Understanding who can bind your company to a contract isn’t just a technicality - it’s essential risk management for every Australian business. If you assume only directors can sign, or that job titles alone create authority, you could end up with unenforceable contracts (or the opposite: surprise liabilities you didn’t expect).
Section 126 of the Corporations Act 2001 (Cth) is the core rule that lets a company act through its people - not just its directors. It explains how employees and agents can make, vary or discharge contracts on a company’s behalf when they have authority. It works alongside section 127 (the “formal execution” rule), which gives you a safe and simple way to execute certain documents.
In this guide, we’ll explain what section 126 does, how it differs from section 127 (including the updated position for sole directors and e-signatures), practical steps to delegate authority properly, and the common pitfalls to avoid. By the end, you’ll know how to keep your contracting process efficient and legally sound.
What Is Section 126 Of The Corporations Act?
Section 126 says a company’s power to make, vary, ratify, or discharge a contract can be exercised by an individual acting with the company’s express or implied authority. In plain English, if someone has authority from the company (by role, by resolution, by policy or by conduct), they can bind the company to a contract.
Key points to remember:
- A company can act through officers, employees, and agents - not just directors.
- Authority can be express (clearly granted) or implied (arising from a person’s position or your business’ usual practices).
- How the contract is formed is flexible: it could be a signed document, a purchase order, an email exchange, or even conduct - provided the person has authority and the essential elements of a contract exist.
Section 126 is designed for the realities of business. Directors don’t need to sign every stationery order, SaaS subscription or service agreement. Instead, you can empower team members to get things done - provided you define and document that authority.
How Section 126 Works Day-To-Day
In everyday contracting, section 126 is all about clarity of authority and the capacity of your staff to act for the company. The more deliberate you are about delegating, the less room there is for disputes later.
Express Authority (Best Practice)
Express authority is when you clearly grant power to someone to bind the company in defined circumstances. This is typically documented in:
- A board or director resolution setting approval limits (for example, a manager can approve supplier contracts up to $20,000). A simple starting point is a clear internal resolution or a tailored Directors’ Resolution template.
- Employment contracts or contractor agreements that include specific signing or approval authority for a role. If you’re updating staff paperwork, make sure the Employment Contract reflects those responsibilities and limits.
- A delegation of authority policy that everyone can reference (and that you keep up to date as the business grows).
Express authority is the safest approach, especially for larger or higher-risk commitments.
Implied Authority (Practical, But Riskier)
Implied authority can arise from a person’s position, usual responsibilities, or your past dealings. For example, a purchasing manager who regularly orders stock will generally have implied authority for routine orders. This is practical, but it’s less certain than express authority - especially if someone acts outside their usual scope or exceeds a dollar threshold.
Apparent Authority And The Assumptions Rule
It’s important to distinguish authority under section 126 from the assumptions that outsiders can make under the Corporations Act. The “assumptions” (often called the indoor management rule, in section 129) let a counterparty assume that a company’s internal procedures have been followed and that people are properly appointed to their roles. This protects third parties who deal with your company in good faith.
However, section 126 is about your company’s internal grant of power - it doesn’t automatically create authority just because a counterparty assumes it. To avoid confusion, keep your internal delegations in writing and communicate clearly with suppliers and customers about who can sign for your business.
Section 126 Vs Section 127: What’s The Difference?
Section 126 allows an authorised person to bind the company to contracts in a general sense. Section 127, by contrast, is about formally executing documents on behalf of a company (for example, deeds or agreements where the other party wants the certainty of a statutory “safe harbour”).
- Section 126: Everyday contracting through authorised officers, employees, or agents. Flexible and efficient for routine deals, purchase orders and service agreements - as long as authority is clear.
- Section 127: A formal execution method that gives counterparties comfort the document is properly executed. It sets out who can sign: two directors, a director and a company secretary, or, for a proprietary company, a sole director (even if they are not also the company secretary).
Recent changes to the Corporations Act make this even more practical. A sole director of a proprietary company can now execute under section 127 without needing to also be the company secretary, and electronic execution is expressly recognised. For a deeper dive into the formalities and signature blocks, it’s worth reviewing Signing Documents Under Section 127 and how this interacts with wet ink vs electronic signatures.
How do you decide which one to use? As a rule of thumb:
- For routine or lower-value contracts, section 126 (via your delegated authorities) is usually appropriate.
- For deeds, property transactions, bank documents or high-value commercial agreements, section 127 execution is commonly requested and provides extra certainty.
Both sections can operate side-by-side. Section 126 doesn’t limit section 127, and section 127 doesn’t stop you from using everyday delegation under section 126. Your contracting playbook should include both.
Delegating Authority Properly: Practical Steps And Documents
Clear, consistent delegation is the easiest way to speed up deals and reduce risk. Here’s a practical approach you can adopt right away.
1) Set Delegation Levels (And Put Them In Writing)
Decide who can approve and sign what - and up to what dollar limits or risk thresholds. Capture this in a board or director resolution and a short delegation policy. As your team changes, refresh your resolution and policy, and tell your key suppliers who the right contacts are. If you’re formalising this for the first time, a concise Directors’ Resolution is a good anchor document.
