Validity of Contracts under Section 127 of Corporation Act 2001

This article discusses the validity of contracts under section 127 of Corporation Act 2001 with two solved examples. It explains the laws related to execution of documents and assumptions made by third parties. The subject is Business Law and the course code is not mentioned. The course name and college/university are also not mentioned.

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Business Law

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Answer 1
Issue
Whether Motorbikes Pty Ltd is liable in terms of the contract signed with the John
Law
Section 127 of the Corporation Act 2001 states the regulations related to execution of the
document. According to clause 1 of the section, organization can execute the documents
deprived of fixing the common seal on the document if such document is affixed by the
signatures of the two directors of the organization or by the director and the company secretary.
It must be noted that, in case company executes the document in this manner, then it is possible
for the third party to rely on the assumption stated under subsection 129(5) in context of dealing
with the company.
As defined by section 129(5), third party can make the assumption that the contract has been
duly attested by the corporation if such document is signed in the similar manner as stated under
subsection 127(1). In terms of creating the expectations, a individual may also make the
assumption that any person who signs the contract.
It is necessary to understand that, while executing the contract on the basis of the organization,
an individual cannot put their signature on the document or fixed the common seal in the
capacity of two different authorities. However, there is an exception to this rule which states that
person signs the contract if he or she is the sole director or sole secretary of the company
(Hatcher, 2016).
Recently, in case of Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC
103, Full Court of the South Australia considered the issue related to the valid execution of the
contract. In this case, contract was signed by the single director and without the common seal of
the company, which means, director execute the contract under section 127(1) of the Act. Court
stated that contract is not valid and cannot be enforced (Winter, no date).
Application
In this case, contract is signed by the Tim and Michael on behalf the organization with the John
for purchasing the motor bike from the John. Contract is executed with the John under section
127(1), as this contract is signed by the director and company secretary of the organization.
Organization can execute the contracts without fixing the common seal on the contract if such
document is affixed by the signatures of the two directors of the organization or by the director
and the company secretary of the company.
It must be noted that, in case company executes the document in this manner, then it is possible
for the third arty to rely on the assumption stated under subsection 129(5) in context of dealing
with the company, which states, third party can make the assumption that that the contract has
been proven by the company if such document is signed in the similar manner as stated under
subsection 127(1).

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Therefore, it is clear that contract signed by Michal and Tim is duly attested, and there is valid
contract between the parties.
Conclusion
Contract is duly attested between the parties, and Motorbikes Pty Ltd is liable in terms of the
contract signed with the John.
Answer 2
Issue
Whether third party that is George is liable towards the Cakes Pty Ltd in context of contract
signed between them
Law
Section 127(2 of the Act states that, organization with the common seal can execute the
document if such seal is fixed to the document and this fixing is witnessed by the two directors
of the organization or by the director and the company secretary of the company. It must be
noted that, in case company executes the document in this manner, then it is possible for the third
party to rely on the assumption stated under subsection 129(6) in context of dealing with the
company.
As defined by section 129(6), third party can make the assumption that that the contract has been
duly attested by the organization if such contract is fixed by the common seal in the similar
manner as stated under subsection 127(2). This assumption further states that common seal fixed
by the company must be witnessed in the manner as stated under section 127.
In terms of making the assumptions related to the execution of the document by the company, an
individual can make the assumption that any person who signs the document and states next to
their signature that they are the sole directors of the organization and the sole secretary of the
organization. In case execution clause states in incorrect manner than the executed document
must be signed by the two directors of the company or by the director and the company secretary
of the company. The constituent is compromised of the sole director/sole secretary who signs the
contract then the risk is that the presumptions cannot be relied on. The document signed by the
company must be executed in context of the section 127 of the Act, unless it clearly states that
such document is signed by the sole director or sole secretary of the company.
In case sole director or sole secretary of the organization held liable for the incorrect execution
clause, and in case they are not held liable then there is possibility that document is not
enforceable in nature.

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In case law Hewlett-Packard Australia Pty Ltd v Exceed Pty Ltd [2004] FCA 135, court
consider the issue in which document was executed without the common seal of the company. In
this case, Court held that the document was considered as the deed if it was executed by the
common seal of the company. Court further stated that, this document was executed by the
company; even such document was not fixed by the common seal of the company but it is
executed in terms of the section 127 of the Act.
Application
In the present case, Gerard and Sylvia purchased the cake shop from the George, and in this
context they registered the company which named as “Cakes Pty Ltd” in Australia. In this
company, Gerard is listed as the director of the organization and his mum Sarita is listed as the
company secretary of the organization.
On the day at which contract is signed between the parties for purchasing the cake shop, and in
this context contract is fixed by the common seal of the company and also witnessed by the
Gerard as the director and Sylvia. After few days, George believes that he must not sell his cake
sho and wants to get it back.
In this case, contract between the parties is executed in terms of the section 127(2 of the Act
which states that organization with the common seal can execute the document if such seal is
fixed to the document and this fixing is witnessed by the two directors of the organization or by
the director and the company secretary of the company. In this case also, contract is fixed with
the common seal and signed by the director of the company (Lavan, no date).
It must be noted that, in case company executes the document in this manner, then it is possible
for the third party to rely on the assumption stated under subsection 129(6) in context of dealing
with the company. As defined by section 129(6), third party can make the assumption that that
the document has been duly attested by the company if such document is fixed by the common
seal of the company in the similar manner as stated under subsection 127(2). This assumption
further states that common seal fixed by the company must be witnessed in the manner as stated
under section 127.
In this case, contract is only signed by the director of the company and not by the company
secretary of the company and this is the reason because of which it can be state that contract is
not executed in the manner stated by section 127. Facts of this case are similar to the case law,
Hewlett-Packard Australia Pty Ltd v Exceed Pty Ltd [2004] FCA 135, court consider the issue
in which document was executed without the common seal of the company. Court further stated
that, this document was executed by the company; even such document was not fixed by the
common seal of the company but it is executed in terms of the section 127 of the Act.
Therefore, it is clear from the above facts, that contract between the parties is not executed in the
manner which is stated under section 127 of the Act, and this is the only reason because of which
this contract is not valid, which means, contract is not enforceable and George can get back his
cake shop
Conclusion

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Contract between the parties is not executed in the manner which is stated under section 127 of
the Act, which means, contract is not enforceable and George can get back his cake shop.
References
Corporation Act 2001- Section 127
Corporation Act 2001- Section 129
Hatcher, S. (2016. Australia: Executing documents on behalf of a company. Available at
http://www.mondaq.com/australia/x/550522/Contract+Law/Executing+documents+on+behalf+o
f+a+company. Accessed on 29th September 2018.
Hewlett-Packard Australia Pty Ltd v Exceed Pty Ltd [2004] FCA 135.
Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103
Lavan. Consequences of defective execution clauses. Available at
https://www.lavan.com.au/advice/property_leasing/consequences_of_defective_execution_claus
es. Accessed on 29th September 2018.
Winter, J. Putting pen to paper – execution under section 127. Available at
https://www.lexology.com/library/detail.aspx?g=cf057ecb-0d7e-4ec2-be21-c833666e0173.
Accessed on 29th September 2018.