PPS Alert: Electronic contracts – what’s new? Part 2 – Authority

Oct 24 2016

Publications

In our February PPS Alert, we looked at the court decision in Stellard Pty Ltd & Anor (“Stellard”) v North Queensland Fuel Pty Ltd (“NQF”)[1] (“Stellard’s Case”), where the court ruled that the name of an agent typed in an email was a “signature” which bound the company under a land contract.  We also looked at when security agreements concerning personal property under the PPS (including Credit Applications and their Terms and Conditions of Trade (called “T+C’s”)) and guarantees need to be “signed”, whether foreign laws are relevant, and noted that proper processes and systems (both manual and online) for ensuring a signature is obtained are crucial.

In Part 2 of this series, we look at who has sufficient “authority” to enter into an agreement or sign on behalf of a customer or guarantor, and what happens if they do not have authority.

Why is sufficient authority essential?

All contracts must be entered into by a person who is the relevant party or their “duly authorised” agent with sufficient authority.  Often, an agent’s authority will be limited to entering into only certain contracts.

If an agent lacks sufficient authority, then no contract is formed, and no rights can be enforced as a contract eg a charge over assets (called a “charging clause”) will not enforceable.  Whilst other rights might be available, these are often expensive to enforce.

Examples of contracts, guarantees and documents made or entered into by an agent

Stellard’s Case – sale of land and business by non-director

  • NQF’s apparent principal asset was land and a service station business located on it.
  • All relevant email communications were with only NQF’s agent, being the director’s son Drew.
  • Drew was not a current registered director of NQF according to ASIC records. No Power of Attorney appeared to have been registered granting him authority to deal with NQF’s interest in land, and it was not alleged that any statement had ever been provided to Stellard by the directors of NQF stating that Drew had NQF’s authority to enter into any contract.
  • It was however expressly admitted by NQF in court documents that Drew was duly authorised to enter into the relevant contract. This meant that it was not necessary for Stellard to prove that Drew was NQF’s duly authorised agent.  Generally however, a non-director would not have authority to grant an interest in land.

When looking to obtain an interest in land, or charging clause, consider having all officers sign, especially if it is a principal asset.

Auto Moto Corporation Case [2] – salesman had authority to buy and sell cars but had no authority to give a charge over the customer’s assets

  • A supplier sold expensive imported cars to a car dealership. All discussions were conducted with a head salesman, who was neither a director nor shareholder.
  • Cars were sold to the dealership on the basis that the supplier retained title until paid, and normally the supplier would receive payment on a sale occurring.
  • Subsequently, as the debt owed grew to over $1 million, the supplier provided a written general security agreement (“GSA”) to the salesman, contained a charging clause by which the dealership was to grant a charge over all of its business to the supplier.
  • A registration was lodged under the Personal Property Securities Act 2009 (“PPSA”) by the supplier based on the GSA.
  • The GSA was never signed by the dealership’s directors, nor was there any evidence that the directors had ever adopted, discussed or seen the GSA.
  • The dealership went into liquidation.
  • The court held that:
    • The salesman was the duly authorised agent of the dealership to buy and sell cars, and to grant the retention of title security interest.
    • This did not mean however that the salesman was also duly authorised to enter into the GSA. It was beyond the actual or implied authority of salesman to grant such a charge.
    • The GSA was not enforceable and so the PPSA registration made by the supplier was deregistered and the supplier was an unsecured creditor for over $1 million.

Takeaway – obtain relevant ASIC and other searches to identify who is duly authorised to enter into agreements to give a charge over a customer’s real and personal property.

