(This post is part of a series called "Common Clauses," focused on explaining so-called boilerplate provisions of contracts. Click the link to see other posts in this series).
Contracts often include a clause stating that the signatories have the authority to sign the contract. You have probably seen something like this before: "If either party is a corporation, LLC, LP, LLP, trust, or other non-individual entity, the individuals signing on behalf of said party hereby represent and warrant that they have authority to sign on behalf of the entity."
These are often called issues of "agency." Agents have certain types of authority to act on behalf of others (called "principles"), and that authority can be express, implied, or apparent. This categorization is outside the scope of this post, but I plan on addressing it later.
Who has authority to sign?
Business entities often identify the people who have authority to sign on their behalf. Corporate bylaws and LLC agreements typically lay this out. If not, statutes can fill the gaps.
Bylaws and company agreements may authorize a particular officer as having the authority (such as the president). They might say that any officer has the authority if explicitly given by the board or members. They might say that any two officers or any two directors can bind the entity in contracts. Your bylaws or company agreement probably have language to this effect, so make sure you're familiar with them.
Can authority be imposed?
Yes. State statutes often provide gap-fillers where something isn't expressly stated in organizational documents. The same is true with regard to authority.
For example, California assumes authority where a contract is signed by two specific officers. Even if your bylaws don't give authority, the contract will still be valid against a corporation where the contract is signed by (1) the chairman, the president, or any vice president, and (2) the secretary, any assistant secretary, the chief financial officer, or any assistant treasurer. Cal. Corp. Code section 313.
The purpose of that kind of statute is to protect innocent third parties; third parties can rely on the signatures of certain officers when entering contracts. To protect the corporation, it is often worthwhile to have your president and CFO be different people.
In short, it's usually up to the entity itself to determine who has authority. But your state may impose authority in certain circumstances.
What if you sign and you don't have authority?
It depends. Depending on who suffers harm as a result (and the applicable documents and statutory authority), a non-authorized signatory could be liable to the company or the other party to the contract. And it could certainly have a negative impact on the running of the business.
For example, the manager of an LLP signs a contract. The contracts makes no mention of the LLP, but the manager meant to sign on behalf of the LLP. Later, the LLP fails to perform the terms of the contract. Can the manager be held personally liable for the breach?
Texas case law says yes. A case out of Dallas involved that fact pattern. The trial court found the manager liable, and the Court of Appeals for the Fifth District affirmed. See PMC Chase, LLP v. Branch Structural Sols., No. 05-18-01383-CV (Tex. App. Jan. 28, 2020).
What if the business lets you sign without authority?
As another example, an employee of a credit union, identified as "assistant vice president," signs an employment contract on behalf of the credit union. He did not have authority to do so, but the credit union knew and allowed it. Later, a dispute arises with an independent contractor. The credit union claims the employee was not an assistant vice president, and had no authority to enter contracts on behalf of the credit union. Will the credit union still be liable to the independent contractor?
Again, Texas (for now) says yes. This fact pattern is also based on a real case out of Texas: San Antonio Fed. Credit Union v. Cantu, No. 04-19-00548-CV (Tex. App. May. 26, 2021). There were other issues involved, but ultimately, the credit union was liable to the independent contractor. On July 15, 2022, the Supreme Court of Texas agreed to hear that case, so we will see if that changes.
Conclusion
If you see an "authority to sign" clause and you are acting on behalf of a business entity, it is critical that you make sure that you have authority to sign. Check your bylaws or company agreement, and if you're unsure, ask for written authorization.
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