Checking for authority to contract on behalf of a company
Does my contact have authority to bind their company?
If you are negotiating a trade credit agreement with a new client - or indeed finalising the details of any major deal - it’s important to check whether your contact has the relevant authority to bind their company to a contract. This is all the more important if you are dealing with a junior member of staff or anyone not directly employed by the company, such as a consultant. But even if you’re negotiating with a company director, you should not necessarily assume that they have requisite authority to form a binding contract. You can clarify the position during a credit checking process by making sure any relevant agreements receive board approval.
What’s the law of agency?
The law of agency refers to the legal issues surrounding the process of one person (called an agent) binding a company (called the principal) to a contract with a third party (usually another company). This is an important branch of commercial law and there are many disputes relating to contracts which are disputed as a result of an initial failure to check that primary contacts have relevant authority to agree to or negotiate contracts. An agent, in this context, will normally be a company director. Their status or title will often be enough to create apparent or implied authority, even though they may not have express actual authority to create a legal relationship on behalf of the company. So it’s always worth checking that your agreements are being entered into properly and that your contact has all the necessary permissions from their end.
How do I check that my contact has authority to contract?
There are various methods of ensuring that contracts are being agreed to by authorised representatives. If you haven’t met your contact in person at the offices of the company you’re dealing with, check out their profile on their company website. If they are a director, you can verify their position using the Companies House website (http://www.companieshouse.gov.uk/).
If you would like further proof that an individual director has the authority to bind the company, you can also ask to see a relevant board resolution - or simply make sure that agreements are signed by the managing director who will generally be deemed to have implied authority.
A variety of documents which can help with matters regarding authority to contract can be downloaded from our Business Documents Folder.