In daily business life it is often the case that a company employee who holds either an administrative, purchasing or financial position is entrusted with the responsibility of negotiating a contract. Then, when the negotiations are complete, that person is the individual required to sign the contract and so to bind their company.
By necessity the employee is often the sole signatory, occasionally in the presence of a witness, but frequently not a legally recognised “officer” of the company. In other words the signatory is not a director or secretary whom the law deems to have the undoubted right to bind the company.
Occasionally, the other party to the contract will pause to query the authority of the first party’s signatory, asking whether such a signatory has the power commit their company to the contract. Can the signatory’s authority be denied? Can the company escape liability because a director did not sign instead?
The short answer is almost always that the signatory’s company is fully bound to perform the contract, whether or not the signatory was a director or secretary. This does not mean though, that the party on the other side should not take some precautionary steps in advance to verify the signatory’s bona fides.
The law recognises three kinds of authority an employee may have to bind the company for whom he or she works: actual authority, implied (or apparent) authority, and ostensible authority. Each of these three categories works in favour of the party relying on the authority of the signatory.
An example of a signatory having actual authority to bind a company, even though he or she is not a director, is where they have a power of attorney, or a less formal authorisation, such as their name and specimen signature appearing on an Authorised Signatories List or letter of authority.
Similarly, an example of a person having their company’s implied (apparent) authority to sign legal documents on the company’s behalf is where the nature of the employee’s position or role would imply certain powers. This is the common situation with contracts whose signatories are financial, managerial or administrative employees.
The third type of authority to sign a contract on behalf a company – ostensible authority – is also best explained by example. An employee may have actual or implied authority from their company to enter into a contract with another party. The employee does so, and subsequently signs a further contract with that same counterparty. It may be that the company gave the employee authority to enter into the first contract, but the employee did not obtain specific authority to enter into the second contract. The law would say that the lack of authority to sign the second contract does not matter: the party on the other side has the right to assume that the employee had authority to enter into the second contract because he or she had authority to enter into the first contract.
Ostensible authority then is a powerful legal protection in the case of repetitive dealings with a corporate customer.
The foregoing legal principles underlie many cases in the area, and find statutory expression in the Corporations Act, specifically in sections 128,129 and 769B.
In conclusion, a contract is validly signed on behalf of a corporate party if the signatory has one of three kinds of authority to do so: actual, implied or ostensible authority. It is rare for an employee acting bona fide on behalf of a company not to fall into at least one of these categories. The proviso is that the party on the other side of the contract should not have any reason to doubt the authority of the signatory concerned.
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This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.