Who are you dealing with? Ensuring companies have authority to bind themselves to legally enforceable contracts

A recent New South Wales Supreme Court decision has illustrated the importance of making sure that a director purporting to act on behalf of a company actually has the requisite authority to bind that company. The consequences of overlooking seemingly minor details may be that what were initially considered binding agreements can be declared unenforceable – with obvious consequences.

In Oliveri Legal Pty Ltd v Cassegrain Tea Tree Oil Pty Ltd[1], Oliveri Legal Pty Ltd (Oliveri) sought a declaration that the defendant, Cassegrain Tea Tree Oil Pty Ltd (CaTTO) was indebted to them in the sum of $1,838,758.76 on account of overdue costs plus interest arising from unpaid legal services provided by Oliveri to Mr Cassegrain, but allegedly guaranteed by the company.

Background

In 2008 Mr Cassegrain was one of two directors of CaTTO, as well as being the company’s secretary and managing director. Mr Cassegrain engaged Oliveri in 2008, and Mr Cassegrain told Mr Oliveri that he had little cash flow but would be in a position to pay the legal fees at the conclusion of the matter, due to his “numerous shareholdings and directorships in companies, some of which are worth up to $20 million.” On 19 December 2008, Oliveri provided Mr Cassegrain with an agreement which purported to include a guarantee in respect of all legal costs and disbursements. Mr Cassegrain had said to Oliveri that, “I am a director of Cassegrain Tea Tree Oil Pty Ltd. The company will provide the guarantee and indemnity.”

A further agreement in 2009 was signed which provided for annual payment of $120,000 which was signed by Mr Cassegrain both in his personal capacity and as director of the defendant. On 28 January 2016, Oliveri and Mr Cassegrain, together with Mr Lockett who had become a director of CaTTO, discussed the outstanding fees. Mr Cassegrain had been declared bankrupt, and Oliveri only recovered $239,067 as assessed by the trustee in bankruptcy on account of the payment of services of two employees of the firm. Oliveri relied on the guarantee and indemnity agreement to assert that CaTTO owed the firm $1.5 million in legal fees, but offered to not seek immediate recovery on the funds on the basis it could lodge a caveat over CaTTO’s properties. Mr Lockett refuted the validity of the guarantee and indemnity document and did not admit Oliveri’s caveatable interest.

The issue to be decided by the Court was whether Mr Cassegrain had authority to bind CaTTO to the agreement, notwithstanding it had only been signed by one of two directors, on the basis that he had held himself out to have authority to bind CaTTO.

The Guarantee

In 2008 the two directors of CaTTO were Mr Cassegrain and Mr Thomas Cassegrain. Section 127 of the Corporations Act 2001 (Cth) (Corporations Act) sets out that a company may execute a document if it is signed by two directors or a director and company secretary. The guarantee and indemnity agreement was not signed by both directors, only Mr Cassegrain.

Oliveri’s submission was that Mr Cassegrain was the managing director of the company and as managing director he had authority to bind the company, relying on the decision of the High Court in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd.[2] Oliveri sought to rely on Mr Cassegrain’s ostensible authority as the managing director to bind the company to agreements.

Additionally, Oliveri submitted that it had the protection of s 129(3) of the Corporations Act – that a person may assume that anyone who is held out by the company to be an officer has been duly appointed and has the authority to exercise the powers of such an officer.

Did Oliveri have the protection of s 129(3) of the Corporations Act?

The Court held that Oliveri was not entitled to this protection as CaTTO the company had not held Mr Cassegrain out to be an officer, but rather the only representation that occurred was by Mr Cassegrain himself. Granting Oliveri protection under section 129(3) in these circumstances would mean that anyone could claim to be a director of a company and that would enable others to assume they had been duly appointed, without any need to verify this with the company.

Additionally, section 128 of the Corporations Act sets out that the assumptions in section 129 can only be made in relation to dealings with a company, but Oliveri was only acting for Mr Cassegrain in his personal capacity. CaTTO, in its capacity as a corporation, had not engaged in any dealings with Oliveri. This barred the firm from relying on the protections of section 129.

The Court further noted that Oliveri made no enquiries whatsoever of CaTTO – such as a company search – did not ask Mr Cassegrain for proof of his authority to bind the company, and simply took his spoken word as proof he could bind the company. Additionally, the guarantee and indemnity agreement was signed without a witness, notwithstanding the provision for a witness and express written instructions to have a witness present.

Reasons why the company wasn’t bound

The Court rejected Oliveri’s suggestion that the entry into the guarantee and indemnity agreement was a dealing of CaTTO. Oliveri was not dealing with the company by simply asking it to guarantee the dealings with Mr Cassegrain in his personal litigation.

Ultimately, the company had failed to execute the guarantee and indemnity provision in accordance with s 127 of the Corporations Act. There was no evidence of CaTTO permitting Mr Cassegrain to act with sole authority to conduct company business with other persons. In any case, the relevant conduct was entirely in respect of his own business – namely personal litigation. Being bound by guarantees on the basis of one director’s ostensible authority was simply not in the course of CaTTO’s trading activities.

Key takeaways

Oliveri has provided, in many ways, a useful example of how not to engage in business with a company. When entering agreements with companies it is important to take steps to ensure that the person with whom you are dealing is authorised to act for the company, including by making any preliminary enquiries of the company. It is also important to ensure that agreements are properly executed and in accordance with the provisions of the Corporations Act.

[1] Oliveri Legal Pty Ltd v Cassegrain Tea Tree Oil Pty Ltd (No 2) [2023] NSWSC 1082.

[2] Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72.