate law and is a Senior Associate in the Commercial Law team at No Borders Law Group. His areas of focus include contractual disputes, commercial transactions, finance, corporate advisory services and trusts.
His practice areas also include business structuring, shareholder contracts, corporate law, commercial litigation, commercial property, intellectual property, taxation and business succession planning.
Daniel works with company directors and business owners to achieve results that align with client objectives. In all matters, he endeavours to provide practical recommendations and develop clear and effective strategies.
LinkedIn: Daniel Dash
(07) 3876 5111