Once created, a company is a “legal person”. It can enter into contracts and be legally held to account for them.
Those contracts are signed in the name of the company and are enforceable against the company.
It is the directors of the company that sign the contracts on the company’s behalf. By signing on behalf of the company, the directors only commit the company to the contract, not themselves as individuals. The contract is only enforceable against the company itself, not the directors or shareholders.
The director must have authority to sign the contract. That authority will be conferred by the company’s articles of association.
However, even if the contract is entered into by a director that did not have authority to bind the company, it will still bind the company provided that the other party entering into the contract, did so in good faith (and had no reason to believe that the director had no authority).
This means that, most of the time, if you are entering into a contract with a company in good faith, you will not need to concern yourself with whether the director signing on the company’s behalf, has the relevant authority to do so.
However, if you are entering into a major contract with a company (or are in any doubt at all as to the authority of the person signing the contract on the company’s behalf), it is always prudent to verify their authority. You can do this by:
1. Checking that the person you are dealing with is actually a director. Who the directors of a company are, is publicly available information and this can be found at Companies House;
2. Asking to see the company’s articles of association (these should confer authority on the directors to bind the company) – these can also be found at Companies House but take care to ensure that you have reviewed the most recent copy filed at Companies House; and
3. Having a set of board minutes of the company’s board approving the transaction. Any major transactions should always be approved by the board that will normally authorise execution of the necessary documents.
Traditional partnerships are not recognised as legal entities in their own right. That means that they cannot enter into contracts and that one or more of the partners will enter into contracts as agents for the partnership. It is the partners who will be personally liable under any contracts made (more on that below).
A contract made with any of the partners will bind all of the partners if the partner signing it had authority to do so. A partner can either have actual or apparent authority.
A partner will have actual authority if the contract is signed by all of the partners or the partners have expressly instructed one of the partners to represent the firm in a particular transaction. For example, the partnership agreement may state that one partner in particular is responsible for purchasing stock of the business.
A partner will have apparent authority if he or she appeared to an outsider to have such authority. So, say for example you are entering into a contract with a partnership - if the contract is one that relates to the type of business the firm appears to carry out and it is one that a partner would usually be expected to be able to enter into on his own, then, provided you do not know that the partner has no authority and you believe the person signing to be a partner, then it will not matter for you if the person signing did not in fact have authority - the whole partnership will still be bound. That means that, a lot of the time, you will not need to concern yourself with whether the partner has relevant authority and will be able to rely on “apparent authority” (but it may be in your interest to ensure that you are dealing with a partner).
If you are entering into a major contract with a partnership (or have any doubts at all about the partner’s authority to sign it), you should:
1. Check that the partner is actually a partner by asking to see a copy of the partnership agreement – the partners may not want to release this as it may contain other confidential information. In this case you should ask for written confirmation from the senior or managing partner
2. Check that the partnership agreement grants that individual authority to sign the contract on his own or get all the partners to sign the contract.
If any contract is being entered into as a deed, then all partners should execute that (whether it is a major contract or not).
So who will be liable if there is a breach of that contract?
If the the partner signing the contract had no actual or apparent authority to do so, then that partner alone will be liable to the other party if there is a breach.
If there was actual or apparent authority, then broadly speaking the other party will be able to enforce the contract against all partners of the firm. If the partner who signed the contract had apparent authority but no actual authority, then he will then be required to indemnify his fellow partners for any liability or loss that they incur.
Limited liability partnerships (LLPs)
Like a company, an LLP is a “legal person” too. It can enter into contracts and be legally held to account for them.
Contracts are only enforceable against the LLP itself, not the individual members. (Partners in an LLP are actually called ‘members’.)
It is the members of the LLP that will sign contracts as agents for the LLP. The member will bind the LLP unless that member had no authority to act for the LLP and the other party knew that they had no authority or knew or believed that that person wasn’t a member of the LLP. That means that, if you are entering into a contract with an LLP, provided you have no reason to believe that the person signing the contract on its behalf has no authority to do so or that they are not a member, then you will not have to concern yourself as to whether they have authority or not as the LLP will be bound.
If you are entering into a major contract with an LLP (or are in any doubt at all as to the authority of the person signing the contract on the LLP’s behalf), it is always prudent to verify their authority. You can do this by:
checking that the person is actually a member of the LLP. Who the members of an LLP are, is publicly available information and this can be found at Companies House; and
asking to see a copy of the LLP agreement so that you can check that the relevant member is actually permitted to enter into the contract and is not restricted from doing so. They may not want to release this to you as it may contain other confidential information. In this case ask to see written confirmation from a senior member.
Sole traders and individuals simply sign contracts in their own name. Those contracts can then be enforced against them as individuals and they will be personally liable.
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