Authority to enter into contracts - why it matters

Types of legal authority – express, implied, ostensible or no authority?

The question of whether someone has legal authority on behalf of a company or business arises in many situations but the most common and important is where you are dealing with a business agent. You should not assume, especially with important contracts, that the agent has legal authority to bind the principal.

The best way to avoid legal risks is to ensure you get clear written confirmation that the person you are dealing with has authority to bind the other party.

What is ostensible or apparent authority?

Ostensible or apparent authority arises usually when dealing with business agents.  To successfully claim that an agent had apparent authority to bind the principal, there are a number of legal tests that must all be satisfied, which are :

• A representation was made by the principal that the agent has authority to enter into the type of contract in question

• The person making the representation must have had actual authority.

• The representation induced you to enter into the contract.

Avoiding problems later relating to claims there was no authority to agree contract terms

The following are some of the key things to consider and put in place to reduce the risks later :-

• Get express confirmation - if in doubt seek clarification as to whether the person you are dealing with has authority. Don’t assume that they do just based solely on a title.

• High value/importance contracts - the more high value or important the contract is, the greater the need for care and vigilance.

• Be wary of variations to your contract - many contracts are ongoing and there are adjustments to the way the contract operates in reality. You may be dealing with different representatives on the other side as the contract continues. Be aware of the issue of authority throughout the duration of the contract.

Company directors – express, implied or ostensible authority?

The starting point is that, to the surprise of many, just because a director is a director does not mean he or she has express or implied authority to legally bind the company.

This is reflected by the Companies Acts. Section 43(1) (b) of the Companies Act provides that a contract may be made on behalf of a company by any person acting with the company’s express or implied authority.

So, the reality is, if you are dealing with a company director, you should check whether that person has authority especially if you have been put on notice that the director may not have sole authority. This in turn tends to depend on the value/importance of the contract or situation you are dealing with.

On the positive side, unless there are reasons for you to doubt the director or other company employee has authority and you have acted in good faith, it is likely to be difficult to successfully claim lack of authority. However, avoiding a dispute later is always an important consideration and objective.

So, common sense and situational sense is important. Consider who you are dealing with, whether they are for example a Managing Director, which tends to suggest implied authority, or a non-executive director, which may give reason to ask for further clear authorisation.

Agents authority

Where an agent no longer has authority, the principal should be careful to ensure that 3rd parties with whom that agent has a history of ongoing dealings are advised that the agent no longer has authority. Without this there is a significant legal risk that such 3rd parties, acting in good faith, may be entitled to assume the agent still has authority.

Partnerships

Unlike limited companies and Limited Liability Partnerships, a general partnership has no separate legal entity status from the partners. The key question which generally arises for general partnerships is therefore, can 1 partner bind all partners legally?

Generally speaking the answer is yes, and because partners are jointly and severally liable for debts of the partnership, this creates potentially very big risks. Partners need to take steps to protect themselves against this risk, both in terms of clear provisions on authority and limitations on authority in a partnership agreement and in dealing with 3rd parties.

Employee authority

An employee may have express, implied or ostensible (apparent) authority. This is particularly important in relation to any material changes or variations to a contract such as timing, payment terms, specifications, performance and the value of the contract. If in doubt, seek express confirmation. Problems can arise especially where a contract requires ongoing input from different personnel in a company.

Legal advice needed?

Legal and factual issues relating to whether a person has legal authority to enter into a contract or bind a company or partnership are complex and fraught with legal pitfalls. Our commercial lawyers and dispute resolution lawyers can guide you through to ensure you reduce risks and protect your interests.

Please do get in contact whether at the contract stage or where a dispute has arisen.