In the recent decision of Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103, the Full Court of South Australia drives home the importance of ensuring that a contract has been validly executed.

The consequences can be dire – from an unenforceable contract to the party signing being personally liable for warranting that they have authority to sign the contract on behalf of their company when they do not.

This particular case involved a contract for a $1.5 million commercial property. The potential purchaser was a company with two directors. Only one of the two directors of the purchasing company signed the contract under a section 127 execution clause, which was countersigned by the vendor. Much to the dismay of the vendor, the director then withdrew from the contract. The property was subsequently sold to another party for $1.25 million.

The key issues before the Court were whether an enforceable contract existed and whether the signing director was personally liable for purporting to have authority to sign on behalf of the purchasing company.

Ultimately, the Court found the contract was not enforceable. A section 127 execution clause requires that if a common seal is not used, a company may validly execute a document either by having it signed by two directors of the company or having it signed by one director and one company secretary. The contract in question contained execution clauses permitting it to be executed under section 127 (execution by the company itself) or section 126 (agent exercising a company’s power to make contracts). The signing director, in this case, had signed the contract under the section 127 execution clause but had also struck out the words ‘Sole Director/Sole Secretary’ thereby indicating that the purchasing company had more than one director. As no attempt was made to obtain the signature of the second director, the clause had not been validly executed and the contract was found to be unenforceable.

While the Constitution of the purchasing company provided that a director could be authorised to execute documents on behalf of the company if a resolution was passed allowing them to do so, no such resolution had been passed. Resultantly, the next question the Court had to consider was whether there had been a breach of warranty of authority by the signing director. Luckily for the director, he had signed the section 127 execution clause and not the execution clause provided for an agent to sign on behalf of the company. Consequently, the Court found that there was no breach of warranty of authority but noted that the position might have been different if he had signed otherwise.

Why is this case important?

Standard REIV contracts of sale do not usually have designated execution clauses meaning that vendors and purchasers must be extra vigilant when executing a contract in order to ensure that the contract is valid.