Businesses are run off contracts. These range from agreements to rent a building, non-disclosure agreements, employment contracts, licensing agreements, supplier agreements, and many, many more. So it’s important to be clear on who has the authority to bind the company to a contract and the extent of their authority to do so.
Business Contract Basics
A contract is an agreement between two or more parties to provide goods or services in exchange for consideration (generally money). There must be a “meeting of the minds” where both parties agree to the terms of the agreement and intent to bind themselves to the arrangement. In the case of a business contract, the person signing the contract must also have authority to do so on behalf of the business.
When a business is first formed, it becomes a separate legal entity, distinct from its owners and employees. However, it cannot sign for itself nor transact it’s own business, so the business relies on its owners or authorized representatives to do so. The representatives can range from the owner to board members, managers, employees, and other personnel.
Who Has Authority
In sole-proprietorships, the owner has authority to sign agreements. The owner can delegate their authority to others. They can give complete authority to a trusted lieutenant, but more commonly they give partial authority to certain employees to sign certain types of agreements. The head of human resources, for example, can be empowered to negotiate and sign employment agreements within certain limits.
For multi-member businesses and corporations, who has signing authority for the business is set by the organizational documents, the by-laws and their edits, and the operating agreement. As a business grows, the need to have multiple people who can handle different types of transactions also grows.
Apparent Authority
Businesses run into problems when an employee who does not have the authority to enter into agreements binds the company. In these cases, the other side will likely argue that the individual, due to their title or position, seemed to have the necessary authority to bind the company. If you have someone on your team that you do not want negotiating and signing agreements on behalf of the organization, you need to make it clear to them the limits of their authority and be available when needed to help them sign the agreements needed to do their work.
If you’ve run into a problem with an agreement, reach out to the experienced team of litigators at the Dunn Law Firm. We understand business litigation and contract law and can help you understand your situation and the best way to move forward. To learn more, reach out to the Dunn Law Firm by calling (435) 628-5405 and set up a free consultation today.
