Contract Validity and Company Representation

This assignment examines the validity of a contract for purchasing a cake shop. The contract is executed with a common seal but signed by a director (Gerard) and a shareholder (Sylvia), who isn't the company secretary. It explores whether Section 127(2) requirements are met, analyzes Sylvia's potential authorization as a representative, and considers George's ability to challenge the contract based on improper signing.

1
Cover Page
Name of the student
Student ID
Word count

2
Contents
Solution 1....................................................................................................................................................3
Issue........................................................................................................................................................3
Law..........................................................................................................................................................3
Application..............................................................................................................................................4
Conclusion...............................................................................................................................................5
Solution 2....................................................................................................................................................5
Issue........................................................................................................................................................5
Law..........................................................................................................................................................5
Application..............................................................................................................................................6
Conclusion...............................................................................................................................................7
Reference List.............................................................................................................................................8

3
Solution 1
Issue
Can Motorbikes Pty Ltd rescind the contract entered by Michelle and Tim with John?
Law
Any person in Australia if intends to establish a corporation, then, he must comply with the
provisions of the Corporation Act 2001. An entity upon incorporation gains the status of a
corporation. As per Saloman v saloman (1896) every corporation become an artificial personnel
once registered. The company acts like a person and has every right and power of a person, but,
it does not have the heart to beat and mind to think. In order to conduct the affairs of the
company, it needs some living person who is called the officers of the company. (Bourne, 2013)
The company director is one such person and he is authorised under the Corporation Act 2001
(section 198A) according to which a company is obligated to carry out its function under the
administration of the director. Thus, a director must be authorised to carry out the functions of
the company and is held in Hely-Hutchinson v Brayhead Ltd [1968]. (Krawitz, 2002)
So, authority on the part of the company officer plays a prime role to make a company liable by
their actions. This is authenticated as per Section 126 of the Act according to which an agent of
the company has the power to make, ratify, discharge the contract on behalf of the company and
this power of the agent can be possessed even if the company is contracting without the common
seal and is held in Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd[2014].
(CooperGranceWard, 2015)

4
Thus, it is now important to consider as how the officers of the company possess authority.
Officers can posse’s authority in three ways; firstly, when the company delegates the authority to
the officers directly, either in the form of contract, deed or orally and is called express authority
and is held in Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd [1964].;
secondly, the authority that is possessed by the officers in addition with the express authority and
is required to complete the tasks that are delegated to them. It is called implied authority
Australia & New Zealand Bank Ltd v Ateliers de Constructions Electriques de Charleroi; thirdly,
when the company makes a representation in front of an outsider and portrays a person to be the
agent of the company, then, such an officer is the company officer under ostensible authority and
is held in Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) . (Gillies,2004)
Now, when the power to bind the company through contract rests with the board then an
individual director has no authority to establish contract on compony behalf (Brick and Pipe
Industries Ltd v Occidental Life Nominees Pty Ltd (1991). But, if an authority is delegated to
him, then, he can enter into contract individually or the company must have a sole director.
Likewise, a company secretary has full authority to make contract regarding those matters which
are in the normal course of business (Panorama Developments (Guildford) Ltd v Fidelis
Furnishing Fabrics Ltd (1971).
Application
Michelle is the Director and Tim is the secretary of Motorbikes Pty Ltd. both of them sell and
buy motorbikes on behalf of the company.
Now, Michelle is the only director of the company and thus as per 198A and 198E he is
authorized to make a contract on company behalf. Likewise, Tim is in regular dealing with the

