I was wondering what contract law stipulates regarding who has the authority to sign a contract on behalf of a company. When my company has a customer sign a contract, it is usually a Vice President or XEO who signs the contract on the customer's side. So in those situations, it seems like the contract would certainly be valid based on the position of the individual. But I have had some situations, particularly with Fortune 500 customers, where the signer of the contract has a title of Manager. So I was wondering what constitutes a valid contract. If a low level employee at a customer signed a contract, I would assume that individual does not have legal authority to do so, and the contract would not be valid. But I have no idea what what the law would technically require. Please post if you know what the rules are. We are a Texas based company that does business primarily with other U.S. based companies. So my primary concern is the U.S. Thanks!
Contract Signing Authority
I am not sure of the legalities, but in practice, just about anyone can be delegated the authority to sign a contract on behalf of their company. This is usually done in writing by the board. I have not seen a counter party asked to see this.
I have seen clauses in a contract that state the person signing is authorized to sign (example below from a free online template). You may want to add something similar into your contract documents.
"The individual signing below hereby represents and warrants that s/he is duly authorized to execute and deliver this Agreement on behalf of Other Party and that this Agreement is binding upon Other Party in accordance with its terms."
If you have concerns (ie that a "manager" is signing), you should discuss with them and ask for verification they are duly authorized to sign.
I'll add that anyone with a title of xVP and up is considered an officer of the Corporation and normally has contract signing authority.
Normally means you can change this, as we did with an employment agreement specifically disallowing this authority for a VP.
Proformative offers an online course titled,
"Introduction to Contracts: A Layperson’s Primer on Reading, Risks, and Rewards," which covers these sorts of legalities.
And, here is a video introduction. to this Proformative course.
There is another concern here. I am not an attorney, and you need to speak to one about this issue; the implications can be serious. My comment comes from experience in a large company, but I think the problem would hold for a small one, too. I was told that, if someone holds themselves out as having the ability to commit the company, and the other party reasonably believes that is the case, you could be committed by that someone. Reasonable expectations might pull in anyone with a high sounding title, even a manager I would guess. The problem I experienced, though, was when a sales person acted as if they could commit the company and signed an agreement. The other company held us to it!
The delegation of authority should be the answer, but I fear perceptions count.
I do not believe the legal definition will truly help. For two main reasons - it is not uncommon for Admin support to order supplies/materials under the name of the CEO. Additionally, if supplies are ordered from a vendor and the vendor requests payment, it is unlikely you will claim the employee did not have the authority to order the supplies. Once you make that claim, you will no longer be able to use that vendor again. A vendor considers the ordering authority situation, your problem, not theirs. I suggest the focus be on the
Why not just ask for the certificate of authority or incumbency at contract signing?
In an ideal world, every type of company, be it corporation, LLC, LLP, etc., should have a legal document that delegates signing/binding authority to select individuals. In corporations, this is usually a Board resolution to the CEO and a separate Banking Resolution regarding authority to open/close accounts and check signatory rules. For a partnership, there should be an Operating Agreement. These documents, in turn, usually allows those individuals to delegate signing/binding authority to other executives. Each delegation or Grant of Authority is a legally binding document that vests signing authority in the subordinate individuals. If these documents were not prepared, one would have to look at a corporations bylaws to determine who is an Officer and the authority of an officer.
A diligent counterparty is within their rights to request a certificate of incumbency from the Secretary (or similar authorized person) of the company attesting to the person's position and signing authority that goes one step further than having a signing representation clause in a contract. The problem being that a person may sign a contract thinking s/he has authority when they don't, so you want to be sure they do.
There is a handy signature authority boilerplate here: https://www.proformative.com/resources/delegated-signature-authority-agreement. Always consider its appropriateness to your company/situation and discuss with counsel.
Do not automatically assume a "bigger" title has the authority to sign everything.
Jake nailed it. The consideration no one has mentioned is materiality. In my long-term equipment leasing and lending work, a certificate of incumbency, board resolution or partnership document showing designated signers was part of every transaction. These were typically six- to eight-figure transactions. However, in the trade receivables area, like the above examples involving routine supplies orders, obtaining documents showing who's authorized to sign was more rare because it may not be worth the headache.
The original poster may want to consider contract size limits in setting a policy about asking for proof of signing authority. Assess the risk/cost to your business of a purchaser claiming their signer wasn't authorized. This applies to both commercial contracts as well as government/military procurement.