Authority as an agent: A risky path for counterparties

In corporate transactions, certainty about who has authority to bind a company is essential. While s 126 of the Corporations Act 2001 (Cth) (Act) allows companies to transact through individuals acting with express or implied authority, it gives significantly less protection to counterparties than direct execution under s 127 of the Act.

The key distinction lies in the absence of the statutory assumptions contained in section 129 of the Act, which accompany execution under s127 of the Act.

What Section 126 of the Act Allows

Under section 126(1) of the Act, the enforceability of a contract depends on whether the individual executing the document had the company’s express or implied authority and acted on behalf of the company.

This provision recognises commercial reality: not every transaction requires the involvement of directors or the company seal. It enables companies to conduct their day-to-day business through employees, officers or agents who hold the requisite authority.

However, while execution under s 126 of the Act facilitates efficiency and flexibility, it does so at the cost of reduced legal certainty for those dealing with the company.

The Problem for Counterparties: A Weak Safety Net

Limited access to statutory assumptions

Section 129 of the Act sets out a series of assumptions that persons dealing with a company may rely upon, including that a document apparently executed under s 127 of the Act has been duly executed.¹

These assumptions protect counterparties by shifting the risk of defective execution to the company.

When a document is executed under s 126 of the Act, these protections are largely unavailable.²

The only assumption available is found in s129(3) of the Act, which allows a person to assume that anyone “held out by the company to be an officer or agent” has been:

• duly appointed; and
• has authority to exercise the powers customarily associated with that position.

If either element is in doubt, the counterparty bears the risk that the company will later dispute the validity of the transaction. This is a far narrower protection than the “due execution” assumption under s129(5) of the Act.

No presumption of valid execution

Execution under s 126 of the Act does not carry any presumption of validity.

A counterparty must establish that the individual signing the document had actual authority (express or implied) or rely on common law principles of ostensible authority.³ This creates an additional risk where the authority of the signatory is unclear, undocumented or subsequently contested by a company who seeks to deny it was properly bound.⁴

Why Section 127 Remains the Safer Route

By contrast, execution under s 127 of the Act attracts the strong statutory assumption in s 129(5) that the document has been duly executed.

This means counterparties can enforce the agreement without establishing authority. The company, not the counterparty, bears the risk of any irregularity in execution.

Section 126 of the Act reverses that allocation of risk. The counterparty must prove the authority of the signatory and may face difficulties doing so if disputed. For this reason, s 127 of the Act remains the more reliable mechanism for formal execution, particularly for high-value or strategically significant transactions.

Practical Implications

To mitigate the risks associated with execution under s 126 of the Act, counterparties should:

• Seek written confirmation of the authority (for example a resolution of the company).
• Verify the signatory’s role to ensure their role aligns with the type of transaction.
• Insist on formal execution under s 127 wherever possible so the statutory assumptions in s 129 apply.

For growing companies, who are entering into an increasing number of contracts but might have difficulty locating directors to execute under s 127 of the Act, a power of attorney granted in favour of certain employees can present a helpful middle ground.  A well drafted power of attorney can distinguish certain classes of employees empowered to execute different types of documents.  It also allows companies to have clear documentary evidence of a person’s authority to bind the company, which can be provided on demand.

Conclusion

Although s 126 of the Act provides companies with operational flexibility, it exposes counterparties to greater risk and an onerous evidentiary burden.

Even with the limited assumption in s 129(3) of the Act, execution under s 126 of the Act does not provide the same level of certainty or protection as s 127 of the Act. The practical consequence is that counterparties must undertake their own due diligence to confirm the signatory’s authority and accept the risk that the company could later avoid the agreement.  Conversely, companies should not be surprised when prudent counterparties press for evidence of an agent’s authority.

Ultimately, it is not uncommon for the administrative burden of proving authority to sign for a company under s 126 of the Act to quickly undo the convenience of not bothering two directors.  Where there are safer execution methods available, it is often best to avoid the shortcuts now to avoid issues down the road.

Disclaimer

The information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.

Footnotes