AUTHOR: HENRY R. STIEPEL
After sometimes weeks or even months of negotiating a contract, everyone is overjoyed to circulate the signature sets – – with the signature lines left blank to be filled in by each party. The scribbled signatures are circulated, and everyone is happy that the “deal is done”. We often overlook, though, the basic question of whether those signing on behalf of a party in fact have the authority to bind that party to the contract. If the wrong person signs it, the contract will be invalid or at least voidable. This article briefly touches on a few of the issues and practicalities.
Legal entities (e.g., corporations, partnerships and limited liability companies) have the same powers to contract as do natural persons, so long as it’s done correctly. For a corporation, the authority to enter into a contract must either be authorized or ratified by the board of directors or the authority must separately arise from the actual or apparent authority of the signing officer(s). In other words, the board must specifically approve of the action or the other party must otherwise be able to rely on the authority of the officer whose signature has been presented. For corporations, even if the board did not expressly authorize the action, the other party can rely on the signed document if those signing fall within the safe harbor of Corporations Code Section 313. Section 313 provides that no action by a corporation can be invalidated by reason of the signing officers not having actual authority to sign if the contract is signed by:
A. The chairman of the board, the president or any vice-president, and
B. The secretary, any assistant secretary, the chief financial officer or any assistant treasure.
The application of Section 313 assumes that the other party does not have actual knowledge that the corporation’s signing officers do not have authority to bind the company.
Signing authority for general partnerships generally poses limited issues since every general partner is considered an agent for the purpose of the partnership’s business. The same generally holds true for a general partner signing on behalf of a limited partnership. In contrast, a limited partner will not have the power to bind the partnership.
The signing authority of members, managers or officers of limited liability companies depends entirely on how the LLC is structured under its operating agreement. For example, if the LLC is managed by all of the members, each member is generally considered an agent of the LLC. If the LLC is managed by a single member or by one or more managers, the non-managing members are not agents of the LLC by virtue of their being members; rather, the managers are agents of the LLC for purposes of carrying out the LLC’s business. Accordingly, a review of the LLC’s operating agreement would be appropriate.
Should you contract with a trust, the trustee(s) authority to bind the trust is governed by the Probate Code and, of course, by the trust instrument itself.
What happens if the signor acted outside of the scope of his or her authority and those signing are not those within, for example, the safe harbor of Corporation Code Section 313 or otherwise does not have authority? The answer, of course, depends on the ensuing facts. In some cases, the contract is still enforceable even though the contract was not executed by the proper signor. For example, partial performance of an oral contract involving the sale or lease of real property where one party has fully performed is enforceable against the other party. Also, a party that induces the other party to take action in reliance on the contract that it otherwise would not have taken, and would be unjustly enriched, is estopped from asserting a defense to the enforcement of the contract. However, the obvious goal is to resolve questions of authority at the time the contract is signed in order to provide certainty of enforceability and avoid subsequent conflict (and litigation). As a result, the prudent approach is to be sure that those signing your contract have the requisite authority to do so before you incur the costs to perform under that contract.
HENRY R. STIEPEL
Henry R. Stiepel represents owners, investors, asset managers, and corporate users in industrial and commercial real property sales, acquisitions, financing, development, and leasing. Mr. Stiepel has more than 30 years of extensive experience in actively negotiating the acquisition, disposition, financing and leasing of office, industrial, R&D and retail projects...