Legal Validity of Contract Execution by Agents on Behalf of Companies
1. Is Motorbikes Pty Ltd bound by the contract? Provide reasons for your answer. You must cite relevant Australian case law and the Corporations Act 2001 (Cth). Do not discuss contract law.
2. Is George bound by the contract? Provide reasons for your answer. You must cite relevant Australian case law and the Corporations Act 2001 (Cth). Do not discuss contract law.
The primary issue to be resolved under the given scenario is to outline if an enforceable contract has been enacted between John and the company (i.e. Motorbikes Pty Ltd) in relation to motorcycle sale. The applicable clauses of Corporations Act 2001 (Cth) would be considered for this discussion.
The company business structure is unique owing to the possession of a separate legal entity as mentioned in s. 124(1) Corporations Act 2001. However, despite having a legal entity, there is still requirement of an authorised agent who should execute contract on company’s behalf since company cannot do the same. However, the contracts cannot be enacted by any entity and hence power is vested in namely two entities[1].
- The company directors along with the company secretary are authorised personnel who must act in accordance with provisions outlined in the constitution of company.
- A particular agent who possesses the require authority as delegated by the directors so as to carry the business affairs and hence enact contract within the scope of authority.
In relation to document execution by the directors, adherence to s. 127 is of critical importance. It is noteworthy that the legal documents on company’s behalf can be executed with company seal or without company seal and hence there are two subsections contained in s. 127 which tend to outline these two scenarios. s. 127(1) deals with the situation where document execution is completed without company seal while the situation where company deal is used for document enactment is highlighted by s. 127(2)[2].
As outlined in s. 127(1), a legal document without common seal (also called as company seal) can be enacted through the signature of a particular combination from the following choices available[3].
- Two directors ; or
- One director and the company director; or
- In cases related to proprietary company, it might be possible that the company director and company secretary may be one individual and signature of this individual alone would also suffice.
However, if there is use of common seal, then s 127(2) advocates that one out of the combinations outlines above must sign in the capacity of witness. For Australian companies, the common mode of document execution is without the use of company seal and hence s. 127(1) would apply n such cases. Besides, s. 127(4) highlights that other modes of document execution can be outlined in the constitution of the company and these would be considered as legally valid.
Further, Corporations Act provides defence against those cases where the contract has been enacted by the agent who knowingly or by mistake lacked the necessary authority for contract enactment. Section 129 outlines the major statutory assumptions that an outsider is entitled to make while enacting the contract with the company through the “authorised” agents. As a result, contract enacted with an outside party in compliance with the requirements of s. 127 would be valid irrespective of the authority of the agent being real or not[5].
Use of Company Seal in Contract Execution
It would be a mistake to consider s. 127 as one which involves mere formality as is apparent from the Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd[6] case. In regards to the contract in this case, signature was put by the company’s director as required by s. 127 and while signing the contract, the “Sole Director/Sole Secretary” was struck out. This clearly emphasized the fact that given company either had atleast one more director or a company secretary. However, since there was signature of neither of the above (i.e. other director/company secretary), hence the contract was not executed and thereby the other party got a chance for withdrawing their offer. When this case landed in court, the decision same in the favour of the other party as the court highlighted that there was no enforceable contract between the two parties even though there was verbal consent since the legal documents had not been duly consented. Therefore, this case clearly highlights the need to ensure that legal documents enacted on company’s behalf adhere with relevant provisions of s. 127[7]..
Based on the relevant facts, it is apparent that John wants to sell his motorcycle and with intention starts interacting with the company. For enacting the sale agreement, a contract is executed between the company and John. On company’s behalf, signature was put by namely two people, one is the company secretary (i.e. Tim) and the other is the company’s director (Michelle). No company seal was involved and thereby s,127(1) would be applicable. It is apparent that the document has been enacted as per this clause since one director and company secretary is an acceptable combination. Hence, the given contract is legally binding on the contracting parties (i.e. company and John) and thereby neither party can shy away from fulfilling contractual obligations.
Conclusion
Since the contract that has been enacted between company and John is legally binding, thus the company cannot withdraw from the contract or else there would be a breach and John can demand damages being the innocent party.
