A company is not a living entity and therefore has to rely on individuals to carry out its actions and enter into agreements on its behalf. A company will only be bound by an agreement if it was entered into by someone (referred to in this article as “agent”) who was authorised to act on its behalf.
If a dispute arises about whether an agent was authorised, it is usually the company that will be arguing that the contract is not enforceable due to the agent’s lack of authority. It will be the responsibility of the party contracting with the company to prove that the agent did have authority (or the company subsequently ratified the agreement).
Therefore, it is wise to directly address the issue of authority before entering into a contract with a company, especially if significant obligations arise under the agreement being entered into.
In summary, a company will be bound by a contract entered into by an agent in the following circumstances:
- The agent has actual authority
- The agent has apparent (sometimes referred to as ostensible) authority
- The company later adopts (or ratifies) an agreement that was entered into without authority
Actual authority
Actual authority arises out of whatever may be agreed between the company and the agent as to what the agent is and is not authorised to do on the company’s behalf. Actual authority may be “express” or “implied”.
Examples of evidence of express actual authority include the passing of a board resolution or the execution of a power of attorney or, less formally, a letter that sets out the extent of the agent’s authority.
Implied actual authority can be less precise to define as it can be inferred from the conduct between the company and the agent. For example, if someone is appointed to be a managing director by a company’s board, that person is then impliedly authorised to take the actions that usually fall within the scope of that role. Individuals appointed to more junior management roles may (or may not) be authorised to enter into transactions on behalf of the company within a narrower scope.
Implied authority can also be derived from a course of conduct by the agent that has the full knowledge and approval of the company. For example, without being formally appointed to a particular role, an agent who enters into transactions, as if they have been appointed, with the approval of the company is likely to have implied authority to do so.
Apparent authority
An agent’s actions outside the scope of their actual authority can still bind a company if they are within the agent’s apparent authority, which is the authority that the agent appears to others to have. An agent’s authority can be extended if:
- The company represents or holds out in some way that the agent has authority that is wider than their actual authority. The representation will need to have been made by someone who has the authority to make it
- The agent commits the company to some obligation to another party within the wider scope of authority
- The other party makes a reciprocal commitment or alters its position in some way in reliance on the representation that a wider authority exists
The company will be bound by the transaction agreed by an agent who has acted within the scope of their apparent authority, i.e. it is as if the agent was actually authorised.
The question of whether an agent has apparent authority to enter into any particular transaction will depend on the circumstances of that transaction. For example, an employee of a company who is put forward as a “Buyer” of certain products will bind the company in any transaction they enter into for such products, unless it has been made clear to a potential seller that the employee’s authority does not extend beyond merely identifying suitable products and/or negotiating terms on which those products may be purchased.
If the other party is aware of some limitation upon the agent’s authority or lacks authority, it cannot rely on the representation made. Although there is some uncertainty as to the courts’ view, it would be prudent for the other party to make reasonable inquiries to ensure that the agent has the requisite authority as failure to do so could mean that the agent’s apparent authority cannot be relied upon. If the other party does not honestly believe that the agent has apparent authority, it will be unable to rely upon that authority.
Ratification
An agent may lack authority if:
- There was no grant of authority at all or
- They exceed the scope of the actual authority granted to them
Where the actions of an agent are taken without any authority, the company may nevertheless be treated as bound by the terms of any agreement entered into if it ratifies (i.e. adopts) the agent’s actions later. Indeed, in some instances, even though the agent was not authorised to enter into a contract, the company may want to adopt an agreement that has been entered into by the agent to benefit from it.
A company can ratify the actions of its agents either by expressly stating that it is doing so or ratification may be implied from the company’s actions, for example, if it acts in a manner that is consistent with it treating the transaction as authorised (or inconsistent with treating it as unauthorised).
Practical steps
Especially where transactions are conducted remotely and via electronic communications (as many are and even more so as a consequence of the COVID-19 pandemic) it is prudent when dealing with a company on a significant transaction, to ascertain that the signatory is authorised.
Companies House records can be checked online to confirm who the current directors of any UK company are. The company’s articles of association can also be checked to make sure that they give authority to bind the company.
For major transactions, it may be appropriate to ensure board approval (in the form of a resolution) has been given for the signatory to enter into the agreement on the company’s behalf.
If accepting a letter of authority or power of attorney authorising the signatory to enter into an agreement, confirm that it has been provided by someone who is authorised by the company to do so.
Alternatively, the contract itself could provide that it is conditional upon the company ratifying it within a set period of time.
If you would like to speak to an expert in this area, Andrew Farrell is on hand to answer your queries, his contact details are andrewfarrell@prosperitylaw.com | 0161 667 3695.
