Contract Validity and Company Execution

This assignment analyzes a scenario involving Cakes Pty Ltd, a newly formed company seeking to purchase cakes from George. It explores the legal validity of the contract executed by Gerard, the director, and Sylvia, who holds no position in the company. The analysis centers on Section 127(2) of the Corporations Act 2001 (Cth), which outlines the requirements for company document execution using a common seal. The assignment evaluates whether the contract is valid under these provisions and cites relevant case law like Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd to support its conclusions.

Running head: BUSINESS LAWS
Business Laws
Name of the student
Name of the university
Author note

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BUSINESS LAWS
Part 1
Issue
The questions which needs to be analyzed in relation to the scenario is the legal position of Tim
and Michelle who are acting as the secretary and directors of Motorbikes Pty Ltd respectively in
relation to a contract which has been entered with John for purchasing a motorcycle.
Sub-issues
Has a legally binding contract being formed between the parties
In case a contract has been formed whether Tim and Michelle can rescind the contract
Rules
According to section 124(2) the Corporation Act 2001 (Cth) it has been provided that the
company has the legal capacity of getting into a contract even where the contract is not is the
best interest of the organization
As stated by section 126 of the CA a person who works on behalf of an organization through
implied or expressed authority has the power to get into, rescind, ratify and change the terms of
the contract which binds the organization. The common seal of the company is not required by
such person in order to exercise such power. In addition any other law which is required for
forming a valid contract is not intervened by the provisions of this section.
Moreover an organization for the cannot get into a contract which is restricted by a state or
territory along with any rights which is provided by the contract and not allowed by the state or
territories laws.

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As stated by section 127 of the CA an organization can execute a document even in case it has
not used the common seal if two directors of the organization or a company secretary and a
director have approved the contract thorough signature.
According to section 129 of the CA an individual who deals with an organization has the right to
assume that any other individual who is listed through the organization as a director has been
appointed duly by the company and the company cannot claim such assumptions as incorrect.
In situation where a document has been given effect in the above discussed manner, the other
party gains the right to rely on assumptions provided through section 129(5) of the CA in relation
to dealing with respect to the company. According to Section 129(5) of the CA an individual has
the right to make assumption that a contract has been executed duly by the company if it has
complied with the provisions of section 127(1). The individual is also provided with the right to
make assumption that a document has been duly executed with seal and it can also be assumed
that persons who depict themselves and the sole secretary and directors of the company are
actually so.
It had been ruled by the court in the case of Royal British Bank v Turquand (1856) 6 El & Bl
327 that an individual contracting and dealing with the organization in a bona fone manner has
the right to assume that the dealing or contract is consistent with the constitution and within the
power of such directors.
It had been provided by the judge in the case of Northside Developments Pty Ltd v Registrar-
General (NSW)(1990) 170 CLR 146 that the company has to make a representation of authority
in relation to the authority held by the person working on behalf of it.
Application

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BUSINESS LAWS
In the given scenario it has been provided that Tim and Michelle are the secretary and directors
of the organization respectively. Both of them are passionate about motorcycles. The reason why
the organization has been formed is to sell, repair and buy motorcycles.
It has been provide that John wished to sell a motorcycle, and Michelle and Tim have signed the
contract to buy the motorcycle. They realized latter that they had paid in excess in relation to the
motorcycles and thus want to rescind the contract.
It has been discussed above in relation to section 127 of the CA that an organization has the right
to execute a document even in case its common seal has not been used and where it has been
signed by one director and one secretary of the company. The other party also has the right to
make an assumption that under section 129(5) of the CA the contract is authorized by the
company. Thus the contract which has been entered by Michelle and Tim with John for the
Motorcycle is binding on the organization.
Moreover, it has been provided by section 124(2) of the CA that an organization can get into a
contract which is not in its best interest and therefore Tim and Michelle would not have the right
to rescind the contract
Conclusion
The contract with John is binding on Motorbikes Pty Ltd and Tim and Michelle cannot rescind it.
Part 2
Issue
The question which needs to be analyzed in relation to the given situation is that whether Cakes
Pty Ltd and got into a valid contract with George

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BUSINESS LAWS
Relevant rules
According to McKendrick (2014) a contract is defined as a legal document which is legally
binding on the parties who have signed it. The contract once formed between the parties can only
be discharged or rescinded in the event of breach, frustration, fraud and misrepresentation by the
other party.
According to section 125 of the CA the company has the power to get into a contract which is
not allowed by the constitution of the company. The contract is merely not invalid as it is not
within the powers of the constitution.
It has been ruled by the court in the case of Knight Frank Australia Pty Ltd v Paley
Properties Pty Ltd [2014] SASCFC 103 that where a contract has been properly signed by two
directors of the organization it becomes legally binding in the company and in case it is not it
cannot be enforced by the organization.
As provided by section 127 (2) of the CA an organization can execute a document where it has
used the common seal, if two directors of the organization or a company secretary and a director
have approved the contract thorough signature. In situation where the contract has been executed
in compliance with the provisions of section 127(2) by the company the other party has the right
to make an assumption which has been provided in section 129(6) in relation to dealing with the
organization.
It has been stated by section 129(6) of the CA that an individual is provided with the authority to
make an assumption that a contract is duly entered upon into by the organization if the common
seal of the organization has been fixed to the document in relation to section 127(2) of the CA.

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Moreover, in case where it is apparent that the common seal has been affixed to the document it
has to be witnessed in compliance with section 127(2). With respect to making an assumption, an
individual has the authority to assume that any person by whom the common seal of the
company has been witnessed and where they depict then selves as the only director and secretary
of the organization are actually occupying both the offices in relation to the company. In addition
officers or agents who have power have the responsibility to guarantee that the document is a
true copy
Application
It has been provided in the scenario that Gerard and Sylvia who both like cakes have came to a
decision to purchase a cake shop. A company named “Cakes Pty Ltd” has been formed by them
both. However where Gerard is the director of the new company, Sylvia has not been provided
with any position within the company. The secretary of the organization is the mother of Gerard
named Sarita.
The organization have cane to a decision to deal with George in order to purchase cakes. Gerard
in relation purchasing the cake shop of George have executed the contractual document through
affixing the seal of the company and signing as a witness. However Sylvia was the other witness
in relation to the contract where she did not have any position in the company. As provided by
section 127 (2) of the CA an organization can execute a document where it has used the
common seal, if two directors of the organization or a company secretary and a director have
approved the contract thorough signature. However in the given situation the document has been
witnessed by only Sylvia and Gerard. Gerard has no right to give effect to the document under
the provisions of section 127(2) of the CA without the signature of the secretary.

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BUSINESS LAWS
Moreover the witness which has been done by Sylvia in relation to the contract does not have
any effect as she hold no position in relation to the company. The company has also not made a
representation that he is working for the company has an agent. The contract actually had to be
signed by Sarita and Gerard along with the common seal to be valid. Therefore it can been
provided as per Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd and section
127(2) the contract with George and Cakes have not been formed.
Conclusion
There is no valid contract between Cakes Pty Ltd and George

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References
Corporation Act 2001 (Cth)
Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103
McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
Northside Developments Pty Ltd v Registrar-General (NSW)(1990) 170 CLR 146
Royal British Bank v Turquand (1856) 6 El & Bl 327