Considering the given facts of the scenario presented, it needs to be opined if George and the company i.e. “Cakes Pty Ltd” have enacted a legally binding contract in relation to the cake business sale.
Company is a unique business structure owing to the separate legal entity outlined in s. 124(1). This allows that contracts which are enacted are done so on company’s behalf with the company being liable for any profits or losses arising from the same. However, since the company is not an actual person, hence s. 126 highlights the need of agents who ought to represent the company for enacting the contracts[8].
Consequences of Non-compliance with Contract Execution Provisions
Vital directions are provided by the Corporations Act 2001 on how the agents should implement these contracts so that the company can be held liable for the same. It is imperative to note that these measures need to be strictly followed as verbal consent in these matters do not count. This has been exhibited in the decision of the Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd case. In this case, the contract was considered as non-enforceable owing to it not being enacted as per s. 127 which outlines the provisions of contract execution with or without company seal. Since the contract was not enacted, hence the offer was revoked by the other party. However, a contract once executed in accordance with s. 127 would be considered as enforceable and then neither of the parties can withdraw from contract without legal consequences since there would be a breach of contract.
The execution of contract and other legal documents in the presence of the company seal need to comply with s. 127(2) so that these are considered as enforceable. Section 127(2) states when the contract enactment is entered into with company seal affixation, then it is essential that in the capacity of witness, one of the following combinations must sign[9].
- Two directors ; or
- One director and the company director; or
- In cases related to proprietary company, it might be possible that the company director and company secretary may be one individual and signature of this individual alone would also suffice.
Once the contract has been executed by following the various provisions above, then the contract would be enforceable even though the signatories above may not have been appointed through the sue process as protection under s. 128 and s. 129 is offered to the innocent party[10].
As per the given scenario, there is a company (named “Cakes Pty Ltd”) which Gerard and Sylvia have registered. At the time of registration, it is apparent that the company director is Gerard while Sarita (Gerard’s mother) would act as the company secretary. A decision is made by the company to buy another business (cake shop) which was owned by George. A contract is executed on the company’s behalf to put into intention into legal terms. There has been use of the company seal in this case and in the capacity of the witness, two people i.e. Gerard and Sylvia have put their signatures. The interesting aspect is that based on the given data, Sylvia seems to be shareholder of the company and is not an office holder for the company. However, s. 127(2) requires that either the witnesses should comprise of two director or the combination of company secretary and one director. However, with regards to this contract, only one director as witness as signed while the other is a shareholder named Sylvia. Thus, the contract enacted for sale of business would not result be enforceable and hence either of the parties has the option to back off from the deal as execution has not been completed duly and hence withdrawing offer or acceptance would not amount to breach of contract.
Conclusion
Considering the above analysis, it is apparent that the contract is not legally binding and hence George can revoke offer in this case without any legal consequences.
Reference:
[1] Barkoczy, Stephen, Foundation of Taxation Law 2015, (North Ryde, CCH, 2015)
[2] Marc Hertz, ‘Importance of execution of contracts by companies’, Thomson Reuters CLEARDOCS (online), February 2015< https://www.cleardocs.com/clearlaw/company-registration/execution-of-contracts.html>
[3] Amanda Seaton and Jarrod Wilksch ‘Putting pen to paper – execution under section 127’, Johnson Winter & Slattery (online), July 2015 < https://www.jws.com.au/en/acumen/item/660-putting-pen-to-paper-execution-under-section-127>
[4] Deutsch, Robert, et. al., Australian tax handbook. (Pymont, Thomson Reuters, 2015)
[5] Gilders, Frank, et. al., Understanding taxation law 2015. (LexisNexis, Butterworths 2015)
[6] Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103
[7] Ibid. 3
[8] Ibid. 4
[9] ‘From Concept to Completion: Contract execution – Some basic rules’ king & Wood MALLESONS (online), 01 June 2013 < https://www.kwm.com/en/au/knowledge/insights/from-concept-to-completion-contract-execution-some-basic-rules-20130601>
[10] Ibid. 5
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