How do you know whether the person signing a document on behalf of a company has the appropriate authority to bind the entity legally? How can you find out? And what can you do if you are faced with the same question in an entirely different legal environment, for instance, in Germany? A comparison of U.S. and German legal rules reveals different solutions for a common problem in the law of agency.
Signature Authority in the United States
Whether a corporate executive or employee has agency signature authority on behalf of the company is governed by several well-known doctrines under the law of agency. The most common and relevant legal concepts for corporate transactions are outlined below, along with the practical issues for counterparties in transactions.
1. Actual Express Authority
The most definitive basis for agency authority is “actual authority.” Actual authority results from the expressed act of the principal granting authority to the agent.1 Such acts might consist of a written statement or certificate, or other actions that lead the agent to reasonably believe he has authority. Actual express authority authorizes the agent only for a very specific legal action (e.g. the signing of documents necessary for a transaction) indicated in the express authorization.
For corporations, actual express authority is usually established through board resolutions giving express signature authority to specified officers of the company. A third party entering into contract with the principal can confirm actual express authority by reviewing these resolutions. In some cases additional evidence that the authority is current and in effect, such as a corporate secretary’s certificate, may be requested.
2. Actual Implied Authority
“Actual authority” also can be implied from a more general statement by the principal granting authority to the agent over a range of activities. It does not relate to a single, specific legal action to be taken by the agent but rather to categories of actions related to the agent’s responsibilities. A duly appointed corporate officer will usually be authorized to handle day-to-day business for the company, and has implied authority to bind the entity legally in contracts arising in this context. Implied authority may result from a company’s governing documents (articles of incorporation or bylaws, for example). Some commentators suggest that actual implied authority is not a separate legal doctrine2 because, as with express authority, the agent has both the power and a grant of authority from the principal to act.
3. Apparent Authority
“Apparent authority” can be distinguished from actual or implied authority in that while the agent has the ability to affect the principal’s legal rights and obligations, the agent does not have the express or implied authorization from the principal to do so.
An agent acquires apparent authority when the principal takes actions, by words or deeds, leading a third party reasonably to believe that the agent has authority to legally bind the principal.3 Persons who are not agents at all, as well as existing agents who are acting beyond the scope of their authority, may acquire apparent authority in this way. Apparent authority is the last resort for third parties trying to prove the existence of authority, since it must be proved based on the facts and circumstances of the situation. The basis of the claim is that the principal’s own actions created the conditions under which it was reasonable to believe that the agent’s authority existed. Counterparties to a transaction are well advised to confirm the actual express or implied authority of the agents with whom they are dealing.
Signature Authority in Germany
Generally there are two kinds of corporate signature authority in Germany: “organ authority” and “authority by legal act.” A characteristic of the German legal system (and other code-based legal systems) is the Commercial Register, which lists, among other facts about companies, the specific persons who have signature authority for the companies and the scope of that authority. Counterparties are entitled to rely on the contents of the Commercial Register; its effect is to create a reasonable basis for belief that the named persons have authority to act on behalf of the legal entity.
1. “Organ Authority”
Much like the implied authority an officer has, certain “organs” of German companies have authority due to their position. “Organ” in this sense is translated to mean an official named position or title within the company. Managing directors of a German Limited Liability Company (GmbH) or executive board members of a German Joint-Stock Company (AG) are examples of such organs, who by their appointment have a codified legal authority to sign on behalf of the company. Company-internal restrictions on the extent of their authority have no effect on the validity of any instruments signed by such persons on behalf of the company. Exceptions apply only where a third party either conspires with the agent to exceed the limits of his authority (“Kollusion”) or acts willfully or with gross negligence overlooking restrictions that were evident to a third party (“Evidenz”).
2. Authority by Legal Act
The German Commercial Code (Handelsgesetzbuch or “HGB”) identifies specific forms of signature authority that can be granted to agents acting on behalf of a merchant.4 The most comprehensive authority is the Prokura (§§48 ff. HGB), which authorizes the agent to represent the principal in any and all commercial dealings for the company. This authority does not include organizational restructuring, such as share transfers or the sale or encumbrance of real property. As in the case of company officers, any company-internal restrictions or limitations of authority of a Prokurist (which are common) have no external effect on the validity of contracts between the principal and a third party.
3. The German Commercial Register – Publicity and Legal Certainty
The Commercial Register is a nationwide electronic registry system in Germany that is maintained by local commercial courts. Every merchant in Germany must file specified information about the business with the commercial court designated for the location of the business, including information about the persons who have signature authority. The Commercial Register provides definitive proof of a person’s signature authority and thereby protects counterparties in their legal decision-making.5 Similar systems exist in other countries (for example, Austria and Switzerland).
Under §15 II of the HGB, third parties are deemed to be on notice of entries in the Commercial Register. Thus if signature authority has been withdrawn and this fact was entered and announced in the Commercial Register in orderly fashion, a third party signing a contract with the former agent will not have a legally binding agreement with the entity even if the third party is unaware of the withdrawal of the agent’s authority.
On the contrary, §15 III HGB states that an inaccurate notice or announcement creates a legal appearance of authority6 which a third party may rely on.7 This is quite similar to the effect of the apparent authority doctrine in the United States.
§15 I HGB goes a step further declaring any legal facts that are required to be entered into the Commercial Register are not binding on bona fide third parties if they have not been properly recorded.8 So, if an entity withdraws a Prokura and does not make the required entry into the register, then a third party may still rely on the authority recorded in the Register, and a contract signed by the former agent/Prokurist in this case will be legally binding.
The U.S. and German legal systems approach the common problem of signature authority from different directions. Contracting parties need to understand how the system applicable in each country works in order to avoid problems with the enforceability of contractual and other legal relationships.