Signing as Director of a company or as an individual

A recent case highlights the need to engage us to advise you before signing even a simple contract for your business.

Mr. Qian Xiao appealed a decision by the Magistrates Court that found him liable for a debt owed to a builder for the fit-out of a restaurant. The appeal centered on whether Mr. Xiao was personally liable for the debt or if the contract bound his company, BBSJ Partners Pty Ltd. The contract was signed at a meeting attended by Mr. Xiao and the builder and identified Mr. Xiao as the “Owner” liable to pay the contract price. The contract did not name BBSJ Partners Pty Ltd as the “Owner” but used an email address associated with the company. The Court found that, despite some errors in the Magistrate’s reasoning, Mr. Xiao was bound as a party to the contract and thus personally liable for the debt.

The Magistrates Court proceedings began with ACT Commercial Builders Pty Ltd as the sole plaintiff and BBSJ Partners Pty Ltd as the sole defendant. Paragraph 5 of the statement of claim alleged that the plaintiff and defendant had entered into a contract, but the defendant denied this and claimed that the named parties to the contract were “Qian Xiao” and “Ian Hoare.” BBSJ Partners Pty Ltd raised the issue of the parties’ identity, prompting ACT Commercial Builders Pty Ltd to file an amended statement of claim that joined Mr. Hoare as the second plaintiff and Mr. Xiao as the second defendant.

Although the parties eventually agreed that the two corporate entities were the parties to the contract, the Magistrate did not clearly address this distinction in his judgment. The judgment referred to the “builder” without specifying whether this referred only to Mr. Hoare or jointly to Mr. Hoare and ACT Commercial Builders Pty Ltd. Additionally, referring to the four directors of BBSJ Partners Pty Ltd as “the owners” was potentially confusing as the term “owner” was used in the contract to denote the party liable to pay the contract price.

The Magistrate’s orders compounded this confusion by using the terms “builder” and “owner” instead of identifying the parties directly. This led to ambiguity about whether the orders were intended to enter judgment in favor of one or both plaintiffs and whether against one or both defendants. The defendants sought to resolve this ambiguity through the slip rule, but the Magistrate’s response did not fully clarify the matter.

Both defendants appealed the Magistrate’s orders, but the first defendant is now in liquidation and cannot prosecute the appeal without leave under the Corporations Act. Therefore, Mr. Xiao is the only active appellant.

The only issue raised in Mr. Xiao’s appeal is the identity of the party liable as “Owner” under the building contract. The appeal is brought as of right under section 274 of the Magistrates Court Act 1930 (ACT), as the amount involved is more than $2,000. However, the requirement to establish error on the part of the Magistrate still applies.

The appeal is a rehearing, and while the respondents emphasize the Magistrate’s advantage in having seen and heard the witnesses, this is of little weight in the present case since the single issue raised in the appeal falls to be determined by an objective test. Therefore, a real review of the evidence and the Magistrate’s reasons is required to determine whether the decision should be reversed.

Ground (a) of the appeal concerns the Magistrate’s apparent treatment of the three directors of BBSJ Partners Pty Ltd other than Mr. Xiao as parties to the contract. The judgment is confusing in this respect, and it appears that the Magistrate may have found that all four directors were parties to the contract. However, there was no allegation or claim in the proceedings by or against any director other than Mr. Xiao. Order 2, which dismissed each of the “owners” defenses and counterclaims, was intended to refer to the defendants’ filings.

Therefore, the ground of appeal may be addressed briefly, and it is doubtful that the Magistrate intended to make such a finding. It is more likely that the Magistrate spoke loosely when he defined the four directors as “the owners,” taking them to be a proxy for the corporate entity.

Ground (b) is the critical issue, which questions the correctness of the Magistrate’s conclusion that Mr. Hoare and Mr. Xiao, as natural persons, were parties to the contract. The ground is also wordy and can be simplified as follows:

Mr. Xiao argues that the Magistrate erred in allowing the claims of the First Respondent against the Second Appellant and the Second Respondent against the First and Second Appellant. This is because:

The Respondents claimed for a debt pursuant to the Contract;
The Contract was signed by the Second Respondent on behalf of the First Respondent and by the Second Appellant on behalf of the First Appellant, as stated in the Statement of Agreed Facts;
The submissions of the Respondents also indicate that the Contract was signed on behalf of the First and Second Respondents and the First Appellant; and
The submissions of the Appellants indicate that the Contract was signed by the Second Appellant on behalf of the First Appellant.

Mr. Xiao’s argument is that the evidence indicates that each man signed the contract on behalf of their respective company. However, it is necessary to clarify what evidence is admissible to prove the identity of the parties to the contract.

The critical issue in this case concerns the correctness of the Magistrate’s conclusion that two natural persons, Mr Hoare and Mr Xiao, were parties to the contract. The identification of the parties to the contract must be made in accordance with the objective theory of contract. Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 supports this proposition.

Mr Xiao’s argument that he signed the contract on behalf of BBSJ Partners Pty Ltd was not supported by objective evidence. He signed the contract in his own name without any indication that he was signing on behalf of the company. He did not mention that he was authorized to sign on behalf of another or invoke s 127 of the Corporations Act as his authority to sign. Another director of the company was present but did not sign the contract, as would be expected if it was being signed on behalf of a company.

Mr Xiao’s understanding of signing on behalf of the company is irrelevant, and his reliance on the other director’s understanding is inadmissible. Additionally, the additional information written by Mr Xiao on the contract is equivocal and does not clearly identify the company as the owner. The pre-contractual email correspondence and the manner in which Mr Hoare completed the contract are also not relevant to the objective determination of the identity of the owner.

Mr Xiao’s second argument relies on the Statement of Agreed Facts, which both parties provided to the Magistrate at his direction. In it, the respondents agreed that Mr Hoare signed the contract on behalf of ACT Commercial Builders Pty Ltd, and Mr Xiao signed it on behalf of BBSJ Partners Pty Ltd. While Mr Xiao did not suggest that this agreement bound the Court, he argued that before departing from it, the Court must give procedural fairness.

However, Mr Xiao’s argument appears weak since BBSJ Partners Pty Ltd first raised the issue in the pleadings about its liability as a party to the contract since the only named “Owner” was Mr Xiao. Although it can be accepted that the pleading and the agreed fact created an expectation that the Court would not depart from its finding without giving the parties a chance to make further submissions, an appeal by way of rehearing provides that opportunity now.

Mr Xiao’s submissions on this issue assume that the Court’s conclusion would be the same for both parties. However, the evidence was different for each party. All of Mr Hoare’s correspondence named him and his company, and a reasonable observer would not expect him to conduct business in his personal name. On the other hand, there was little in the contractual or pre-contractual correspondence that made it known to Mr Hoare that he was dealing with a company named “BBSJ Partners Pty Ltd.”

In his final argument, Mr Xiao cited the written submissions provided to the Magistrate, in which both parties submitted that the contract was between the companies, not the individuals. However, the respondents pointed out that the submissions also referred to “the Defendant-Owners” and “the Owners,” undermining the point made by Mr Xiao. This argument is similar to the point made about the statement of agreed facts. The question at this stage is not whether the Magistrate’s conclusion was reached fairly, but whether it was correct. In my opinion, the Magistrate was correct in finding that Mr Xiao assumed personal liability for the debt by signing the contract in his own name without any overt indication that he was signing on behalf of an unnamed company.

Regarding the respondents, while the finding in their favour was included in ground (b), little argument was directed toward that issue. I am not convinced that there is a basis for overturning that aspect of the Magistrate’s decision.