A general manager of a company who is not a director may still have authority to sign a contract and bind the company to perform a contract so companies must ensure they are aware of what their managers are doing and what contracts they are signing states Allister Doo.
The recent case of Levin Meats Limited (“Levin”) and Perfect Packaging Limited (“Perfect”) dealt with a situation in which the general manager/chief executive (“GM”) of Levin signed a contract in the name of Levin to purchase some equipment from Perfect. Levin then later argued the contract was not binding on the company and that the GM had no authority to sign the contract in question. The court found the GM did have authority to enter into the contract and the company was bound to perform the contract and pay the purchase price for the equipment.
Execution of an Agreement
A document being entered into may be a ‘deed’ or an ‘agreement’. A ‘deed’ includes certain documents required by law to be in the form of a deed such as a guarantee or deed of lease. A deed must always be signed by a director of the company unless an exception applies.
If a document is not a deed it is an ‘agreement’ and may be signed by a director or other person authorised by the company. The issue becomes whether a non-director such as a manager has the necessary authority to sign the agreement on behalf of the company.
Actual and Apparent Authority
The board may pass a board resolution expressly giving authority to the manager to sign the relevant agreement. The manager then has what is called actual or express authority and the company will be bound by that agreement.
Even if the board does not grant actual authority to the manager, the board and the company may create or allow an impression to be given to the world at large that the manager has authority to enter into the relevant agreement. The manager will have what is known as apparent or ostensible authority and other parties are entitled to rely on the representation of apparent authority. Then if the manager signs an agreement in these circumstances the manager will have apparent authority and the company will be bound by that agreement.
What representations amount to Apparent Authority?
In the Levin case the court found the GM did not have actual authority but did have apparent authority so that the company was bound by the equipment contract.
The reasons why the GM had apparent authority is that the board and company had allowed representations to be made about the GM’s authority to make it appear to others that he had the authority to enter into the agreement. These representations included:
- The board had not put any internal controls on the GM and did not monitor his activities;
- The board gave the GM a significant degree of autonomy in managing the company’s plant, the directors were never seen at the plant and others dealing with the company always dealt with the GM and the GM appeared to be in complete control;
- In the past the GM had entered into similar contracts and the board had not objected to such contracts;
- With the contract in question, the GM had been the only person conducting negotiations with Perfect.
There is administrative convenience with having a general manager signing contracts for the company as directors may not always be available to sign documents. However the directors are responsible for what authority is given to a manager to sign documents, whether that authority is expressly given or is apparent authority. Then if the manager does have either actual or apparent authority to enter into a particular contract, the company will be bound by such contract.
This means directors must keep close controls on the activities of managers and establish monitoring and supervision systems to limit a manager’s apparent authority to only those matters which the directors specifically intend the manager to have authority to enter into on behalf of the company.
- Legal documents
- Risk management