You discover a major contract has been signed by someone who is not expressly authorised to act on behalf of your business, and you haven’t agreed the contract. What can you do?
It’s a fairly common situation for organisations to find themselves in and it can have dire consequences if your business did not agree to enter into the contract, particularly if it’s for a significant number of years, or value, or simply not in your interests.
Can the signatory’s authority be denied? Can your business escape liability because the person who signed did not have actual authority? Or is the agreement likely to be binding regardless?
Is the signatory authorised?
In most cases it will be obvious if a signatory has actual authority to bind the organisation. Examples include formal powers of attorney, copies of board resolutions, or letters setting out the scope of someone’s authority. Similarly, the managing director of an organisation will have implied actual authority to do everything that falls within the usual scope of their role.
However, even if they don’t have actual authority, they may have implied or apparent authority to bind your organisation. For instance, they might hold a position that would normally have the authority to act on your organisation’s behalf. This may be the case for people in financial, managerial or administrative roles and may depend on factors like the scope of their job role, the size of the organisation, the value of the contract and so on.
Examples of implied authority
As with most things that are implied, it can be nuanced and every situation is different. For example, an IT manager may have implied authority to enter into an agreement to replace an office server but may not have implied authority to enter into an agreement with a pension adviser to provide services to the company.
Alternatively, if someone would not normally be implied to have authority to bind the organisation, but the they are nonetheless “held out” (by words or conduct) as having authority, their signature may also be binding.
For example, a management committee of a running club informs a retailer that a particular club member will be handling the design and purchase of the club kit. In good faith, the retailer then signs a contract with that member to produce and deliver the goods.
Limitations on authority
Limitations on someone’s authority to act are usually set out in your organisation’s articles, partnership agreement, membership rules, board or meeting minutes, etc. However, your business is still likely to be bound by a contract even if the signatory exceeds a restriction in your governing documents or constitution, provided it was within the ordinary business of your organisation and the other party is acting in good faith.
Take the example of the running club above, which may be bound by the contract even if the club constitution states that a contract of that value must be signed by the chairman of the management committee.
Generally, the contract will only be binding if the other party did not know about the restrictions so their belief that the individual had authority is reasonable.
How to avoid unauthorised agreements
- Ensure that your organisation has clear policies setting out who is authorised to sign contracts on behalf of your organisation and in what circumstances.
- Give proper training to your people to ensure they are clear on when they can and can’t sign on behalf of your organisation.
- If your organisation is part of a group, make sure the correct organisation’s name is on the contract to avoid binding another business within the group.
- Make sure the other party knows who will be signing the contract, once agreed, and be clear about any limitations on what they are authorised to sign for.
This advice is by no means exhaustive and often these matters are heavily fact dependant. If you have any queries about your documents, or for a free consultation, please call Henry Mullen on 0191 211 7894 or email [email protected]