5
day to day activities of the company and thus as per Panorama Developments he can also bind
the company by his actions.
Now, both Tim and Michelle brought the bike of John @ $ 5,000. This purchase is within their
authority because they were also in regular dealing in selling and buying the bikes, thus, they
already has an express authority to buy and sell bikes on company behalf.
So, the contract is binding and cannot be rescinded.
Conclusion
Since the contract by Tim and Michelle is within their authority and is binding so the contract
cannot be rescinded at any later stage.
Solution 2
Issue
Is the contract made between George and Gerard and Sylvia is binding or can be resided?
Law
The company with the help of its officers can enter into contracts with third parties and such
contracts are binding in nature. But, what will be the situation when the officer who is entering
into the contract is not authorized to establish the contract on company behalf. The company then
can rescind the contract on the basis of lack of authority. In order to cure this defect and to bring
justice to the outsider who makes a contract on the belief that the officers is an authored agent,
the corporation Act 2001 has enacted section 128 and section 129 of the Act. The outsider can
make assumptions laid down in section 129 of the Act (section 128 (1) of the Act)). (Australia,
2011)

6
The outsider can assume that the all the companies internal matters are conducted in an adequate
manner (section 129 (1) and (2)). That the company documents are executed in an appropriate
manner (section 129 (6)). If the documents are with common seal then the requirements of
section 127 (2) must be met in order to make an assumption under section 126 (2). The
requirements are, firstly, to directors must sign the document or a secretary and director must
sign the document. If these conditions are not met then such document has no relevance in law.
However, if the document is executed with common seal and the requirements of section 127 (2)
are not met but the officers who had signed the document are the authorized agents of the
company, in such situation as well the document is valid. (KWM, 2017)
But, no assumption can be relied upon by the outsider if he is not acting in good faith (section
128 (4) of the Act).
Application
George is intended to sell out his cake shop to Gerard and Sylvia. In order to do so, Gerard and
Sylvia establishes a company in the name of “Cakes Pty Ltd” , wherein the director is Gerard and
the secretary is Sarita.
In order to buy the cake shop a document was executed with common seal. But, the document is
signed by Gerard and Sylvia. Sylvia is not the company secretary rather she is the shareholder of
the company.
Now, George can make assumption under section 129 (1) and (2) that all the internal matters of
the company are met duly. Also, he can assume that the documents are executed validly provided
the same is signed by 2 directors or a director and secretary. But, the document is signed by
Gerard (director) and Sylvia (shareholder).

7
So the requirements of section 127 (2) are not met so such basis the contract is not valid.
But as per the law, even if section127 (2) is not met but if the document is signed by the
company agents who are the authorized representatives, in such cases as well the documents are
binding.
Now, the document is signed by Sylvia who is assumed to be the authorized representative of the
company.
In such case, the document is valid and is binding upon the company.
George cannot take advantage of his own wrong, since he is aware that the document is signed
by the parties who are not complying with the conditions of section 127 (2).
Conclusion
Thus, the contract is binding upon the parties and George cannot cancel the contract.

8
Reference List
Books/Journals/Articles
Australia (2011) Australian Corporations & Securities Legislation 2011: Corporations Act 2001,
ASIC Act 2001, related regulations, CCH Australia Limited
Bourne N (2013) Bourne on Company Law, Routledge.
Gilliers, P (2004) Business Law. Federation Press, .
Krawitz, A (2002). Protecting Outsiders to Corporate Contracts in Australia. Murdoch
University School of Law. Volume 9, Number 3
Maisto, G (2009). Residence of Companies Under Tax Treaties and EC Law. IBFD.
Case laws
Australia & New Zealand Bank Ltd v Ateliers de Constructions Electriques de Charleroi.
Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991).
Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) .
Hely-Hutchinson v Brayhead Ltd [1968].
Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd [1964].
Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014]
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd (1971).
Saloman v saloman (1896).

9
Online Material
CooperGranceWard (2015) Has the company correctly signed the contract? Director’s personal
liability for incorrectly signed contracts (online). Available on:
http://www.cgw.com.au/publication/company-incorrectly-signed-contract/. Accessed on 15th
September 2017.
KWM (2017) From Concept to Completion: Contract execution – some basic rules (online).
Available on: http://www.kwm.com/en/au/knowledge/insights/from-concept-to-completion-
contract-execution-some-basic-rules-20130601. Accessed on 15th September 2017.