Apparent Authority: Who Can Bind Your Company to Contracts?
Let’s say that you get notice that you are being sued for breach of contract. That sounds odd to you because you never signed any contract at all. And you are right—you didn’t sign the contract that you are being sued for. Someone else did, and by doing so, they bound your company to a contract that had you known, you never would have agreed to or signed.
The Dilemma of Apparent Authority
This is a problem that many companies have. On the one hand, the owner and CEO can’t be the only person who can sign contracts, at least, in large companies. The owner may be too busy, and may want to delegate those tasks. On the other hand, not every employee can just go around signing contracts for and on behalf of your company.
And it does happen that an employee, contractor, or just someone in your company that shouldn’t have the legal ability to sign, ends up signing an agreement and binding your company. The other side to the contradict may have no idea that the person who signed and bound your company had no authority to do so.
When Can Someone Else Sign?
When is your company bound by something that someone signed, when that person isn’t authorized to sign? In large part it comes down to what is called apparent authority.
A court will ask what you did, or didn’t do, that gave a third party (the other side to the contract) a reasonable belief that the person who signed a contract was legally authorized to bind your company to that contract.
It comes down to more than what your agent says. So, if some employee tells the world that he or she can sign contracts for your business, that isn’t enough. Courts will look to other factors, to see if it was reasonable for the other side of the contract to rely on the authority of that person to sign the contract.
Mistakes Companies Make
Companies often make mistakes that represent to the world that someone can sign a contract, when in fact, he or she can’t.
For example, titles tell a lot even though they aren’t determinative of whether someone has or doesn’t have authority. Don’t call someone a “vice president,” if they are just an office employee. Titles do convey some level of authority.
If you tell a third party who wants to enter into a contract that they can “speak with my vice president,” you also may be conveying that the vice president has the authority that you have—to sign and agree to a contract.
You can also file corporate resolutions, or statements with the Department of Corporations, that detail who can bind the company.
If you draft a contract, make sure it’s your name on the signature line—not just a blank line that anybody can sign on and for.
Avoid legal problems and let us handle your contracts and contract disputes. Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954-440-3993 today.