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FOCUS ON… SIGNATURE CLAUSES IN CONTRACTS |
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You would be forgiven for missing the change in the law on execution of documents, since this lone provision is buried amongst a raft of provisions on accounts and audit, company secretaries and other matters coming into force at the same time. Executing documents correctly is of vital importance to a company’s day-to-day management because there are serious consequences on the company’s contractual relations and directors’ personal liability if it is not done properly. Therefore, directors and secretaries need to be aware of the change in the law and what this means for them. Entering into different types of contract There are two levels of written contract: simple written contracts (also known as contracts “under hand”) and deeds. Strictly speaking, executing a document has a more specific meaning than just signing it. If a document has been executed, the necessary formalities for it to be legally valid have been completed. In most cases, a document will become legally valid if it is signed by the correct person. However, some types of document require additional formalities. One of those formalities is a particular type of signature clause, called an “execution clause”. To avoid confusion, the term “execution” is only used here to refer to these execution clauses. Contractual relations can also arise under oral contracts. They can also be implied by the conduct of the parties or a course of dealing, for example by similar orders being placed over a period of time. Of course, there are no formalities for these contracts, but they are much more difficult to enforce if a dispute arises. Using an express written contract instead gives the parties more certainty as to their rights and obligations under the contract, as well as complying with any legal requirements for the contract’s validity beyond signature. Contracts formed online, for example when ordering goods from a website, are not signed as such. The terms and conditions usually specify how the contract is formed, most commonly by an exchange of emails between the parties. If such a contract is entered into on behalf of a company, the director or other person acting for the company will still have to be authorised to do so (see below). Simple written contracts The vast majority of written contracts are in this form. Written contracts have an obvious advantage over oral contracts - the terms are set out in writing so that the parties can clearly ascertain their rights and obligations under the contract. Normal business contracts, such as agreeing to supply goods or services, are therefore usually in this form and based on standard terms and conditions. The law requires some contracts to be in writing in order to be valid. Where the law stipulates that a type of contract must be in this form, it sometimes also sets out other requirements that must be met in order for the contract to be valid. For example: » contracts for the transfer of shares do not have to be in writing, but written evidence of the transfer must be delivered to the company in the form of a proper transfer instrument before the new owner can be registered (s 770 CA 2006, also in force 6 April 2008; see CLM ¶1865+). Companies’ articles often also require transfers to be in writing (there are two exceptions to this requirement: share warrants (see CLM ¶1902) and listed companies with shares in uncertificated form); » guarantees must be in writing (or at least a note of their terms must be in writing), otherwise they are not enforceable (s 4 Statute of Frauds 1677; see CLM ¶4696+); » an equitable mortgage must be in writing, signed by or on behalf of each party and must incorporate all of the terms expressly agreed by the parties (s 2 LP(MP)A 1989; see CLM ¶1938+, 4596+); and » contracts for the sale of land must also be in writing, signed by or on behalf of each party and must incorporate all of the terms expressly agreed by the parties (s 2 LP(MP)A 1989). The actual transfer of land needs to be in the form of a deed (see below). Most simple written contracts only need to be signed in order to be legally valid. These will be everyday contracts for goods and services, for example. A company can enter into such a contract by the signature of a director or other person authorised to do so on its behalf (see below). Some simple contracts require the more formal execution clause. This level of formality tends to be reserved for high-value, important contracts. It may be necessary because the law sets out extra requirements to be complied with for that type of contract, or it may simply be because the contract is drafted to include a formal execution clause. Execution of a contract by a company must be carried out in a particular way (see below). Deeds Deeds, on the other hand, must be executed. They are used where very formal evidence of the contract is needed. The law requires certain contracts to be executed as deeds, such as: » transfers of land (s 52 LPA 1925); » leases (except for certain short leases) (ss 52, 54 LPA 1925); » mortgages and charges over land (ss 85-87 LPA 1925); and » the appointment of a trustee (s 40 Trustee Act 1925). The other main situation in which a deed is used is where there is no consideration for the agreement. Consideration is the technical term for the price paid to a person in return for him agreeing to be subject to a contractual obligation. It is usually in the form of money, but is not necessarily so. A simple written contract is not valid without consideration. If no consideration is given, or if the consideration is in doubt, executing the contract in the form of a deed provides the necessary evidence that the person intends to do something for nothing. For example, where property is being transferred for nothing a deed can be used to prove the giver’s intentions to give it away. The formalities for executing a deed are: » that it is clear on the face of the document that it is intended to be a deed (s 1 LP(MP)A 1925). This is usually achieved by its labelling and a testimonium clause, for example “This document is executed as a deed and is delivered and takes effect at the date written at the beginning of it"; » that it is executed in the appropriate form for the party in question. See below for examples of how a company can execute a deed; and » that it is delivered. Delivery sets the date on which the contracting party with the obligations under the deed is bound. This often occurs on the date of execution (as in the sample testimonium clause above), but