Law of Business Association: Contractual Obligations of a Company

LAW OF BUSINESS
ASSOCIATION

Issue:
The concern in the current case scenario is the determination of whether George (hereinafter
referred to as G) is bound by the contract that he has entered in with entity Cakes Pty Ltd
(hereinafter referred to as CK).
Rule:
The “Corporations Act 2001 (Cth)” is the chief governing law of the company matters in
Australia. The “section 124 (1)” of the said act pronounces the company in the eyes of the
law to be a separate legal entity, that is different from its shareholder owners or the members.
This enables a company to enter into contracts in separate capacity with the third parties. The
corporate directors are the agents of the company and “Section 126” of the act prescribes
responsibility on the said agents or the management of the company to enter into the said
contracts on behalf of the company. The “section 127” of the said act is further to be noted
here. The section states that corporate directors are required to follow certain rules while
signing the contracts on behalf of the company. The first rule implies that two directors of the
company must be the signatory to the contracts on behalf of the company. The second rule in
this regard states that the signature would be still be valid if the same is done by the company
secretary employed in the corporate and one of the directors. The above manner of signing
has been prescribed in section 127 (1). In addition, the said contracts must be executed
mandatorily in the name of the company itself as stated by the Section 126 of the act. It is
imperative to note that directors can further opt the option of delegation of the power of
signing the contracts to any of the employees of the said company, on behalf of the directors
who are presently in the employment. In addition to the above, the section 127(2) caters the
requirement of the use of the common seal on the contracts of the company referred as above.
As per the referred section, it is significant to note that the contracts of the company can be
executed with or without seal on behalf of the company; however the said execution must be
in line with the procedure prescribed in the act through various sections in relation to the
signing of the contracts. In addition, the said signing can be done in the presence of
witnesses. The case of Knight Frank Australia Pty Ltd and Paley Properties Pty Ltd is
important to be noted here, where it was held by the courts of the law that where the
mandatory requirements of section 127 have not been followed while signing the contracts,
the said contract does not exist. This leads to the benefit of the third parties to opt out of the
said contract, as the same is not binding.