One of the most frequently asked questions of our Corporate team is how UK companies should execute contracts on either side of the border.
Importantly, in both Scots and English law, subject to certain exceptions, there is no requirement for a contract to be in writing. A contract formed orally, or over the course of dealings, if not one of those exceptions, is no less binding than one committed to paper.
Nonetheless, for these purposes, it's assumed that we have two UK companies who have formally recorded their agreement in writing and are now wondering how that agreement should be signed.
When considering whether Scots or English law applies, the first port of call is the contract itself.
If the contract is governed by Scots law, then Scots law will govern how the contract should be executed. If, on the other hand, the contract is governed by English law, the relevant English law requirements for execution will apply.
Though there are similarities between the two, there are also important differences to which signatories north and south of the border should be alert.
The position in Scotland
In order to execute a contract in a manner compliant with Scots law, certain requirements will have to be met. Those requirements are contained in the Requirements of Writing (Scotland) Act 1995. Technically speaking, the execution requirements set out in the Act are only mandatory in certain circumstances. That said, it is best practice for those requirements to be followed in all circumstances where an agreement has been recorded in writing.
The Act allows for two types of execution: "valid" execution and "probative" execution.
A contract will be considered "validly" executed if the contract has been executed in a manner that is compliant with the requirements of valid execution.
One step beyond validity, a contract will be considered "probative" if the requirements for probativity have been met. If so, the contract will be presumed to be validly executed. This means that should someone challenge the contract's execution, this presumption puts the burden of proof on the party challenging the execution of the contract to prove that it was not validly executed.
The belts and braces approach in this regard is to ensure the contract meets the requirements of probative execution, in order to minimise the risk of any future challenge. However, many companies will be content with valid execution, particularly for routine contracts of lower value. Valid execution may also be considered slightly less cumbersome where parties are working remotely or contracting at a distance.
Requirements for valid execution by a company under Scots law
In order to execute a contract validly, it must be signed on behalf of the company by a director, a company secretary or an authorised signatory.
In Scots law, an authorised signatory is anyone who has been given authority by the company to sign. Such authority is usually given by the board of the relevant company. There is no requirement for the authorised signatory to hold any particular office, and could be a manager, an employee or a third party agent. This differs quite markedly from the position on authorised signatories south of the border, discussed below.
Requirements for "probative" execution under Scots law
In order to meet the requirements of probative execution, a contract must be signed on behalf of the company in one of these ways:
- By a director, company secretary or authorised signatory, and that person's signature must then be witnessed by someone else; or
- By two directors, a director and company secretary or two authorised signatories.
The position in England
If the contract is governed by English law for a company to execute the contract in a manner compliant with English law the provisions of sections 43 and 44 of the Companies Act 2006 will apply.
The Companies Act 2006 also provides for contracts to be executed in two ways:
- On behalf of the company; or
- By the company.
Contracts signed "on behalf" of the company under 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.
In practice, the most common way for a company to enter into a contract is through the actions of an agent who is expressly or impliedly authorised to act on the company's behalf. As a general rule, directors have implied authority to act on behalf of their company, and so such an agent may be a director, but this may not always be the case. Depending on the circumstances, other individuals (e.g. managers) might also have authority to sign particular contracts.
The key requirement is requisite authority. 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 that the signatory has the requisite authority to do so. Such authority is usually evidenced by a board minute extract, or a letter from the board, confirming that the signatory is authorised to execute the contract on the company’s behalf.
Contracts executed "by" the company under English law
Section 44 of the Companies Act 2006 regulates the manner in which documents are executed by a company. For a contract to be validly executed "by" a 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.
In contrast to the position in Scots law, the English law definition of "authorised signatory" is much more limited. Under section 44, 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, a director and company secretary or a director and a witness.
English law: which signing method?
The most appropriate signing method will depend on a number of factors beyond the scope of this note. For example, English law "deeds" must be executed "by" the company (i.e. under the section 44 method), as well as fulfilling additional requirements.
Execution on behalf of the company (i.e. under the section 43 method) may afford a greater degree of flexibility given the restrictive nature of the "authorised signatory" under English law.
However, in the same way as probative execution in Scots law, execution under section 44 (i.e. "by" the company) is considered most certain.
As a final check, before pen is committed to paper, consider whether there are any internal or external consents or approvals which may be required. For example:
- Does the person proposing to sign the contract have the requisite authority to do so, and have they provided evidence to that effect?;
- Does the board (or anyone else within the company) need to approve the terms of the contract?;
- Does the company require parent company approval?; and
- Are any third party consents required (for example, from investors or lenders)?
This note considers execution of a contract by a company by traditional means, i.e. on paper with "wet ink" signatures.
That said, it may be possible, again depending on its nature, for certain contracts to executed electronically both north and south of the border. Following the events of the last year, electronic signing, its capabilities and when and how it can be used has come to the fore, with many contracts now by executed by electronic means.
However, Scots and English law are not consistent on when and how electronic signing might be used, and the position is less than straightforward. When electronic signing might be appropriate in executing a contract in Scots and English law is discussed here. However, the law in this regard has become something of a moveable feast, and so it is best to consult a legal adviser before executing using electronic methods.
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