A family business’ significant commercial relationships are usually reflected in written agreements. But who is authorized to sign those agreements and to bind the company to the terms? Typically, a company’s management will have actual authority to sign agreements. However, the company may give the impression to third parties that other employees (for example, purchasing agents, account managers and IT personnel) that those employees have “apparent” authority to sign contracts relating to their areas of responsibility and thus bind the company to agreements. It is therefore important for family business owners and management to clearly instruct their employees and agents – and to communicate to third parties – as to whether those employees or agents are authorized to sign contracts and other important documents on the company’s behalf.

A recent trial court decision from New York – Utopia Home Care, Inc. v. Revival Home Health Care, Inc. – highlights the confusion and potential for liability that can arise when an employee signs a document on a company’s behalf without express authority to do so. According to the Court’s decision, Utopia is a family owned and operated business, with its president, her father and her brother being the company’s sole stockholders and officers. Utopia provided home care services for patients referred by Revival. A written contract, signed by Utopia’s president, provided the terms of payment for these services.

After Utopia provided certain services, it sent invoices to Revival totaling over $60,000, which Revival refused to pay. Utopia filed a lawsuit to collect the unpaid balance. Revival defended by pointing to a document that it claimed was a written amendment to the contract that reduced the time within which Utopia must submit an invoice in order to receive payment. This amendment was signed by an employee who, Utopia claimed, “was an administrator for [Utopia’s] New York offices only . . . and [who] had no authority to negotiate or approve any contract amendments.”

According to Utopia’s president, only the family member owners and shareholders were authorized to enter into contracts on Utopia’s behalf and to bind the company. The Court credited this testimony and found that the administrator who signed the amendment was not authorized to sign it and thus could not bind Utopia to the shorter time limits for submitting invoices for payment. The Court noted that neither party called the administrator as a witness and further stated how it was “somewhat remarkable that the key witness as to the issue of agency, authority, [and] apparent authority . . .” was not called.

It is not clear how the Court would have ruled had the administrator been called as a witness, but one expects that Revival would have attempted to make it clear through that witness or others that Utopia represented or gave the impression that the administrator was authorized to sign the amendment and to bind the company to the change in payment terms. Such testimony, if the Court believed it, may have led the Court to rule that Utopia was in fact bound by the claimed amendment and thus not entitled to collect on the late requests for payment. Instead, the Court entered judgment in Utopia’s favor for the full amount of the unpaid invoices, concluding that the amendment was not effective to bar payment.

One takeaway from this case is that a family business should clearly notify all employees that only certain company personnel – such as the family member owners and managers in Utopia’s case – are authorized to sign any contracts, amendments or other legally binding documents on the company’s behalf. The company also should take steps to not give the impression to third parties that unauthorized personnel actually do have the ability to sign and bind the company to agreements. Finally, the company should put oversight processes into place to ensure that such limitations on contract signing are enforced. By doing so, family businesses may be able to avoid claims that they are bound to terms of agreements that they did not intend to enter.