Executing a contract on behalf of a corporate entity is not a mere formality. Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd (Knight Frank) highlights the potential difficulties that may arise in circumstances where a corporate entity does not correctly execute a contract.
It is prudent that the parties to a contract check to ensure that the correct corporate representatives from both sides have executed any required document, that those corporate representatives have the required authority and that the document has been executed in the correct manner.
The Corporations Act
Section 126 of the Corporations Act stipulates that a corporate entity’s power to enter into a contract may be exercised by an individual acting with the corporate entity’s express or implied authority and on behalf of the corporate entity.
Section 127 of the Corporations Act stipulates that a corporate entity may execute a document if the document is executed by either 2 directors, a director and a corporate entity secretary, or one director only (if the corporate entity has a sole director who is also the sole corporate entity secretary).
If a contract is executed correctly in accordance with section 126 or 127 of the Corporations Act, the corporate entity, not the signatory, will be responsible and liable to fulfil the contract.
Issues in Dispute
Paley Properties initiated an action an action for breach of contract in the District Court against De Chellis Homes claiming the difference in the sale prices and associated costs as damages.
De Chellis Homes filed a defence denying the existence of a contract on the basis that it was not properly executed by the corporate entity.
Paley Properties further pleaded that Richard De Chellis had committed a breach of warranty of authority in executing the contract and was therefore personally liable for damages.
As outlined above, under sections 126 and 127 of the Corporations Act 2001, a distinction is made between execution by the corporate entity itself (which is governed by section 127), and execution by an agent on behalf of the corporate entity (which is governed by section 126).
The contract execution page for the purchaser (De Chellis Homes Pty Ltd) was material to the Full Court’s analysis as there were alternative execution boxes for the purchaser.
The first execution box stated explicitly that the execution was in accordance with section 127. It made provision for execution by the corporate entity in two different modes, depending on whether the corporate entity had one or more directors:
- If the corporate entity had a sole director and secretary, provision was made for the purchaser to strike out the word ‘Director’ and for the ‘Sole Director/Sole Secretary’ to execute as the corporate entity.
- If the corporate entity had two or more directors, provision was made for two signatures – either two Directors or a Director and a Secretary.
Section 126 provides that the power of a corporate entity to make a contract may be exercised by an individual acting with the company’s express or implied authority on behalf of the corporate entity. The second execution box provided for execution by an agent on behalf of the corporate entity.
Implications
Correctly executing a contract by or on behalf of a corporate entity is not mere formality.
If a contract is incorrectly executed on behalf of a corporate entity it may result in the contract being unenforceable against the corporate entity. Furthermore the director or agent who purported to execute the contract on behalf of the corporate entity might also be personally liable.
In section 129 of the Corporations Act is technical in application. Whether a particular assumption will apply will depend on the factual circumstances.
Where a contract is purported to be executed by an agent or representative on behalf of a corporate entity (as opposed to the situation where a contract is executed by the corporate entity itself) there is a risk as to whether the purported representative or agent has authority to execute on behalf of the corporate entity.
Hence if you are the other party to a contract you should obtain confirmation that the representative or agent had authority to execute on behalf of the corporate entity.
In internal corporation disputes or where there is ‘seller or buyer remorse’, allegations are commonly made that a representative of the corporate entity acted without authority in purporting to execute an agreement.
Hence a person purporting to execute as representative or agent on behalf of a corporate entity is that may be liable to pay damages if they breach the warranty that they had authority to execute on behalf of the corporate entity. Agents should make sure that they have written evidence of the required authorisation before purporting to execute on behalf
Conclusion
A simple ASIC search may reveal whether the signatories can execute a contract on behalf of a corporate entity.
If in doubt after an ASIC search clarify if there is another document verifying a valid signatory on behalf of a corporate entity.
If the correct signatories have not executed, the contract on behalf of a corporate entity the contract may not be enforceable.
Furthermore a signatory may be personally liable to pay damages if they did not have authority to enter into a contract in respect to a corporate entity.
Corporate Lawyers Sydney at Pavuk Legal can assist you with correctly executing legal documentation and on many other legal aspects.
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