An Employee’s Capacity To Bind A Company By Contract

As a business owner, you’re probably used to signing heaps of contracts. But wouldn’t it all just be easier if your employees could sign the contracts for you?

There are legitimate ways in which you can get your employees to sign contracts and bind your business to the obligations within them. Trusting your employees to act on your behalf in these situations can be an efficient way of ensuring things get done, especially if you’re preoccupied elsewhere. 

But, obviously, most business owners want to maintain control over which employees can sign contracts and to what degree they can act on behalf of the business. 

Here are some common questions we hear from our business owner clients on this topic:

• How do I manage who has the right to negotiate and sign contracts on behalf of my business?
• Do you have to be an officer of a corporation to sign a contract on behalf of a company?
• Can a company sign a contract through a common seal?
• What is expressed, implied and ostensible authority?

To answer these questions, we need to first understand the basics of how businesses actually enter into contracts. 

How Do Businesses Enter Into Contracts?

Unlike a sole trader or partnership, a company is a separate legal entity. This means that any liabilities or responsibilities stemming from contracts and transactions remain with the company, and don’t affect the director personally. 

However, as the company is not a real living being, it cannot physically sign or perform any of these duties. This is where the company’s owners or employees come into play. Certain employees will perform these tasks on behalf of the company. 

A company must explicitly decide which employees are able to negotiate and enter into contracts on their behalf. Typically, this would be a company’s director or secretary, but people like liquidators or trustees also often fulfil these duties.

These employees are referred to as  officers of the company and will have the authority to bind the company to contracts.

Who Is Considered An Officer Of A Company?

Under the Companies Act 2006, an officer of a corporation is usually a director or company secretary. However, it can also be a person who:

• Makes or participates in making substantial decisions impacting the company
• Has the capacity to significantly impact the company’s finances
• Instructs the directors as to how they must act

Aside from directors and secretaries, other roles that often act as officers of a corporation include trustees, liquidators, the president or treasurer of the company.

What Does It Mean To Bind A Company?

‘Binding a company’ in this context means that someone can validly enter into contracts on behalf of the company. So, if an officer signs a contract on behalf of their company, that company will be bound to the obligations and liabilities set out in that contract. 

We mentioned earlier that a company is a separate legal entity, which is why the company itself (rather than a natural person) would be tied to these liabilities. 

When Can An Employee Bind A Company By Contract?

An employee can bind a company to contracts in certain circumstances, that is, where the company has provided them the authority to do so. This authority can be expressly stated (for example, included as a clause in a contract) or implied through conduct (so, a reasonable person could assume that they had that kind of authority based on the conduct or business dealings they engage in). 

There are three instances in which an employee can bind a company to a contract:

• Actual authority
• Implied (or apparent) authority
• Ostensible authority

It’s important to know how each of these play out to avoid the risk of entering into a contract without the authority to do so. Let’s go through each type of authority in detail. 

Actual Authority 

Actual authority is granted expressly. So, this could be in the form of a clause in a contract, or a separate written agreement entirely. Essentially, it just means that there is a clear and formal recognition of authority to act on behalf of the company, and the most common method of doing this is through writing. 

This makes it easier to enforce if things ever get messy. 

For example, a director has actual authority as it would be expressly stated in a document like the Company Articles. If this director then granted authority to a shareholder to enter into contracts on behalf of the company, this would also amount to actual authority. 

However, sometimes, authority isn’t as clear or set out in writing. But this doesn’t make it any less valid – let’s go through these kinds of scenarios below. 

Implied (Apparent) Authority

Implied (or apparent) authority arises where a person acts on behalf of the company without explicit authority (for example, an employee). However, their conduct gives the impression that they do hold such authority. 

Employees who have a senior role in the company, such as managers and team leaders, often have an implied authority to take on certain responsibilities to ensure the smooth running of company operations. 

So, it is likely that they would have implied authority. It’s a little harder to determine whether implied authority arises in the absence of a written agreement, however where it does arise, it is binding as the person to whom the obligations are owed would have relied on that person’s authority.  

