The assumption is often made that, if the manager or a director of a company is signing a contract, they have authority to do so and no further enquiry is necessary. Unfortunately, this is not necessarily the case. We examine below some of the differences between English law and local laws in this area and highlight various potential pitfalls for the unwary.
For UK companies, the Companies Act 2006 (the Act) sets out detailed rules governing a company's capacity to contract and the methods and formalities of due execution. It includes several key protections for third parties, such as:
- the power of the directors to bind the company or authorise others to do so is deemed free of any limitation under the company's constitution;
- in favour of a purchaser in good faith for valuable consideration (a purchaser), a document is deemed to have been duly executed by a company if it purports to be signed in accordance with the Act, e.g. by two authorised signatories or by a director in the presence of a witness.
There are also regulations in relation to overseas companies which modify and apply similar execution provisions to non-UK companies entering into English law contracts. The regulations create a statutory presumption of due execution which is similar to that described above. In favour of a purchaser, a document is deemed to have been duly executed by an overseas company if it purports to be signed by a person who, in accordance with the laws of its territory of incorporation, is acting under the authority (express or implied) of the company and is expressed to be signed by that company. In other words, the local law on who has authority to bind the company is key.
Where a party is contracting with an overseas company under English law, therefore, it may be prudent to require a legal opinion from local lawyers in the relevant jurisdiction confirming capacity, authority and the validity of the method of execution under local law. This was recently highlighted in the English Court of Appeal decision of Integral Petroleum SA v Scu-Finanz AG (2015), where the failure to confirm the Swiss law requirements on the number of signatures required to bind a Swiss company led to a lengthy court battle and arguments that the contract did not bind one of the parties.
The position in relation to UAE companies and UAE law governed documents is less clear. For example, under the Commercial Companies Law 2015 (the CCL):
- general authority is given to the manager of a LLC under Article 83, which states that the manager may bind the company when his actions are corroborated by stating the capacity for them, unless the manager's powers are limited by the company's memorandum of association (MoA) or by the contract under which he was appointed. A LLC's MoA is not available for third parties to check via a public registry such as Companies House in the UK. A counterparty is therefore limited to examining a copy of the MoA provided by the company itself, which may not be accurate or current. Similarly, it may be difficult in practice for a counterparty to confirm that there are no additional restrictions under the relevant manager's contract of appointment;
- the chairman of the board of directors of a JSC can bind such a company if he has the authority of the board. However, the board is not competent to authorise all transactions. In particular, loan agreements for periods over three years, sales of real property and pledges of both real property and movables (amongst other matters) require shareholder approval or specific authority in the company's MoA or Articles of Association. (See also our commentary on arbitration provisions);
- there are no provisions which specify the execution formalities under UAE law (for example, the need to have a signature witnessed in certain circumstances under English law in relation to the execution of deeds). This leads to the development of market practices, such as the use of a company stamp, which may be relied on as conferring an additional "official" or legal comfort when in fact it does not; and
- there are no specific provisions in UAE law which deal with which laws apply to the execution of a UAE law governed agreement by a foreign entity.
In light of these difficulties, in the UAE, a well-advised counterparty may insist that the relevant contract is executed pursuant to a power of attorney containing specific powers. Such powers of attorney do not necessarily require notarisation (unless, for example, they are to be used in a government process such as registering an amendment to the MoA), but they will be given greater evidential weight by a court if notarised and attested for use in the UAE. There is also the added comfort that the notary will have taken steps to ascertain actual capacity and authority.
New UAE provisions
The CCL has introduced a potentially helpful change in this area, in comparison to the position under the former Companies Law 1984 (the Old CCL). Article 23 provides:
"The company shall be bound by any act or thing by the persons authorised to manage the company upon conducting the affairs of management in a usual manner."
In addition, Article 25 states that a company is not entitled to disclaim liability to third parties on the grounds that an authorised director/manager was not properly appointed, provided that:
- the third party is acting in good faith and did not know (or could not have known), based on his relationship with the company, of any defect in appointment, or in the act or thing proposed to be done on behalf of the company; and
- the acts of the director/manager are within the usual limits of a person holding the same position in a similar type of company.
Taken together, these Articles create ostensible (or apparent) authority in the UAE for the first time. Article 25 was briefly considered in some obiter comments at first instance in a DIFC case (Ginette PJSC v Geary Middle East FZE and Geary Limited (2016)). However, the Court of Cassation has not yet published any judgments under these new provisions. In practice, the question of whether a director/manager was acting in a `usual manner' or within `usual limits', and whether a counterparty would have constructive knowledge of a defect (without actual knowledge), will depend on the particular facts of the case. The common practice of seeking notarised powers of attorney for transactions of significance is therefore expected to continue notwithstanding these developments.