2) Align Employment Contracts And Role Descriptions
If a role needs signing authority, spell that out in the Employment Contract and the position description. Include any monetary caps, categories (for example, IT subscriptions, supplier agreements, variations to existing terms), and any counter-sign requirements for higher-risk matters.
In addition to your policy and contracts, consider a simple “letter of authority” or an internal sign-off checklist for larger deals. Where a third party needs assurance, provide a copy of the relevant resolution or an updated authorised signatory list. If you regularly empower someone external to act on your behalf, it may be helpful to understand what an Authority To Act form does and when to use it.
4) Check Your Constitution And Shareholder Settings
Your Company Constitution or shareholders’ arrangements might set consent thresholds or restrict who can bind the company above certain limits. If you have co-founders or investors, a well-drafted Shareholders Agreement often includes “reserved matters” for bigger commitments. Make sure your delegation policy lines up with these governing documents so there’s no conflict.
5) Keep Your Templates And Signature Blocks Consistent
Update your contract templates with correct signature blocks for section 126 (authorised representative) and section 127 (formal execution). Consistency reduces mistakes and makes it easier for your team to follow the right process every time. If you need help refining templates and execution clauses, tailored support through Contract Drafting will save time and headaches.
Common Risks And How To Avoid Them
Even well-run businesses get caught out by avoidable execution mistakes. Here are common pitfalls and ways to stay clear of trouble.
- No written authority. If authority isn’t documented, you risk disputes over whether someone could bind the company. Put delegations and limits in writing and refresh them as roles change.
- Outdated signatory lists. When staff leave or roles change, notify key counterparties immediately. Otherwise, you could be bound by deals a former employee informally “agrees” to.
- Authority creep. Over time, staff start doing more than their initial scope. Revisit limits regularly and provide training so everyone knows the boundaries.
- Conflicts with governing documents. If your constitution, resolutions and policies don’t line up, you invite confusion. Keep all documents consistent.
- Using the wrong execution method. Some documents (like deeds) are best executed under section 127 for certainty. If in doubt, choose section 127 - especially for high-value or long-term commitments.
- Assuming email acceptance covers everything. Email acceptance can form a binding contract, but make sure the right person is doing the agreeing and that your internal approval steps are followed.
Practical tip: run a short training session for anyone who negotiates or signs agreements. Walk through your delegation policy, signature blocks, and when to escalate for director approval.
Best Practice Checklist To Execute Contracts Correctly
Use this quick checklist before you send or sign your next agreement:
- Confirm the method: Are you using section 126 (authorised representative) or section 127 (formal execution)? Choose the right path for the document and its risk profile.
- Check the authority: Does the person signing fall within their delegated authority (value/risk/category)? If not, escalate.
- Use the correct signature block: If it’s section 127, follow the statutory signing layout and ensure the right officeholders sign (including a sole director for proprietary companies where applicable). If it’s section 126, state the person is signing as an authorised representative.
- Leverage e-signatures appropriately: Electronic execution is broadly supported. Still, confirm counterparties are comfortable and that the document type is suitable for e-signing. If the other party requests traditional signing, follow any agreed process outlined in the contract. For background on formats, see the comparison of wet ink vs electronic signatures.
- Recordkeeping: File the signed agreement, the approval email or resolution, and any internal notes about the authority used. Good records make post-deal questions much easier to resolve.
- Keep templates clean: Standardise your contract templates and playbook notes (for example, which agreements are deeds, which require section 127, who can sign what). If you don’t have a playbook, build one as you go - or get help through Contract Drafting to set it up properly.
- Online contracts: If your customers accept terms online, ensure your clickwrap or browsewrap process clearly captures consent and that the person acting for your company has authority to publish or update those terms. Make sure your website or platform also includes a current Privacy Policy for compliance where personal information is collected.
Finally, double-check your internal approvals before you hit “send.” A quick second glance at the authority level and signature block catches most execution issues.
Key Takeaways
- Section 126 lets your company enter, vary or discharge contracts through authorised officers, employees and agents - you don’t need a director to sign every deal.
- Authority should be clear and preferably written (via resolutions, contracts and policies). Implied authority can work for routine matters, but it’s less certain.
- Section 127 is a complementary “safe harbour” for formal execution of documents like deeds. Proprietary companies can now have a sole director execute under section 127, and electronic execution is recognised.
- Align your delegations with your Company Constitution and any Shareholders Agreement so there are no conflicts about who can bind the company.
- Avoid common pitfalls by documenting authority, refreshing signatory lists when staff change, keeping signature blocks consistent, and choosing the right execution method for each document.
- A simple playbook and solid templates will speed up contracting and reduce risk - and getting tailored help with Contract Drafting or your Employment Contracts can set you up for growth.
If you’d like a consultation on setting up your company’s authority structure or you need help reviewing your execution clauses and templates, reach out to our team at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
