03/03/2015

For a contract to be enforceable and binding, it must be correctly executed.  But what if it is not? Could a signing party be held personally liable for damages for breach of the warranty of authority?

There generally is an implied term in a contract that the person signing it has the authority to sign the contract on behalf of the party they are signing for. This term is known as the warranty of authority.

When a company is signing a contract, it can be done in one of two ways:

•    the document is signed by the company itself through its directors; or
•    the document is signed by an authorised agent on behalf of the company.

The first situation is covered by s127 of the Corporations Act (Cth) ('the Act') which allows a company to execute a document through its directors (either two directors or one director and one company secretary) in order to be bound.

If a document is executed under s127, the vendor can rely on the assumption that the signing party has been duly appointed and has the authority to bind the company (s129 of the Act).

The second situation is dealt with in s126 of the Act which states that a document can be signed by an individual acting with the company's express or implied authority ('agent').

A recent reminder of the importance of the capacity in which a person is signing a document was illustrated in the case of Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd.  In this case, a contract had alternative boxes for execution by the purchaser:  execution by the director(s) in accordance with s127 or execution by a duly authorised officer of the company.  

The signing party signed in the first execution box and crossed out the words 'sole director/sole secretary'.  No other director signed the contract and the second execution box was left blank.

The Full Court found that as the director had signed in the first execution box (which was pursuant to s127 of the Act), the signing party could not have given the impression that they were signing as an authorised agent of the company.  By crossing out the words 'sole director/sole secretary', the signing party made it clear that there was more than one director and accordingly the vendor was not entitled to rely on the assumption that the contract was correctly executed under the Act. Instead the contract was only half executed, pending the execution by the second director as required under s127.   

As the contract was not properly executed, it was found not to be enforceable and the signing party not personally liable for breach of the warranty of authority.  However, the Court emphasised that had the signing party been acting as an agent of the company, their execution of the contract would have represented to the vendor that they had authority from the company to enter into the contract and as such they may have been personally liable for damages to the vendor for any breach of the warranty of authority.  

The Court noted that while the company's constitution allowed the board to resolve to authorise a director to execute contracts on its behalf, there was no evidence that such authority had been given to the signing party.  Also, had such a resolution been passed, the director would have been acting as an agent of the company (and the execution covered by s126) rather than as a director.

Tips:

1.    Parties should obtain confirmation that the person signing the contract on behalf of the other party has authority to do so.
2.    Directors need to understand whether they are signing in their capacity as a director of the company or as an agent.
3.    If signing as an agent, they should obtain a written record of that authority before signing any transaction documents or risk being personally liable.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.