Contract Execution Basics
The execution of a contract means to sign that document, thereby agreeing to the specific terms and conditions contained within it. A contract (or at least one that is legally binding) requires the consent of all parties with the capacity to do so. This can be verbally, via physical signatures on paper documents, or through an electronic agreement.
According to the U.S. Uniform Electronic Transactions Act, electronic contracts have been found to be legally enforceable equivalent to ink on paper, and can be considered executed once both parties have agreed through electronic means . However, this has only become standard practice over the past few decades, although since most documents are now exchanged via email and are returned via scanning rather than traditional Notary services, this is not uncommon.
If a contract has not been properly executed by all involved parties, it is vulnerable to claims of unenforceability should the agreement be called into question.
Contract Execution Steps
The typical steps involved in the execution of a contract include a. preparing the contract so that it is completely filled out, signed, and dated, or, in some cases, so that only the signature and date line are left blank for the parties’ signatures (see also "Messy Workspaces, Messy Contracts"); b. obtaining all necessary signatures on the final form (this may be a combination of original signatures on a single final form, or copies of originally signed documents on each party’s copy of the contract, or in the case of electronic copies, affixing electronic signatures); c. delivering the contract to all parties; and d. retaining a copy in a safe and secure place, generally in a lockable file cabinet. The contract should be retained with any contract-related papers or correspondence and in an orderly fashion, possibly in chronological order of contract formation and thus including drafts of the contract as well as correspondence and papers relating to the negotiations, execution, delivery, and so on. If you are busy, it can be tempting to rush right away to sign the contract and begin performance, but taking the time to do the above-mentioned items will save considerable time, trouble, and expense, or even worse, a failed business deal due to the existence of a poorly drafted or executed contract.
Legal Aspects of Contract Execution
Execution of a contract refers to the actual signing or otherwise officially completing the terms and conditions agreed upon in the contract. This is the stage that transforms a potential agreement into a legally binding contract.
The binding nature of a contract once it has been executed essentially means that there is a legal obligation created for both parties that can be enforced through legal channels in the event that the terms of the contract are not carried out by either party.
For example, if a party has executed a contract that requires them to transfer a piece of property to another person for an agreed price, the person who now has ownership of the property can take action against the other party if they refuse to follow through on the terms of the contract by transferring payment for the property.
Execution is typically made official through the signing of a document, but other elements can also qualify as execution. Other ways of executing a contract include: However a contract is executed, it is important that the party carrying out the execution keeps a copy of the contract to help prove it is legally enforceable should any issues arise.
Common Contract Execution Problems
Executions "subject to" contract terms may be accepted by a Court. A contract may be executed by an authorized agent, even where the principal entity is not named. Executions given without authority are ineffective or may cause the contract to be void. Regardless of whether the execution is by an individual or entity, it is essential that the person executing the contract has legal authority to do so. For individuals, this means the person has to actually have the legal capacity to enter into the contract. For entities, the individual signing on the entity’s behalf has to be a person authorized to bind that entity.
Particular care needs to be exercised by an individual if he or she is signing "on behalf of another party". In order to bind the other party, the individuals must be properly authorized to sign by the party on whose behalf they are executing the contract. If this is not done, then they may be personally liable under the contract, as they are actually entering into the contract "on their own account" rather than on behalf of the other party. An example of the form of words which effectively conveys authority is as follows: "…signed by [insert name] her/him/them in the capacity of attorney for and on behalf of [insert company name] in accordance with the in-house authorities of the company." (emphasis added)
When it comes to executing a contract on behalf of an entity rather than an individual, it is important to understand that the person signing has to be a person who is legally authorized to bind that entity.
