In any deal, each party should as a matter of good practice make sure that the people acting on behalf of the other party have the authority to do so.
Usually it’s the directors, proprietors or partners who make contracts which bind the business. But authority may also be delegated or given to employees or agents, either generally or for specific kinds of contract.
Essentially, a party acting in good faith is entitled to rely on what they are told about the authority of the person they are dealing with, and is protected if the person in question turns out not to have had that authority.
But that doesn’t mean you can turn a blind eye to facts or circumstances that ought to suggest that the person is acting without the appropriate authority. If you knew they were acting beyond their power, you can’t later claim that protection.
Beyond that, however, you are not always required to verify the authority of the person who is purporting to act on behalf of another party.
But it is good practice to do so, and particularly when that person is an agent or employee.
If you are the business on whose behalf an employee or agent is acting, you can make sure that the limits of their authority are explicit. For example, you might:
- set it out expressly in the agency agreement
- include a relevant clause in a contract of employment, or refer to company management authorisation levels (for example, all managers at Grade 3 or higher might be authorised to make purchase orders worth up to £1,000).
In either case you should consider taking steps to ensure that those your company is trading with are aware of those limits.
Directors and partners can usually be taken to have authority to bind the company or firm, but those powers can be expressly or implicitly limited, for example:
- by a company’s articles of association or a partnership’s terms of association
- by the deal in question being against the interest of the company, or outside the normal business of the partnership.
If the deal being struck by a company is going to be set out in a contract to be signed as a deed (such as many contracts involving the transfer of land), that would almost always require at least one director, or two directors, or a director and the company secretary.