How can an agent validly sign a contract on behalf of a company?

When an agent is entering into a contract on behalf of a company, all parties to the contract should take particular care to ensure that the contract is executed properly, making it legally binding and enforceable.  Particular attention should also be given to the agent themselves, as it is important to verify that they have the authority necessary to bind the company to the contract.

Types of Authority

Section 126 of the Corporations Act 2001 (Cth) outlines that a company’s power to make, vary, ratify or discharge a contract may be exercised by an individual who acts as the company’s agent.  In order to do this though, the agent must have authority.

In order to show actual authority, it is necessary to be able to identify some form of agreement between the principal and agent which authorises the agent to contract on the principal’s behalf (as in Hely-Hutchinson v Brayhead [1968] 1 QB 549).

An agent’s authority may be express or implied.  Express authority is the authority which a principal of the company has expressly given to the agent (orally or in writing), and implied authority is the authority an agent has to do acts (such as engaging in contracts) which are reasonably incidental to and necessary for the effective performance of their duties.  Implied authority may arise simply by employing someone in a role which has authority attached to it.

Where a supposed agent entered into a contract on behalf of the company but does not actually have authority to do so, a company may choose to ratify an agreement.  This would bind both the company (as principal) and the third party.  For this to be effective the principal must:

• Ratify the agreement within a reasonable time of being entered into;
• Have contractual capacity both at the time the agreement was entered into and at the time of ratification; and
• Ratify the whole of the contract as opposed to selective terms.

Further, an issue of ostensible authority (or apparent authority) may arise. This may be the case where a principal makes it appear to a third party that the agent does have authority when they do not, and the third party relies on that representation.  In this situation the principal will be bound to the contract.  This is discussed in more detail below.

The difference between actual authority (implied or expressed) and ostensible authority was explained in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 1 All ER 630.  Here a distinct line was drawn between authority created by a consensual agreement (actual authority) and authority created by representation (ostensible authority). While this is an English case, its principles have been applied to Australian cases such as Crabtree-Vickers Pty Limited v Australia Direct Mail Advertising & Addressing Company Pty Limited (1975) 133 CLR 72.

Where does this power come from?

Generally the power to grant authority to an individual is found in the company’s constitution or the replaceable rules under s 141 of the Corporations Act 2001 (Cth) where the company does not have a constitution.

It is also common for this power to reside with the company’s directors, and the power to act as the company’s agent can be conferred by a resolution of the board of the company.

How should documents be executed by an agent?

 Where an agent is signing a contract for a company, it is essential that they ensure the execution clause is signed correctly.  The execution clause should be set up similarly to the following:

Consequences

 If it is found that the contract was incorrectly signed, it may be unenforceable against the company.  The director or agent who purported to sign the contract on behalf of the company may be personally liable.

Assumptions available

You are able to assume that anyone who is held out by the company to be an agent of the company has been duly appointed, and has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company (section 129(3)).  This assumption is available even if the agent acts fraudulently, or forges a document, in connection with a dealing (section 128(3)).

 What should another party do to confirm their authority?

 In order to prevent delays and disputes later on, it is advisable that when entering into a contract with an agent for a company, you should always ask for confirmation of their authority and make any enquiries necessary about the source of that person’s authority.  This may include requesting to look at documents proving their authority, such as a copy of the resolution from the company’s board, and a copy of their constitution.

Was the contract validly executed by the CEO to bind the company? In the matter of Shield Hardwood Pty Limited [2020] NSWSC 697

In a decision handed down by the Supreme Court on 25 May 2020, it was noted that a company may enter into a contract by any individual acting with the company’s express or implied authority and on behalf of the company (section 126), and may also enter into a contract without using a common seal, which is optional (section 123).  In this matter, a director of the plaintiff company signed the subject contract by herself, without another officeholder’s signature (as per the requirements under section 127).  The Court noted:

The defendant was entitled to assume that [the signing director] had authority to enter into the contracts on behalf of the plaintiff, as she did.  The defendant was also entitled to infer from [the signing director]’s position, Chief Executive Officer, that she had such authority.  There is no evidence that [she] was not authorised to execute either contract … It is apparent from contemporaneous documents that both directors of the plaintiff company were aware of the contracts at that time; neither sought to suggest that the contracts should not have been entered into by [the signing director] …  The defendant relied on the contracts which appeared on their face to be executed by an individual acting with the company’s express or implied authority, as confirmed by contemporaneous documents.