Sealing the Deal: Contract Execution Basics

 

10 March 2017
Posted by Suzy Wood

 

If there is one thing too many businesses have learned the hard way, it’s that signing on the dotted line is more than just a token formality. Making sure the person who signs is appropriately authorised (for each side of the deal) can mean the difference between having a watertight contract and the entire agreement falling through.

At Studio Legal, we want to put you in a position where if the time comes, you will be able to enforce the agreement against the other side to the transaction.

Read on for some short, sharp pointers on how to make sure your business is entering into agreements in a way that will help them stick.

1. You’re a sole trader/ they’re a sole trader

Sole traders can sign agreements personally. The trader’s name should be spelt in full.

2. You’re a company/ they’re a company

At law, companies are a separate entity to their individual directors and secretaries. Of course, a company cannot physically sign a contract and needs to act through individuals to do so, which is where the rules about signing (“executing”) contracts come into play.

There are four usual ways a company can execute an agreement in a way that binds the company to the agreement (not counting the outdated rules about company seals):

(a) Signature by two directors of the company

(b) Signature by one director and the company secretary

(c) If the company has only one director who is also the company secretary – that person

(d) Signature by an individual acting with the company’s express or implied authority.

The first three ways are what we call execution “in accordance with section 127(1) of the Corporations Act”. The last way is what we call execution “in accordance with section 126(1) of the Corporations Act”.

If you don’t know who your directors and secretaries are, that’s easily fixed! Contact us and we’ll download an extract from ASIC which gives us up-to-date information about your company officers.

If your company is in the habit of signing agreements in a way which doesn’t fit into the first three kinds of execution (like having signatures by only one company director, your general manager, your HR specialist or your creative director), it’s a good idea to get a formal authorisation document in place for those people. This is proof of “actual express authority” – the easiest kind of authority to prove.

More critically, if the other party to the deal is wanting to sign in a way that doesn’t fit the first three categories (for example, they might be trying to get their general manager or creative director to sign), you should always them to produce the document granting that party authority to sign. If they don’t have one, you should insist on an appropriately authorised party signing. It’s as simple as that! Again, we can download a company extract from ASIC for the other side and tell you who the authorised parties would be.

3. You’re a partnership/ they’re a partnership

True partnerships are pretty rare in our client’s businesses. They arise automatically by operation of the law wherever two or more people carry on a business in common with a view of profit.

The standard position is that each party to a partnership usually has authority to enter into agreements that bind each other partner, but this can be modified by a partnership agreement so we’d usually suggest getting the signatures of each partner to avoid any confusion!

4. What about witnesses?

While some kinds of documents are legally required to be witnessed (think wills and statutory declarations), many commercial agreements don’t technically need to be witnessed in order to be valid. Witnessing can be nevertheless be useful to help prevent the other side trying to claim the signature wasn’t theirs: if the signature was witnessed, this claim is going to be harder to make.

You might be used to going to a pharmacist or JP to have documents witnessed. Again, commercial agreements can be more relaxed in this department. Depending on the kind of agreement, the witness may not need to be the kind of witness who is authorised to witness a stat dec.

5. Studio Legal’s top tips!

To recap, here are Studio Legal’s top tips for smooth sailing at execution time:

(a) Always check the specific wording in the execution clause. Does the clause refer to section 126 or 127 of the Corporations Act? Make sure the signatures match what is being asked for. You are entitled to ask it to be changed if you can’t sign in the way that’s written in the clause!

(b) If the company on the other side wishes to have an “authorised agent” sign, you are entitled to ask for a copy of the relevant authority. You should keep this on file along with the signed agreement.

(c) If you’re left with a contract that was signed by someone who wasn’t actually authorised by the other party, don’t despair. You may be able to rely on the implied authority of the signing party to bind the other company to the agreement, particularly where the party was senior within the company or the company otherwise represented that the person had authority to bind it. Speak with us for advice and assistance!

(d) Check the signed agreement when it comes back to you. You shouldn’t rely on the other party claiming that the agreement has been signed. Open the document and check that the appropriate person has indeed executed the contract.

(e) Give your staff a crash course on who is allowed to sign what. Every director and senior manager in your company should make sure they are clear about who is empowered to sign certain types of contracts.

(f) If you don’t have written authorities in place, you should get onto these as soon as possible. Contact us for a quote on the documentation you need!

Happy signing!

For further enquiries please contact Suzy Wood on (03) 9521 2128 or email suzy@studiolegal.com.au

DISCLAIMER

The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.