You Should Make it Clear Who Can Bind Your Business

Your business may have a lot of shareholders, officers, or people who act as managers or contractors. These agents are on the street or on the phone every day, trying to generate customers, jobs, or services for your business. However, you may only give permission to a select few to actually sign contracts on your business’ behalf, and to bind your business to agreements.

But how does the outside world know to whom you have given that authority? What happens if an agent of your company who does not have authority to bind your company (such as a fired employee or former shareholder), actually signs a contract or makes a promise that ends up binding your company to an agreement that you did not want signed?

The quick answer seems like it would be that the contract or agreement is automatically void, as the employee or agent did not have permission to bind your company to any such contract.

However, the law makes this a much tougher question, and your business could end up bound to agreements that are signed or ratified by those without authority. In fact, your business could be obligated to pay damages to someone who is defrauded by the person who acted as if they had authority to act on behalf of your business.

That is due to something known as apparent authority. Apparent authority asks whether it is reasonable under the circumstances for the other party to believe that the (purported) agent of your company actually had permission and authority to bind your company.

For example, if you were selling goods to a grocery store, you would likely know that a cashier does not have authority to bind the store. You may know, but not be certain whether the produce manager has authority. You would be pretty certain that the head manager has that authority.

Remember that when determining whether a third party was reasonable in relying upon the signature or approval of someone who is not authorized to bind your business, your actions will be heavily scrutinized. You may be excited to announce and brag about your new district manager. However, if you do not want them binding the company to agreements, you should make that very clear.

How do you protect your business from a former employee, former shareholder, or current employee from getting your business involved with business agreements without your permission? One way is to make sure that your public filings and your bylaws specifically say who does and does not have authority. The Articles of Organization for LLCs can also spell out who has authority to bind your business. A corporate resolution detailing who has authority to bind the company will also help.

If you anticipate an ongoing relationship with a company, a simple email detailing your procedures for approvals of agreements can also provide notice to the third party.

The California business and corporate attorneys at SAC Attorneys LLP Law can review your business practices, forms, and corporate filings, to keep your business out of legal trouble. We serve clients throughout Silicon Valley. Call today to schedule a comprehensive consultation.