When you're a part of an organisation, there's a lot that goes on behind the scenes to keep the ship sailing smoothly. Contracts and Agreements form the bedrock of most corporate relationships. But what happens when someone signs a contract without proper internal authorisation? It's an occurrence that happens more often than you'd think.
The question is, just how much damage can an employee do if they act beyond their actual authority? Will the company have to foot the bill and face the consequences of their actions? Or is there some recourse if the company says the action was unauthorised?
In this blog, we look into this scenario under English and Welsh law.
Unauthorised signatures: What does the law say?
In the UK, a company is generally bound by the acts of its agents, provided these actions fall within the scope of their authority. But the issue becomes more complicated when an employee signs a contract without being authorised to do so.
Under UK law, the starting point is that an employee without explicit or implied authority cannot legally bind the company. However, things can understandably become complicated if the third party (the other company involved in the contract) is under the impression that the employee had the authority to sign.
The principle of "apparent authority"
This is where the principle of "apparent authority" comes into play. In contract law, there are two types of authority.
Actual authority (express) – This is where an individual has been specifically authorised to make decisions and sign contracts and that authorisation is in writing.
Actual authority (implied) – In cases of implied actual authority, the individual in question is considered authorised based on their position or course of conduct. This would apply, for example, if they were in a senior role at a company.
Apparent (or Ostensible) authority – Less clear than the above, apparent authority is where an agent has the power to act on behalf of a principal. This power arises when a third party relies on that representation of authority, that representation having been can reasonably inferred from the principal's conduct, in that they granted power to the agent.
In the case of apparent authority, if the company has, through its conduct, led a third party to reasonably believe that the employee had the authority to enter into a contract, the company might be bound by it.
However, this can be a point of contention and is rarely straightforward and may require legal intervention to resolve.
The consequences of unauthorised signatures
Employer's Liability: The company may be forced to adhere to the contract if it's found that the employee had "apparent authority."
Employee Accountability: The employee who signed the contract without authorisation may be subject to disciplinary action, which could range from a warning to termination.
Legal Consequences: Both parties may have to go through legal proceedings to determine the legitimacy of the contract, which can be time-consuming and costly.
Mitigating the risks
Companies can take several steps to mitigate the risks associated with unauthorised signatures. These include:
A Clear Company Policy: Have a transparent policy in place that outlines who is authorised to enter into contracts on behalf of the company.
Regular Training: Conduct regular training sessions to ensure that all employees are aware of the company's policies.
Due Diligence: Always undertake due diligence when entering into contracts, and ensure that the person signing the contract on the other side is authorised to do so.
The bottom line
Signing a contract on behalf of your company without proper authorisation is a dangerous act that can have significant legal implications. Whether you're an employer concerned about the corporate governance of your organisation and liability, or an employee who has found themselves in this tight spot, understanding the legal landscape is crucial.
Remember, it's easy to delay signing a contract so you can consider the contents or small print and liaise with your management team or take legal advice. It's much harder to get out of a contract once signed. As with all legal issues, it's better to be safe than sorry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.