How Should a Company Execute its Contracts and Deeds?
Imagine that your company has a contract with a cleaning company to clean its premises daily.
When the cleaner gets sloppy and does not comply with its obligations, you retain a lawyer to see whether you can terminate the contract.
The lawyer informs you that it may be difficult to enforce the contract without going to court as the other company has not executed it correctly.
In this blog, we explain how companies should sign contracts and deeds, and why it is so important to ensure that it is done correctly.
Our company does not have a common seal. How does it correctly execute contracts and deeds under section 127(1) of the Corporations Act 2001 (Cth)?
In this day and age, most companies do not use a common seal (i.e. a stamp that shows that a company accepts a contract or deed) to execute documents.
If yours does not, the process for getting documents signed is much simpler.
All your company needs to do is ensure that the contract or deed is executed by:
its two directors; or
its director and company secretary; or
if it is a proprietary company (i.e. a business that does not have more than 50 shareholders), its sole director of the proprietary company if that director is also the sole secretary, and the company does not have a company secretary.
Here are examples of how a company signs a document without a common seal correctly and incorrectly.
Our company has a common seal. How does it correctly execute contracts and deeds under section 127(2) of the Corporations Act 2001 (Cth)?
If your company has a company seal, your company should execute contracts and deeds by:
stamping the document with the company seal.
ensuring that the contract or deed is signed by:
a) its two directors; or
b) its director and company secretary; or
c) if it is a proprietary company (i.e. a business that does not have more than 50 shareholders), its sole director of the proprietary company if that director is also the sole secretary, and the company does not have a company secretary.
Here are examples of how a company signs a document with a common seal correctly and incorrectly.
Why is it important to execute contracts and deeds correctly?
It is worth taking the time to ensure that your company’s contracts and deeds are signed properly because:
it reduces the chance of the other party saying that the contract is not binding so they can avoid their obligations. While you strictly do not need to sign a contract for it to be enforceable, why would you give the other party the ammunition in the courtroom to prove otherwise? There is no better way to show a judge that both parties intended to comply with their contractual obligations than to shove a properly executed contract under his or her nose.
it may save your company money in the long haul. If a contract is not executed correctly, you may have to go before a judge to determine whether it is enforceable. This means having to incur the legal fees associated with battling it out with the other party in the courtroom.
it could prevent your company from progressing transactions. Some transactions may hinge on your company having properly executed documents. For instance, if your company is dealing with a banking institution or lender, they are often meticulous about having correctly signed documents on hand.
if your company ends up in a messy court battle, the judge will assume that:
a) your company’s constitution and replaceable rules (i.e. guide to managing your company), if any, have been complied with.
b) your company’s directors, secretary, officers or agents have been appointed correctly and are authorised to perform their duties.
c) your documents have been executed in accordance with sections 127(1) and 127(2) of the Corporations Act 2001 (Cth).
d) your company’s officers or agents have the authority to issue documents or certified copies of a document on the company’s behalf, and say whether a document is a genuine or true copy.
In summary
We understand that you might have limited time with directors and the like to sign documents, and that there might not be time for you to check that they are executed correctly.
However, failing to check that documents have been executed correctly may mean that your company’s contract or deed is unenforceable, that your company ends up in court, or that your company’s business transactions do not progress.