Williams Group Australia (“WGA”) Case [3] – electronic signature not inserted by guarantor’s duly “authorised agent” and so guarantee not enforceable

  • WGA was a building material supplier. Its customer was IDH Modular (“IDH”).
  • Mr B, Mr W and Mr C were IDH’s directors, and Ms H was its admin assistant.
  • Mr A set up an electronic signing system for the directors to use called “Hellofax”. Hellofax permitted each user to upload a copy of their signature which could be applied to documents electronically.
  • Mr B, Mr W and Mr C all uploaded copies of their signatures, and were provided with unique user names and passwords to be able to access Hellofax. Only persons with the suitable user name and password could access the system and use the related signature.
  • As further protection, whenever a document was to be signed using a director’s Hellofax, the relevant director would be emailed. After their signature had been applied, the relevant director was sent another email as to their signature having being applied to the document.
  • Lastly, the Hellofax system also logged from where and when a user of the signature had accessed the system.
  • Mr C never changed his user name or password.
  • IDH went into liquidation owing WGA $1M.
  • The evidence showed that Mr C’s signature had been placed on the guarantee by a person who had logged in at IDH’s Murwillumbah office, at a time when Mr C was not in Murwillumbah. It could not be proven who the person was who used his (unchanged) user name and password, or that Mr C had read the emails as to the use of his electronic signature.
  • The court held:
    • there was no evidence that any person had been actually authorised to place Mr C’s signature to any document, or that Mr C had led WGA to believe that Mr C had granted such authority to others. Mr C’s failure to change his password was not sufficient;
    • that since Mr C had not read the emails as to his signature being used, he could not be said to have ratified any unlawful use of his signature.

and therefore the guarantee was not enforceable against Mr C and he was not liable for the debt owed.

Takeaway – make sure that you communicate directly with and even in person with a guarantor to make sure that they have signed a guarantee, and do not rely on solely an electronic signature.

Menzies [4] – accountant handled all communications with banks and forged signature of client on loans, real property mortgages and guarantees – contracts not binding on client

  • A client placed her trust in her accountant to assist in making a loan application.
  • The accountant used her ID documents to forge her signature on numerous loans, personal guarantees and to grant mortgages over the client’s properties.
  • All communication, bank statements and correspondence were sent via the accountant’s office.
  • Client was not liable for the fraud of her accountant as he had no sufficient authority.

Tai Hing Cotton Mill Ltd Case[5] – HK$5M in cheques signed by customer’s employee who was not an authorised signatory on bank account – bank liable for entire loss

  • The customer’s employee made off with the ill-gotten funds.
  • The company did not complain to the bank for some time after receiving bank statements.
  • Because of the terms of the contract between the bank and its customer, the bank was still liable for the employee’s fraud and was required to refund the HK$5M in full, despite the passage of time.

Takeaways – credit providers are also providers of finance.  Whilst cheques are used less today, fraudulent ordering by employees of goods and obtaining of fraudulent refunds by them on customer accounts are possible exposure for suppliers under T+C’s.  T+C’s and guarantees should be reviewed to ensure that the customer and guarantors will be liable for any loss due to any fraud or forgery by the customer’s employees, and especially if not notified within a stated period of time.

Takeaways

A contract, guarantee and other documents generally do not grant any contractual rights to a creditor if they were not signed or entered into by a duly authorised agent with sufficient authority.

Electronic “signature” systems and processes might seem fine and efficient, however they should be reviewed to ensure that they are accurately verifying the lawful and authorised placement of signatures.  Independent and direct contact with any guarantors is especially important.

Consider the risk if you fail to have contracts signed by a duly authorised agent, as you will not likely be able to enforce rights against assets, the other party, guarantors or third parties, or even lodge PPSA security interests.

Review your contracts to ensure that if a customer’s own employees effect a fraud, the customer is still liable.

Stay tuned for the final Part 3 of this series.  In the final part, we will look at when parties are legally bound during negotiations, even if and when they say “subject to contract”.

Written by:

Peter Mills |  Special Counsel | +61 7 3338 7921 | pmills@tglaw.com.au

Robert Gallagher | Partner | +61 7 3338 7920 | rgallagher@tglaw.com.au

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[1] Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119

[2] Auto Moto Corporation Pty Ltd v. SMP Solutions Pty Ltd [2013] NSWSC 1403

[3] Williams Group Australia Pty Ltd v. Crocker [2015] NSWSC 1907

[4] Perpetual Trustees Victoria Ltd v Menzies [2012] NSWSC 1066

[5] Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] 3 WLR 317