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The Essential Guide to Contract Law


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Why you must ensure your contracts are properly executed

Every single organisation in the UK will, at some stage, have a business contract with another party. There are many issues to consider when drawing up such contracts and misjudging the importance or accuracy of these points can result in costly legal disputes. One such issue is the question of who has the authority to sign a contract. This is something that is very important to identify early, as my colleague Peter Sammons explains below.



Once a proposed contract has been negotiated it is time to enter into the actual agreement. What are the risks around signing (or “executing”) a contract? The basic error is that the contract might be signed by someone who does not in fact have the requisite authority within their organisation to commit it to the contract.

Whilst Directors are generally authorised to enter into contracts, other senior staff members may also have delegated authority to do this. The general legal position is that a contract will be valid when executed by someone with ostensible authority to do so.

Authorised Signatures and Authorised Persons

Rather too frequently small businesses enter into legal transactions by, for example, sending a written contract for a signature to someone with whom they have been in discussions, and yet who does not in reality have the appropriate delegated powers to act in this way. In this situation it is possible that a contract could be declared invalid, or simply repudiated by one party. How can we protect ourselves from this eventuality?

The first thing we should do is simply ask the question, informally, near the beginning of the relationship: “who in your organisation would be authorised to enter into any contract with ourselves?” Dependent on the answer it might be prudent to confirm that expectation in writing, especially if there is any doubt in your mind. In the event of litigation this might help to demonstrate that some level of fraud had been perpetrated against your company, and that might mollify the view of the court.

Signatories to contracts from non-UK counter-parties

In a recent case, Integral Petroleum v SCU-Finanz AG, the English Court of Appeal looked at a situation where an oil contract was signed on behalf of a Swiss company by a sole company officer. The contract was governed by English Law so this would be acceptable. However, due to Swiss corporate rules and an entry on the Swiss Register of Commerce, two officers should have signed. The Court had to decide on which country's laws to apply and decided that, under the Swiss rules, a sole signature was insufficient and therefore the contract was voided.

This is because, under English common law rules, questions of capacity to form a contract are governed by the law of the country of incorporation, not the governing law of the contract.

In addition, a provision of the Companies Act 2006 sets out that under English law, a document is sufficiently signed by an overseas company if it 'purports' to be signed in the proper way. But the court said that this would not apply to a document executed by one person on behalf of an overseas company where joint signatures were required. It was perhaps ironic that both parties involved in this particular dispute were Swiss corporations and the joint signature rule should not have been a surprise to either of them.

This case underlines the importance of understanding foreign rules for execution of contracts by companies. Once again, ask questions informally as the possibility of a contract becomes apparent, and then follow these up with appropriate enquiries (possibly using a local legal firm) once it becomes clear that a contract is likely to ensue.


Peter Sammons is a member of the Chartered Institute of Procurement and Supply and has spent many years negotiating and managing major contracts. He will be presenting a brand new course, The Essential Guide to Contract Law, for UK Training in London on 22nd October: visit this page for details.


Stephen Smith

Managing Director
UK Training (Worldwide) Limited

 

 
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