Sep 15, 2015
What should you consider when entering or signing contracts for your company?
A company director walks into a bar. He has just started his own wine distribution business, VINO VINO VINO PTY LTD. As the sole director and shareholder he has made an agreement to provide this bar with all its oenological needs for a very reasonable price.
He didn’t bother appointing a secretary because proprietary companies don’t require one. Very chuffed with himself, he presents the signed contract to his accountant who says, “Mate, we may have a problem.”
In Australia, a company comes into existence on the day it is registered and is itself a separate legal entity with all the powers of a body corporate to do exciting things like issue shares and grant options. Internal governance is set out in the company constitution, replaceable rules or both, in the case of a constitution that is silent in a certain regard. At the same time companies are legally subject to the Corporations Act 2001 (Cth) and a mixture of common law and equitable principles.
Entering into contracts is likely to be an expected and ordinary part of a company’s day-to-day functions. For this reason it is crucial to have a basic understanding about how a company can execute a legally binding agreement, in what circumstances it inadvertently has not and when a company can be held to the performance of a contract it didnt expressly authorise.
A contract will be enforceable against a company if it is executed in accordance with one of the following four modes of entry:
Direct Authority (Signed, sealed, delivered)
This is the easiest and most effective way to execute a document on behalf of the company. The requirements of direct entry are set out is s 127 of the Corporations Act 2001 (NSW). It is common for a contract to state that execution should be consistent with s 127. In the absence of a common seal, the contract/deed must be signed by:
- 2 company directors
- A company director AND secretary
- A sole company director who is also the company secretary in a proprietary company
In the event that a company’s common seal is affixed, the act of fixing the seal has to be witnessed by (a), (b) or (c).
One director will only ever have the authority to commit a company to a specific contract if it can be proven that they are acting as an agent with express or implied authority.
What does this mean for our burgeoning wine distributor? He is the sole-director of a proprietary company but he is not a secretary as well. Therefore he has not executed the contract according to s 127. If this were a stipulation of the contract, it would not be enforceable and he would not be able to hold the bar to any promises made in the contract.
Express Authority (Company told me to sign)
An agent will have express authority to bind a company where a directors resolution has been passed to explicitly permit the exercise of that power. Evidence of this express authority will usually be sourced from directors minutes. In plain terms, a person will have authority to commit the company to a binding contract if the company said to do so.
This principal-agent relationship is expressed in s 126 of the Corporations Act.
Implied Authority (My position allows me to sign)
This power is implied from the position of the individual within the company. As an example, the managing director may have the authority to commit to contracts regarding the day-to-day functionality of the company. Likewise, the secretary may be able to sign on behalf of the company for administrative contracts.
There may be limitations on these actors, restricting the type of agreements they can make or their value. A company secretary may be authorised to enter contracts for stationery supplies to the value of $2000. This constraint, if it were to exist, would feature in the companys constitution. If the entity acts outside of these prohibitions, on a frolic, the contract will not be enforceable and the perpetrator may be found personally liable.
Apparent/Ostensible Authority (The other party wants to keep me honest)
Apparent authority is likely to be argued, similarly to that of implied authority, by the other party to the contract. This is particularly the case if that party stands to be disadvantaged by the statutorily unenforceable nature of the agreement. Three elements must be satisfied for apparent authority to be proved:*
- There must be a representation that the agent had the requisite authority to commit the company to the contract
- A person whom has actual authority to manage the companys’ affairs must make this representation. As with implied authority, actual authority is determined by looking to the position of the agent within the company.
- The third party must rely on this representation
Put simply, if someone says they have authority, holds a position in the company that would lead an outsider to believe this person to be acting legitimately and the reliant party enters the contract based on these assumptions, a contract will exist.
Any limitations on the agents powers set out in the company constitution will not undermine apparent authority.
If our wine distributor represented himself as the managing director or even as the CEO of his company and tried to release the company from the contract, the bar may be able to enforce it on the basis of apparent authority.
*N.B This is a common law test sourced from Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Assumptions
Provided that the other party to the contract does not know or suspect that the information or representations are incorrect, they are entitled to rely on a set of assumptions about the course of dealings.
Among others, these include the assumption that the company’s constitution has been complied with, that the representor was properly appointed to their position in the company and will properly perform their duties. A more complete list can be sourced from s 129 of the Corporations Act.
What does this all mean?
Entering into contracts matters. How a company enters into a contract matters even more. This is something you should have in mind as early as the time of company registration to avoid, in technical terms, a sticky situation.
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