When an individual enters into a contract, their signature signifies their intent to be bound. Corporations and limited liability companies are distinct legal entities that must act through human agents. The validity of any corporate agreement rests entirely on whether the person signing possesses the legal power to commit the entity to the contract’s obligations. A contract signed by an unauthorized party may be unenforceable, leaving the counterparty without recourse against the company. Verifying the signer’s standing is a necessary step in mitigating commercial risk.
The Foundation of Corporate Signing Authority
The power to legally bind a company is rooted in Agency Law. This framework establishes that the company, as the principal, grants authority to certain individuals, the agents, to perform legal acts on its behalf. Corporate contracts are valid and enforceable only if the signing agent acted with one of two primary types of authority: actual authority or apparent authority.
Actual authority represents the internal permission granted by the corporation to the agent, which can be either express or implied. Express actual authority is a clear grant of power, such as a formal resolution passed by the board of directors. Implied actual authority is the power necessary for the agent to carry out the duties expressly assigned to them. Establishing actual authority requires examining the company’s internal governing documents.
Roles with Inherent Authority to Bind the Company
Certain high-ranking corporate officers possess inherent actual authority based solely on their title and the ordinary course of their duties. The Chief Executive Officer (CEO) typically holds the broadest scope of inherent authority. The CEO is empowered to enter into contracts that fall within the normal operations of the business, such as operational, supply, and employment agreements.
The Chief Financial Officer (CFO) holds inherent authority related to financial matters, including managing investments and signing loan documents. This inherent authority is generally limited to ordinary transactions. Extraordinary transactions, such as the sale of all corporate assets, usually require formal authorization from the board of directors or shareholders.
Authority Granted by Internal Delegation
Signing authority is frequently extended to employees who do not hold high-level officer positions, such as division heads or procurement managers, through a formal delegation process. This delegation is a grant of express actual authority that must be documented within the company’s internal governance structure. The company’s Bylaws often specify the general contractual limits and powers assigned to various management tiers.
For specific or high-value transactions, the Board of Directors grants authority through a Board Resolution. This formal, written document authorizes a named individual to execute a specific contract, such as a commercial lease. Delegated authority is often accompanied by specific limitations, such as a maximum dollar threshold for the contract value.
Understanding Apparent Authority
Apparent authority is a distinct legal concept focusing on the perception of the third party, not the company’s internal authorization. This authority arises when the company, through its words or conduct, leads a reasonable third party to believe that a specific agent has the power to bind the entity, even if the agent lacks actual authority internally. The corporation’s actions, or ratification of past behaviors, create this external impression of empowerment.
For instance, if a sales manager consistently signs large deals that the company honors, the company creates a reasonable impression of authority for future contracts. If the manager signs a new, unapproved contract, the company may still be bound if the counterparty reasonably relied on the company’s past conduct. Apparent authority protects the third party who relied in good faith on the company’s external representations.
The Risks of Signing Without Proper Authorization
When an individual signs a contract without actual or apparent authority, the legal consequences affect both the company and the unauthorized signer. The primary risk is that the contract may be deemed voidable, meaning the corporation is not legally obligated to perform the terms of the agreement. Since the company never legally consented, the counterparty may be left with an unenforceable contract and a financial loss.
The individual who signed the document may face personal financial liability to the counterparty. This liability stems from a breach of the implied warranty of authority, which is an assurance that the signer possesses the power to bind the company. If the company disavows the contract, the unauthorized agent can be sued directly for damages resulting from their misrepresentation.
Practical Steps for Verifying Authority
Parties entering into a contract must perform due diligence to ensure the person signing is properly authorized, mitigating the risk of non-enforcement. The most reliable method is to request specific documentation that formally establishes the agent’s power to act.
For major transactions, a party should require a certified copy of the Board Resolution specifically authorizing the transaction and naming the individual empowered to sign the contract. This resolution must be certified by the Corporate Secretary, who attests that the document was properly adopted by the board.
Requesting a Certificate of Incumbency is another standard practice, as this document, also signed by the Corporate Secretary, officially confirms the title and signature of the person authorized to execute the agreement. Additionally, a counterparty should request to review the company’s Bylaws, particularly the sections detailing the powers and limitations of various officers and managers.