Before a contract is signed, what must be checked to make sure the people signing it have the right power to make their company keep its promises?
Before a contract is signed, it is crucial to verify that the individual signing it possesses the legitimate power, known as authority, to legally bind their company to the agreement. Without proper authority, the contract may not be enforceable against the company, meaning the company might not be obligated to keep its promises. This verification process ensures legal enforceability and protects all parties involved. A company is a separate legal entity, distinct from the people who work for it, so its actions are carried out by individuals who must be empowered to act on its behalf.
There are primarily two main types of authority to consider: actual authority and apparent authority.
Actual Authority is the authority the company has genuinely given to its representative. It can be:
1. Express Actual Authority: This is explicitly granted, either verbally or in writing. Examples include a formal board resolution specifically authorizing an individual to sign a particular contract, a power of attorney document granting specific signing rights, or a job description that clearly states the employee has the power to enter into certain types of contracts on behalf of the company.
2. Implied Actual Authority: This is authority that is not explicitly stated but is reasonably necessary to carry out express authority, or is customary for someone in a particular position. For instance, if a company's sales director is expressly authorized to negotiate and finalize sales contracts, they would have implied actual authority to sign standard order forms or other related documents necessary to complete the sale, even if not explicitly told to do so.
Apparent Authority (or Ostensible Authority) arises when the company, through its words or conduct, makes a third party reasonably believe that a person has the authority to act on its behalf, even if that person does not have actual authority. The company essentially 'holds out' the individual as having authority. For example, if a company allows an employee to consistently sign similar contracts over a period of time without objection, a third party might reasonably assume that the employee has the authority to sign a new, similar contract, even if the company had internally revoked that employee's actual authority without informing the third party.
To check for proper authority, the following steps and documents should be examined:
1. Company's Constituent Documents: Request and review the company's Articles of Incorporation (sometimes called a Certificate of Incorporation or Memorandum of Association) and its Bylaws (or Articles of Association). The Articles of Incorporation define the company's fundamental purpose, powers, and capacity – what it is legally permitted to do. If a contract falls outside these defined powers, it might be an 'ultra vires' act, meaning beyond the company's legal capacity, and potentially void. The Bylaws set out the internal rules governing the company's operation, including how decisions are made, who holds specific roles, and who has the authority to bind the company in different circumstances, often specifying required approvals for various transactions (e.g., board approval for contracts exceeding a certain value).
2. Board Resolutions and Meeting Minutes: For significant contracts, especially those outside the ordinary course of business or involving large sums, ask for a copy of the Board Resolution or relevant meeting minutes where the company's board of directors (or equivalent governing body) explicitly authorized the transaction and designated the specific individual(s) to sign the contract. This provides clear express actual authority.
3. Power of Attorney: If an individual is signing on behalf of the company as an agent, request a formal Power of Attorney document. This written authorization grants specific authority to an agent to perform designated acts on behalf of the company, often detailing the scope and limitations of that authority.
4. Corporate Registry Information: Publicly available information from the relevant corporate registry (e.g., Companies House in the UK, Secretary of State in the US) can confirm the registered directors and officers of the company. While this doesn't always detail specific signing limits, it helps verify that the signatory holds an official position within the company.
5. Job Title and Company Structure: Understand the signatory's job title and their position within the company's organizational hierarchy. While a job title alone is not definitive proof of authority, it helps assess whether the type of contract being signed is consistent with the usual responsibilities of that role. However, never rely solely on a job title.
6. Representations and Warranties in the Contract: Include specific clauses in the contract where the other party explicitly represents and warrants (promises) that the signatory has full power and authority to enter into and perform the agreement. While this does not create authority if none exists, it shifts the risk. If the representation turns out to be false, the other party could be liable for breach of contract.
7. Legal Opinion: For very large or complex transactions, it may be prudent to request a legal opinion from the other company's legal counsel. This is a formal letter from a lawyer confirming that the company is duly organized, has the power to enter the contract, and that the signatory is properly authorized to bind the company.
By systematically checking these elements, a party can significantly mitigate the risk of entering into an unenforceable contract due to a lack of signatory authority.