Understanding Section 126 of the Corporations Act: Australian Business Essentials

If you’re running a business or planning to set up a company in Australia, it’s vital to understand who is legally allowed to make decisions and sign contracts on behalf of your business. One of the most important pieces of legislation in this area is Section 126 of the Corporations Act 2001 (Cth). While this section might sound technical, it lays the foundations for how companies do business every day - especially when it comes to entering into agreements and making sure those arrangements are legally binding. In this article, we’ll break down Section 126 of the Corporations Act in plain English, explain why it matters for business owners and managers, and show you how to stay compliant so you can operate with confidence. By the end, you’ll know how your company can act through its people, what you need to watch out for, and the key legal documents that should be in place. We’ll also cover some practical tips for minimising risk and protecting your business when signing contracts or authorising others. Let’s dive in and make sense of how Section 126 of the Corporations Act influences your business’ day-to-day operations, plus what you can do to make sure your agreements are valid and enforceable from the start.

What Is Section 126 of the Corporations Act?

Section 126 of the Corporations Act 2001 (Cth), often called “Corporations Act section 126”, sets out who is legally allowed to execute (i.e. make or sign) contracts on behalf of an Australian company. It essentially specifies that:

• A company can make, vary, ratify, or discharge a contract through a person acting with its express or implied authority.
• This authority can be given to an individual, regardless of whether they are a company director, secretary, or hold any other official title.
• Such a contract can be made in writing, orally, or partially in writing and orally.

Put simply, the law recognises that a company, as a separate legal entity, can only act through the people it authorises. Section 126 means you don’t always need a director or secretary to physically sign every contract - it can also be done by any person the company gives authority to, such as a manager or trusted employee.

Why Does Section 126 of the Corporations Act Matter?

Understanding section 126 of the Corporations Act is essential because:

• It clarifies who can legally bind your company to a contract or execute documents, reducing the risk of agreements being challenged as “unauthorised”.
• It helps prevent costly disputes or misunderstandings over who has authority in your business.
• It’s a key part of risk management, especially when your business grows and more team members are dealing with suppliers, clients, or partners.

Section 126 works alongside other laws and company constitutions to ensure your business has a clear and legal way to get things done - whether that’s buying goods, signing a lease, hiring staff, or entering into major transactions. If you don’t follow these rules, you might find your contracts are unenforceable, or worse, that your business is open to lawsuits or financial loss.

Who Can Sign Contracts for a Company?

Under section 126 of the Corporations Act, your company can authorise almost anyone to sign contracts or execute documents - directors, managers, staff, or even external agents. However, it’s up to the company to ensure that:

• The person genuinely has express or implied authority (usually this comes from a board resolution, employment contract, or internal policy).
• The terms and limits of that authority are clear and communicated (e.g. a business development manager can sign off up to $20,000 contracts, but not above).

For major decisions - like selling assets, taking on large loans, or restructuring - the board usually passes a resolution (a formal decision) to authorise an individual. For day-to-day matters, authority can be set out in job descriptions or delegated formally through a power of attorney or internal company policy.

How Can You Give Someone Authority Under Section 126?

A company can give express authority (clear, written permission) through:

• A board resolution specifically naming the person and their powers
• An employment contract detailing signing rights
• A power of attorney outlining what they can do and for how long
• Internal policies or delegations of authority (e.g. an approval matrix)

Implied authority (i.e. authority inferred from someone’s position or past actions) might apply for roles like general manager or head of department, especially if it’s “customary” for someone in that role to sign agreements. To avoid disputes, always aim for clear written authority. This protects both the company and the person given the power to act. If in doubt, formalise it with a board resolution or written authorisation, and keep a record for compliance purposes.

Setting Up Your Business: Step-by-Step Guide to Structure and Contracts

When you’re establishing or growing a business in Australia, the way you handle contracts and authority should be part of your core setup. Here’s a simple pathway:

1. Decide on Your Business Structure

• Sole Trader: Simple setup but only you can contract (no “company” to delegate authority)
• Partnership: Partners act together, but always clarify who has authority
• Company: Offers limited liability and allows delegation of authority under Section 126

For most established businesses, setting up a PTY LTD company gives flexibility for growth, liability protection, and easier delegation of signing rights.

