by Sharon Fryer
How can you be sure that the person signing a contract on behalf of a company has the power to make that commitment for the company?
If the contract is governed by English law, you are able to benefit from some statutory protections. An agreement which a company enters into with a purchaser acting in good faith will be deemed to have been duly executed if signed by a director of the company in the presence of a witness.1 If the signatory is not a director, you should ask for evidence of his authorisation (for example, a resolution of the board of directors or a power of attorney).
In relation to overseas companies, there is a statutory presumption of proper execution if a document purports to be signed by a person who, under the laws of the company’s home territory, is acting on the authority of the company. This means that it is essential to understand who has authority, under that local law, to bind the company. This will differ from country to country, and if there is any doubt, it would be prudent to obtain a legal opinion from local counsel.
Contracts often include warranties that the company has taken all necessary action to approve entering into the contract and that the contract’s terms will be binding on the company. However, if the signatory does not have power (either in reality or under a legal presumption) to commit the company to the contract, those warranties, being part of an ineffective document, will equally be without effect.
Therefore, this is no substitute for checking independently that the signatory does indeed have the necessary powers.
Looking from the other side – a director who commits the company to a transaction without proper authority from the board and/or shareholders – risks being personally liable to compensate the company for any loss it suffers as a result of his unauthorised action. The signatory therefore also has a vested interest in being clear as to his authorisation.
1 Companies Act 2006 s. 44