delivery could be made conditional. Deeds executed by companies are presumed to be delivered on the date of execution, unless the contrary intention is clearly shown (s 36AA CA 1985, restated at s 46 CA 2006 as of 1 October 2009). Companies’ signature clauses Companies legislation sets out the basic rules as to how companies can sign and execute contracts. Most contracts, such as everyday orders for goods and services, can usually be entered into by the signature of one director or other authorised person. In very formal simple contracts and deeds, they will have to comply with the execution formalities. Usually, companies will be guided by the signature clause in the document concerned. Simple written contracts that do not require execution can be entered into by a company (s 36 CA 1985, restated at s 43 CA 2006 as of 1 October 2009): » by affixing its common seal, if it has one; or » if it is signed by any person acting under its authority (express or implied). If any additional formalities are required by law, they must also be complied with (unless it is clear that they are only intended to apply to individuals). In reality most contracts (i.e. those that do not require any formalities beyond being in writing and being signed by the parties) are signed by just one director or other authorised person on behalf of a company. A director can be given specific authority to do this, or he can be assumed by the other party to the contract to have the authority to do it because of his position. Directors’ authority to act on the company’s behalf is a complex area, and is discussed in detail at CLM ¶2350+. Non-directors can be authorised to sign in a similar way. Where a contract is not in writing, it can be entered into on behalf of the company by a director or other person acting under the company’s authority. Deeds and simple contracts that have to be executed can be entered into by a company: » by affixing its common seal, if it has one; » if it is signed by two “authorised signatories”, who are the company’s directors and any secretary; or » if it is signed by one director, whose signature is witnessed. Under the old law, execution could occur by affixing the common seal or by the signature of two directors or a director and a secretary. This change in the law is being brought into force to coincide with the relaxation in the requirement for all companies to have a secretary. From 6 April, private companies will be able to choose whether or not to have a secretary. This new execution provision allows private companies with a sole director and no secretary to execute documents. However, its use is not limited to these companies. Therefore, any company with any number of directors and a secretary can still execute documents by the witnessed signature of one director. The provision in the new Companies Act dealing with execution is the only one in this area that comes into force on 6 April 2008 (s 44 CA 2006). Those dealing with company contracts, the company seal, execution of deeds (this section simply requires a deed to be executed as described above and delivered as a deed) and execution of documents by attorneys are all due to come into force on 1 October 2009 (ss 43, 45-47 CA 2006). These issues are still governed by CA 1985 for the time being. Challenging contracts If a contract is not signed or executed properly, it can be invalid. The way in which a contract is entered into is usually only challenged when one party wants to extricate itself from the contract. A party contracting with a company is well protected against the company claiming that it did not enter into the contract properly: » as long as the party has dealt with the company in good faith, he is entitled to assume that the director signing on behalf of the company is entitled to do so. This means that as long as he checks that the signatory really is a director of the company (which can easily be done by searching the register at Companies House or by requiring the director to provide evidence of his appointment), the party is not expected to make sure that the authority to enter into the contract was properly delegated to that director. This is also the case if a non-director signs the contract on the company’s behalf (proof of his authority would normally take the form of confirmation from the board); or » if the company contracts with a purchaser and the statutory execution formalities appear to have been complied with, the contract is deemed to have been executed properly (s 44(5) CA 2006). Therefore, even if a director or other person has entered into a contract without the proper authority to do so from the company, the company will usually be bound by that contract. The company may be able to take action against the director or other person to remedy the situation if necessary. See CLM ¶2434+ for a detailed discussion of the claims that can be made against directors for breach of duty. The result is that the contracting party is treated fairly but the company can also protect itself by obtaining compensation from the director or other person for any losses it incurred because of the unauthorised contract. Practical steps Many companies will not need to change the way they enter into contracts at all. However, some may want to take advantage of the new freedom to execute formal documents by the witnessed signature of one director. Companies should review their policies on signing documents in the light of this change in the law. For the benefit of companies and those who can enter into contracts on their behalf, companies should: » be clear about what sort of contracts can be executed by just one director and what requires two authorised signatories or a witnessed director’s signature; and » ensure that their directors and any other persons are properly authorised to enter into contracts on the company’s behalf. If the authority differs from person to person, they must be clear about who is entitled to do what. Example signature clauses (text in italics and square brackets to be tailored or deleted as required) Simple written contract entered into by a single director or other authorised person:
Simple written contract executed by two authorised signatories:
Simple written contract executed by a single director with a witness:
Deed executed by two authorised signatories:
Deed executed by a single director with a witness:
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One of the provisions brought into force on 6 April deals with the execution of documents by companies. It provides more flexibility than the old law. This issue’s Focus on… looks at the options open to a company. |