2. Register and Document Your Authority Structure

• Register your business with ASIC and obtain an ABN
• Draft or update your company constitution or governing documents to address authority to contract
• Set clear policies outlining who can sign contracts, up to what value, and for what purposes

3. Ensure Contract Validity and Compliance

• Whenever an agreement is made, keep a record of who signed, their authority, and on what basis
• If a business, customer, or supplier asks for proof of your signing authority, provide a copy of the board resolution or authorisation as needed
• If using e-signatures or online agreement platforms, ensure your process is legally compliant - see our guide on e-signatures in Australia

Are There Any Laws or Regulations That Apply on Top of Section 126?

Absolutely - while Section 126 is crucial, other laws and compliance areas are equally important for business owners:

• Section 127 of the Corporations Act: For execution of company documents (including deeds) by prescribed officeholders. Using s 127 allows counterparties to rely on s 129 assumptions.
• Australian Consumer Law (ACL): All contracts with consumers must be fair and transparent - see our Australian Consumer Law guide.
• Employment Law: If staff are empowered to sign contracts, add clear terms to their employment agreements.
• Privacy Law: Personal data handled through contracts must comply with the Australian Privacy Principles.
• Intellectual Property Law: Protect your brand and agreements with registered trade marks and written IP clauses in contracts.

Always check whether your industry or state requires specific steps for certain kinds of contracts (for example, real estate or health industries).

Common Mistakes to Avoid with Section 126 Authority

• Assuming anyone can bind the company without proper authority (always double-check internal policies!)
• Not recording or updating formal delegations - if a manager changes roles, revoke or reissue authority
• Failing to review if a contract type needs directors’ or shareholders’ resolution due to high value or risk
• Mixing up Section 126 (general contracts and document execution via authority) with Section 127 (formal company execution method and s 129 assumptions)
• Letting staff sign beyond their limits, exposing the company to unexpected liability

Regularly review and update your internal signing policies and keep them consistent with your company’s constitution and any special board limitations.

What Legal Documents Do I Need to Cover Section 126 Authority?

Getting the right legal documents in place helps you apply Section 126 of the Corporations Act smoothly and avoid disputes. We recommend considering:

• Board Resolution: Specifically authorises an individual to enter into contracts and/or execute documents (template available - Directors Resolution Template).
• Employment Agreement: Clearly states what contracts the employee is allowed to make and any monetary or subject-matter limits (read more).
• Power of Attorney: Grants authority to a person or role, usually for property or major decisions (learn more about POA).
• Delegations of Authority Policy: Sets out who within the company can approve or sign what, and any limits (often part of a staff handbook).
• Service and Supplier Agreements: Include a “signing clause” clarifying who signed and their authority.

You may not need all of these for a small operation, but even basic businesses will benefit from a Board Resolution and solid Employment Agreements. For fast-growing businesses, reviewing and formalising your authority processes is key as you scale.

What Happens If Someone Signs Without Authority?

If someone signs on behalf of your business without proper authority, the contract could be:

• Unenforceable - the company may not be bound (particularly where the other party knew or ought to have known of the lack of authority).
• Binding on the individual - if they represented they had authority and the other party reasonably relied on it.
• Open to legal challenge - potentially exposing both the company and the individual to court action or financial loss.

Always double-check authority before executing major contracts or deeds. If you’re on the receiving end (e.g., another company is signing a deal with you), request a Board Resolution or written confirmation of the person’s authority.

Practical Tips for Staying Compliant with Section 126

• Keep detailed records of all delegations and Board decisions on contract authority
• Update employment or contractor agreements if signing powers change
• Regularly review your company constitution and internal policy documents to reflect current business processes
• If unsure, get legal advice on whether a director’s signature or a general manager’s sign-off is appropriate - it’s always better to check before signing
• Ensure all your business contracts are up to date and include an explicit “authority to sign” clause

For more on avoiding typical risks, see our guide to common small business mistakes.

Key Takeaways

• Section 126 of the Corporations Act allows a company to act through authorised persons - not just directors or secretaries - to make contracts and execute documents (including deeds).
• Express or implied authority is needed for someone to legally bind the company; it’s best to record this authority in writing.
• Section 126 covers agency-based execution; Section 127 provides a formal company-execution method that enables counterparties to rely on Section 129 assumptions.
• Common pitfalls include unclear delegations, inconsistent policies, or failing to remove authority when roles change.
• Your key legal documents should include Board Resolutions, clear Employment Agreements, and an up-to-date Delegations Policy.

If in doubt or for complex transactions, consult a legal expert to ensure your contracts are valid and your business is protected.

Need help?

If you’d like a consultation on company contracts or understanding your authority structure under Section 126 of the Corporations Act, reach out to Sprintlaw at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.