“IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their officers or duly authorized representatives.”
Usually, just above the signature block of most contracts, this short representation doesn’t get much attention. So, just who are these officers and duly authorized representatives? Do they actually have the ability to legally bind their company? Are they acting within their authority?
We exercise our understanding of authority on a daily basis. In our personal lives, for example, we sign a check for a purchase or authorize a medical provider to access our private health information. Likewise, most married folks check in with their spouse before committing to a “big” purchase or bringing home a new puppy. The failure to do so can result in the “you did what?” conversation – it’s generally better to avoid this result.
The same is true for businesses. Officers and/or employees in a business have certain levels and limits of authority. For officers (and perhaps directors) it should be expressed in writing as part of the corporate bylaws. For managers and staff it should be in a job description, but is more likely acquired by implication over time as part of job responsibilities and work assignments. Just like our personal lives, if we overstep our bounds, the boss will no doubt begin the conversation with: “You did what?” This can, however, lead to legal counsel declaring: “You didn’t have authority to do that.” Another result that is best avoided.
How is corporate authority obtained? How can we better understand when to seek confirmation of corporate authority? The answer lies in part in understanding the source of your authority and how actions bind companies.
Authority to legally bind a business or create an enforceable contract typically comes in one of two forms: “actual” or “apparent” authority. These sources of authority are quite different but can be equally binding. Understanding the differences can be a key to better decision making as part of your day to day work and ultimately protect your business from unwanted results.
It is generally good law that a principal (i.e. company) is responsible for the actions of its agents. Without describing the exceptions to this broad statement, the authority to bind a business is often specifically granted to officers (and perhaps directors) as part of the written corporate bylaws or other approved corporate resolutions. These approvals may come with limitations on the scope and/or dollar value of the authority for officers depending on their level in the organization. This is often referred to as “signature authority” or an authority matrix. When your approval to bind a business is expressed in this way the authority is “express” actual authority. Express actual authority need not be in writing; you can also get express authority orally from a superior to do a particular task or represent that you are authorized to bind the business. The other way businesses provide actual authority is via what is known as “implied” actual authority. Implied authority is usually a result of a pattern of approvals to perform certain tasks, or represent that you are authorized to bind a business, that result in an understanding that you are authorized to perform similar functions in the future. You are approved to do a certain thing and then do so over and over again without seeking additional confirmation each time the task arises. Over time this is your “implied” actual authority.
Separate from actual authority (express or implied) is “apparent” authority. This source of apparent authority is different from actual authority in that apparent authority is viewed from the third person. It is the other party to the contract and how they view the representations by you (and the business) that determine whether the contract will be considered legally binding. If the third party can be seen as reasonably viewing your representations and actions as those of the business, then it is more likely that such reliance will result in a binding contract or obligation. It is apparent authority that can create unexpected risk for a business because the business is not in control of how the third party views the facts that created the authority to bind.
If you are unsure of whether you have actual authority to perform a particular task or make certain representations it is best to ask first – before you bring home that new puppy.