We are often asked by companies north and south of the Border how they should execute contracts.
In both countries, subject to certain important exceptions, there is no requirement for a contract to be in writing. Legally binding contracts can be formed orally (e.g. through phone conversations) or through a course of dealings.
But we’ll assume here that we have two UK companies who have recorded their agreement in writing and are now wondering what has to be done to sign it.
What is the governing law?
The first thing to check is what law governs the contract. If it’s Scots law, then Scots law will govern how the contract should be executed. If it’s English law, then the company must follow the English law requirements for execution.
There are subtle but important differences between the two.
The position in Scotland
The law is contained in the Requirements of Writing (Scotland) Act 1995. Technically, the execution requirements set out in this Act are only mandatory for certain special categories of contract. But in practice we advise companies to follow them for all written contracts.
There are two types of execution: “valid” execution and “probative” execution.
“Valid” execution means what it says: if a company follows the requirements for valid execution, then the contract will be validly executed.
“Probative” execution takes you a step further. If a company follows the requirements for this, then a presumption arises that the contract was in fact validly executed. Should someone challenge this in the future, that presumption would put the burden of proof on the challenger to prove that the contract was not validly executed.
Lawyers, who are very fond of the belt and braces approach, will normally advise companies to go for probative execution. However, many companies may be happy to go with valid execution, particularly for low value, routine commercial contracts.
Requirements for valid execution by a company under Scots law
The contract must be signed on behalf of the company by a director, company secretary or authorised signatory.
An authorised signatory is anyone who has been authorised by the company to sign. In practice, it will be the board who gives the authority to sign. The authorised signatory can be anyone at all – a manager, another employee or even a third party.
Requirements for “probative” execution
There are two ways to achieve this. The contract must be signed on behalf of the company either by:
- a director, company secretary or authorised signatory and that person’s signature must then be witnessed by someone else; or
- two directors, two authorised signatories, or a director and the company secretary.
The position in England
This is contained in sections 43 and 44 of the Companies Act 2006.
English law permits contracts to be:
- signed on behalf of the company; or
- executed by the company.
Contracts signed “on behalf of” the company – English law
Section 43 of the Companies Act 2006 provides that, under English law, a contract may be made on behalf of a company, by a person acting under its authority, express or implied.
As a general rule, directors have implied authority to act on behalf of their company. Depending on the circumstances, other individuals (e.g. managers) might also have authority to sign particular contracts.
Where a person proposes to sign a contract on behalf of a company, depending on the nature, value or importance of that contract, the other party may wish to check before signature that the person does indeed have the necessary authority. They could ask for a board minute extract, or a letter from the board, confirming that the person is authorised to sign the contract.
Contracts executed “by” the company – English law
Section 44 of the Companies Act 2006 provides that, for a contract to be validly executed “by” the company, it must be signed on the company’s behalf by two authorised signatories or a director of the company in the presence of a witness.
Rather confusingly, the English law definition of “authorised signatory” is much more limited than the Scots law concept. Under s44, an authorised signatory can only be a director or a company secretary.
So, for execution by a company under section 44, the contract must be signed by two directors, or a director plus a witness, or a director and the company secretary.
Which signing method to choose (English law)?
The appropriate signing method will depend on a number of factors beyond the scope of this blog. For example, English law deeds must be executed “by” the company (i.e. the section 44 method) as well as fulfil other requirements.
The section 43 (“on behalf of” the company) is potentially more flexible given the restricted meaning of “authorised signatory” under section 44.
If in any doubt, go for the “execution by the company” method (belt and braces again) or consult your legal adviser.
Where to sign
Scottish and English signing blocks differ in content and where they appear in the contract and there are differences regarding where they should be signed – please consult Brodies for information regarding this.
A final point: before anyone signs a contract for a company, consider whether there are any internal or external consents or approvals which are required. Does the board (or anyone else within the company) need to approve the terms of the contract? Does the person signing have authority to sign a contract of this nature/value? Are any third party consents required (e.g. investors or lenders)?
How can we help?
No-one wants to end up in court over their contract. Certainly no-one wants to argue over a formality such as whether there was a properly signed contract in the first place.
We regularly advise companies on the requirements for execution of documents under both Scots and English law. Should you require any further information, please get in touch.
The information contained in this blog is provided for general information purposes only and should not be construed as legal advice from Brodies LLP. No reader should enter into any contract without first seeking appropriate professional or legal advice.
On August 3, 2018