For example, if the company is entering into an agreement with a new supplier and the only employee available that day signs the contract on behalf of the company, this would be binding under implied authority. Even though that employee would not have had express authority to enter into the contract, the supplier would be under the impression that they did have such authority. 

Example Let’s say Jane is employed as the head officer of her sector at a large corporation. She is spearheading a new operation that will involve a short-term project with another company.  As she is leading the company in this particular initiative, it is implied that Jane has the authority over any relevant contracts related to her operations. There has been no formal agreement assigning Jane these powers, however as she is the lead authority, her authority to do so is implied through her conduct.

Ostensible Authority 

Ostensible authority arises where a third party can reasonably assume the employee had the authority to enter into the contract. 

Even if the person wasn’t actually authorised to sign on the company’s behalf, the contract can still be enforced against the company.

If your business finds itself in this predicament, you may be able to defend yourself if the person seeking to rely on ostensible authority (so, the person you entered into a contract with) should have made certain enquiries. According to the case of Criterion Properties plc v Stratford UK Properties LLC (2004), this means that the circumstances should have put the person ‘on inquiry’. 

If the court agrees that they should have questioned the authority used, then you may be able to avoid liability here. 

Example Let’s keep the example of Jane in mind for this purpose. Jane has not been granted the authority to sign contracts despite leading the company’s new initiative. Her duties have been limited to being the face of the new initiative by the company.  The third party asks Jane to sign a contract, but the higher level staff have not agreed to this or provided Jane with any authority to sign.  Despite this, Jane’s conduct suggests that she was the leading authority, so the third party is reasonable in assuming she had the authority to sign the contract. The contract is still binding under ostensible authority.

How Is A Contract Signed By A Company? 

We mentioned before that a company is recognised as its own person, so they can enter into contracts and be liable for any losses incurred as a result of breach or non-performance. 

But since a company cannot physically sign a document, the closest thing to it is the use of a common seal. 

What Is A Common Seal?

Before 1988, common seals were required by law if a company were to sign a contract. A common seal is a stamp that has been engineered to represent the company in place of a signature. The use of the seal would then be ‘fixed’ to the document and witnessed by either: 

• Two directors of the company
• A director and a company secretary of the company
• For private companies with a sole director, the director must be a witness to it

The ‘common seal’ approach is not, however, required by law. Under the Companies Act 2006, a company can still bind themselves to a contract without the use of a common seal. Instead, a traditional signature can be used in place of the seal. The signee will still need to be someone who fits the requirements listed in the bullets above.

This approach (i.e. not using a common seal) is becoming more common with modern companies, who simply rely on the signature of directors to bind the company. This is mainly because companies now want the most efficient methods of completing transactions. With online options so readily available, it’s also an opportunity for greater security. 

Can I Sign Contracts Electronically?

If you’re looking for an e-signature tool for your business, you’ve come to the right place. We’ve had a number of clients providing valuable feedback, and from this, we built our very own E-Signature Tool which you can access as part of our Sprintlaw Membership. 

So, what would this mean for you?

Using our E-Signature Tool means you can keep all of your documents in our online portal and send them off to the people you work with. This way, you can keep track of your key contracts and important details, like when they were signed. When you enter into contracts with other parties, both of you will have copies of the final, signed document. 

Essentially, our tool helps your business stay on top of your legals by building an efficient method of sending and signing documents electronically. You won’t have to worry about your electronic contracts being invalid – chat to our friendly team today to learn more. 

What Happens Next? 

There are multiple ways to enter into a contract, and many circumstances under which it can remain valid. These situations can become complex, so we can advise you on your options here. 

At Sprintlaw, we offer contract review services and advice on employment law issues. If you’re not sure about the boundaries of your employees’ authority or whether you can enter into certain contracts, chat to our friendly lawyers today. 

If you would like a consultation on your options going forward, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.

---