Public Filings Can Avoid Apparent Authority Problems
Businesses that have employees usually delegate to those employees certain tasks and responsibilities. In many cases, employees need to speak on behalf of the company in order to carry out daily business functions. But not every employee is authorized to do everything for the corporation. For example, an employee may have the right to sign a purchase order, but no authority to sign a long term lease for a company.
You may know what the limits of each employee’s authority are. But does the rest of the world? How do you know that an employee isn’t overstepping his boundaries by entering into agreements that you don’t want entered into; and, if that happens, how do you get out of that agreement?
Every business needs to be aware of apparent authority problems. Apparent authority allows others to rely upon your agents (which can be officers, representatives, or employees) when entering into contracts or agreements. That means that they can legally enforce contracts that these agents sign, even if you didn’t authorize them to do so on behalf of your company.
In order for apparent authority to exist, you, as the owner or principal of the business, need to have held out your agent as someone authorized to bind the company. The question becomes whether it is reasonable for someone else to think that you are authorizing your agent to act on your behalf.
In many cases, businesses can create this kind of impression without intending to. Statements on websites that give employees authority, or verbal impressions that others would take as giving authority to the agent (“speak to my vice president who is in charge of these things”) can all provide that impression. Even the simple use of a title, like CEO, or Sales Manager, can signal apparent authority to others, and bind your business to an agreement that you didn’t authorize.
Public Filings Can Avoid Problems
In many cases, problems can be avoided by filing documents in the public records that limit authority. For example, LLCs can file a “statement of authority” with the state, which provides public record notice of who has authority to do what. Partnership agreements can also be filed in the public records, delineating the authority of the partners.
Corporations can pass simple resolutions limiting authority, and those can be filed in the public records. Whatever the method, the document limiting authority must be in the public records. In many cases, operating agreements of LLCs or partnership agreements are not publicly filed, and thus won’t provide the protections needed, no matter what they say.
Obviously, simple diligence and common sense can avoid the problem as well. For example, an email to a third party that asks them to deal with your CEO, but to contact you before contracting, could suffice to avoid the perception of authority to contract. Likewise, a form sent to potential vendors specifying your internal procedures as to who can contract would work as well.
A business attorney can avoid problems before they happen. Contact Tampa business attorney David Toback to discuss reviewing your business’ operating documents to make sure it’s operating safely.