In our experience many companies continue to execute commercial documents incorrectly or not at all. This potentially has implications if a party wishes to rely upon the terms of a contract for example for payment, enforcement, confidentiality, breach and termination.

The commonly accepted methods of executing a document, including a deed at common law, involve the use of the common seal and signature by the directors and secretary, or by the method which is prescribed by the company’s constitution.

Execution of deeds

The prime law governing the execution of deeds by companies is section 127 of the Corporations Act 2001 (2001 Act) and section 10 of the Property Law Act 1969 (1969 Act). The rules are that a deed may be validly executed:

• by a company under seal with a signature of a director and a secretary (section 10 of the 1969 Act and section 127(2) of the 2001 Act); or
• by two directors of the company, or a director and a company secretary (section 127(1) of the 2001 Act); or
• in the case of a sole director company then that director or director/company secretary alone can sign the deed, and the document must be expressed to be a deed (section 127(1) of the 2001 Act).

Execution of other agreements

Section 127 of the 2001 Act also applies to the execution of documents other than deeds. Accordingly an agreement may be validly executed:

• by a company under seal with a signature of a director and a secretary (section 127(2) of the 2001 Act); or
• by two directors of the company, or a director and a company secretary (section 127(1) of the 2001 Act); or
• in the case of a sole director company then that director or director/company secretary alone can sign the agreement, and the document must be expressed to be a deed (section 127(1) of the 2001 Act).

What are the consequences of failing to execute a deed or agreement properly?

An outsider dealing with the company may assume that a deed or agreement has been duly executed by the company if it meets the requirements set out above, as applicable.

However, where a company fails to comply with these requirements, the legal effect is, technically speaking, that there is no contract. Statute law is silent on whether the defaulting party or parties may be allowed to escape from being bound by the contract. It would appear that this would be a decision for a court to determine, based on the facts.  Section 127(4) of the 2001 Act, however, makes it clear that section 127 does not limit the ways in which a company may execute a document.

Parties dealing with a company which has, for some reason, failed to properly execute a deed, may find themselves taking comfort from section 127(4). This is because case law suggests that the section may cover the situation where, by virtue of some act, the contract is binding on the company.  Hence, a contract not properly executed may nevertheless be treated as a valid and binding contract because the company had represented to an outsider that the contract had been validly executed.  In that event the rules of estoppel would operate so that the company would be prevented from denying that the document was binding: Prime Constructions v Westbridge Investments (2004) 22 ACLC 1.

For further information or advice on whether your company contracts are validly executed and on associated risks or enforceability, please contact Paul Kordic, Principal, by email at pkordic@talbotolivier.com.au or Louis van Aardt, Senior Associate, by email at Lvanaardt@talbotolivier.com.au