Who Has Authority to Sign a Contract?
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Who Can Sign Contracts for a Company?
The question, “who can sign contracts on behalf of a corporation” is more complex than it appears at first glance. This question concerns the level of authority that an individual possesses. Authority is based upon two factors, the authority intended by the employer and the authority expected or perceived by third parties. In this context, authority is a function of agency law. What is the level of authority of an employee (an agent). The context for this discussion is whether the employee has the authority to sign a contract as an agent of the principal (employer)
Below we discuss the types of authority that exist under agency law and how this will affect the company.
Actual authority refers to the level of authority that an employer bestows upon the employee. This can come in the form of an employment agreement, direct command, or other expressed grant of authority. For example, if the employment agreement states that an employee will have responsibility for signing contracts on behalf of the company, then the employee has expressed or actual authority to do so.
Implied authority concerns the level of authority that a third party dealing with the employee reasonably believes that the employee has. What makes the third party’s belief reasonable can be based on any specific or general knowledge that allows the third party to form an opinion of the employee’s authority. For example, if an employee has a very senior title, it would be reasonable to assume that the employee would have the authority to sign a contract that is consistent with the responsibilities of someone with that title. For this reason, giving a lower-level employee an elevated title could vest the employee with implied authority. Another example might include a history or course of dealing with an employee. For example, if an employee signed a contract on behalf of the company in the past, then it may be reasonable to assume that the employee still has this authority. As such, allowing an employee to sign a contract (even if only one time for a special purpose) can have the effect of impliedly authorizing that employee to sign similar contracts in the future.
Apparent authority is very similar to implied authority. The difference is that the employee expresses to third parties that she has the authority to act on behalf of the employer, but that assertion is manifestly false or untrue. If the employee makes this representation and the third-party reasonably believes the representation, then the employee is deemed to have apparent authority. As such, the employer would be bound by the contract. One limitation on this type of authority is that the third-party’s reasonable belief must generally be attributable to some action of the employer. For example, if the employer expressly limited the authority of the employee, but failed to make third parties aware of this limitation in authority, then it is natural that the employer bears the risk of an employee’s unauthorized actions.