Agency; an agent's liability to third parties; non-existent principal.
Facts: A contract for the purchase and sale of land was executed in writing. Where the contract provided for the signature of the purchaser, the name 'Western Suburbs Holdings Pty Ltd' was written, and beneath this were added the signatures of Smallwood and Cooper. These two signatures were bracketed together, with the word 'Directors' written alongside. Although Smallwood and Cooper believed that the company had already been incorporated when they signed the contract, it had not been.
Issue: As the company did not actually exist when the contract was signed, were Smallwood and Cooper personally liable on the contract?
Decision: The court held that it could be inferred that Smallwood and Cooper had not intended to become personally liable on the sale. This is because they believed the company was incorporated when they signed the contract and because they signed it as agents of the company.
Reason: A person is only liable on a contract if it can be inferred from the circumstances that they intended to be a party to the contract. When a person signs a contract as an agent, on behalf of a principal, then it cannot usually be inferred that they intended to be personally liable on that contract. This is so even if the principal did not actually exist, as long as the agent believed when signing that the principal does exist. The result is different if a person signs a contract supposedly acting as an agent for a principal they know does not exist. In such circumstances, it can be inferred that the supposed agent did intend to be personally liable on the contract.
The court stated (at [4]):
"[T]he fundamental question in every case must be what the parties intended or must be fairly understood to have intended."