Companies signing contracts where formalities can not be followed

In some commercial dealings, having two directors sign a document or asking for a copy of a board resolution in order to verify that a representative is authorised to bind the company is not always practical or possible.

In some circumstances you may be able to assume the person you are dealing with has authority to bind the company. An outsider may assume a person has implied or apparent authority to bind a company where there is the appearance of authority conferred on that person. Where a person has such an appearance of authority, as between the company and the outsider, the company is prevented from denying that the person lacked the required authority, and as such the person who had the appearance of authority may validly bind the company, whether they had the required authority or not.

In order to assert that the person you are dealing with has implied or apparent authority, the company, or someone with actual authority, must represent the person’s authority either by:

1. Appointing the person to a particular position (for example, a managing director could be assumed to have authority to binding the company with respect to matters regarding the day to day running of the company); or
2. Allowing the person to carry out particular tasks beyond their usual authority (for example, where the company does not object to arrangements that have been entered into by a senior executive – the company’s acquiescence creates the appearance of the authority in that person). However it is important to remember that a person who purports to act on behalf of the company must act within the limits of their actual or apparent authority.

Matters you should consider when deciding whether to accept a single person’s apparent authority would include;

• the size of the company;
• the nature of its business; and
• the position held in the company by the person holding themselves out to have authority.

For example, a managing director probably does not have authority to make a decision to sell the entire company’s business.

If you are in any doubt as to the authority of the person you are dealing with, or their ability to bind the company, you should seek to have their authority verified by someone that you know has actual authority, otherwise you should insist on strict execution formalities being complied with. Contact the Commercial Team at Solari & Stock for more information.