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Our Corporate & Commercial team has recently advised a number of clients, both UK-based and international, on questions surrounding the validity of commercial contracts.
Queries have included:
In this article, we address these points and explain some of the key issues to look out for when companies are entering into contracts.
How does a company enter a contract?
There is a wide array of ways in which a company can form a legally binding contract with another person, ranging from oral agreement to ‘smart contracts’. Very often though, commercial parties enter into agreements by signing written contracts.
Written contracts can be entered into either as ‘simple contracts’ or as ‘deeds’.
Simple contracts require relatively limited formality – they are usually entered into by a single director signing ‘for and on behalf of’ each company entering the contract.
Deeds, on the other hand, are a specific form of written instrument required for certain transactions. In order to be valid, they must meet additional requirements. Companies usually enter into deeds either by having two directors sign the document or by having one director sign before a witness.
Do the directors have authority to sign the contract?
A director can enter into a contract on behalf of company, provided they have authority to do so.
A company’s articles of association will generally give authority to the company’s directors to exercise all powers of the company. This includes entering into contracts.
However, that authority is generally given to the directors as a group – not to any single director. That said, the directors may, as a group, be able to delegate certain powers of the company (such as the power to enter into a particular contract) to a single director.
So, if a single director signs a contract on behalf of a company but has not been authorised to do so by the other directors, the starting point is that the contract is not binding on the company.
However, in certain circumstances, a third party is entitled to assume that the proper internal management formalities have been carried out by a company (even where they haven’t).
To avoid the uncertainty:
A deed has only been signed by one director – is it valid?
In one recent case, we were asked to advise on the validity of deed that had only been signed by one director of each of the two companies that were party to it (without any witnesses).
If the proper execution formalities have not been observed, then the contract will not take effect as a deed.
In certain cases, such as transfers of land, a properly executed deed is needed in order for the transaction to be valid. If the execution formalities are not observed in these cases, it will be a ‘failed deed’ and not binding on the parties.
However, in a situation where a deed is not necessarily required (for example, a commercial contract for the provision of services), a failed deed may still be legally binding. Provided the requirements for a simple contract are met, the agreement will just take effect as a simple contract and not a deed.
As with most legal questions, it will only be possible to establish the answer by looking closely at the relevant law combined with the specific factual circumstances. If you have any concerns about whether a company contract is valid, our Corporate & Commercial team would be delighted to help and will explain the position in clear and simple terms.
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