Contracts are often executed and signed "on behalf of" another party. An example is where one of the signatories is an agent or is the employee of a party to the contract and executes and signs the contract "on behalf of" his/her employer. In order to bind the other party, the individuals must be properly authorized to sign by the party on whose behalf they are executing the contract. If this is not done, then the persons may be personally liable under the contract, as they are actually entering into the contract "on their own account" rather than on behalf of the other party. An example of the form of words which effectively conveys authority is as follows: "…signed by [insert name] her/him/them in the capacity of attorney for and on behalf of [insert company name] in accordance with the in-house authorities of the company." (emphasis added)
It is not uncommon for a contract to be signed by a person who apparently does not hold a position with the authority to bind the entity. For example , the contract may be signed by an employee or other representative of the entity without express authority to sign the contract. If this is the case, the question arises, did the person signing have authority to execute the contract? Specifically, this question is relevant to the position if a party wishes to enforce the contract against the other party on the basis that it has been validly executed. There are two ‘sub’ questions contained in this issue. Firstly, can the party seeking to rely on the contract prove that the person who executed the contract had authority? Secondly, if the other party denies it had authority, can the person seeking to rely on the contract prove that they "genuinely believed" the person executing the contract had authority?
It is generally accepted that a contract will be binding on the entity if the person executing the contract is an agent and the contract is within the authority of the agent. In addition to the validity of the contract being subject to whether the person signing on behalf of a company was actually the proper person to sign, if the contract contains provisions which require the company to sign in a particular way, for example, stating that it must sign "executed as a deed in accordance with s127 of the Corporations Act 2001" or "executed as a deed in accordance with the in-house signing policy of the company", then, unless the contract specifies the form of execution and the contract is not in that form, the company may not be bound by the contract.
Electronic execution of a document is permitted and indeed it is important that any electronic communications and electronic signatures are capable of being admitted as evidence in Court in certain circumstances. The Uniform Law regime requires that documents are capable of being recorded on paper so it is sufficient to electronically send files to a printing device and review that electronic data on the screen before printing it. Whether you choose to print the signed document or keep it in electronic form is up to you.
Digital Contract Execution
Electronic contracts are gradually displacing contracts made on paper. The law is evolving to give recognition to this modern trend. Electronic contracts can be made in many ways, for example through emails with attachments or web-based services. With the rapid pace of technological advancement, the ways to make electronic contracts are only limited by your own creative thought.
An electronic signature can be a symbol, character, sound or even your fingerprint, if it is intended to indicate your intention to authenticate a document. E-signatures can be a scanned graphic file of your handwritten signature from your own computer, as well as those provided by third party websites offering electronic signature services.
The Electronic Transactions Act 1999 (Cth) and the Electronic Transactions Act 2000 (NSW), and other similar legislation in the other Australian states and territories, provide that a transaction will not be invalid just because it happened in electronic form provided certain conditions are met. Essentially, the transaction must be as reliable as is appropriate and must not be inconsistent with any prescribed requirements for how it is performed.
These laws also state that for electronic contracts, where a law requires a document to be signed or witnessed, signature and witness requirements will be satisfied if the law is satisfied that the method used to sign or witness the document is as reliable as is appropriate. In assessing the reliability of the technology, the following factors are considered:
When it comes to the execution of company documents in a corporate setting, directors and secretaries may sign company documents, including deeds, using an electronic signature if their written consent is obtained.
The law prefers using technology to make a record of a signature rather than legal formalities of a signature or a deed.
Contract Execution Best Practices
To ensure a smooth and legally compliant contract execution process, consider the following best practices:
- Choose the Right Method of Execution: The method of execution (e.g., electronic vs. paper, signature vs. initial) should be clear, and any requirements for additional execution copies or written consents should be followed to the letter.
- Read the Fine Print: All parties involved should read the entire contract carefully, including any fine print. Sometimes, important details concerning specific provisions or related agreements may be included therein.
- Pay Attention to Governing Law: The laws of enforcement may vary by state; therefore , ascertain what governing law will apply to the contract and whether any of its provisions are at odds with state or local statutes or regulations.
- Meet All Local and Federal Government Requirements: The Federal Acquisition Regulation (FAR) requires U.S. Government contractors and subcontractors executing contracts to comply with specific regulations and guidelines. The application of FAR requirements is generally based on the amount of the government contract or subcontract; however, even prime contractors and subcontractors that are not subject to FAR compliance requirements should pay close attention to contract details, especially when they engage subcontractors or third parties.