Loss Prevention Alerts

ALERT 31:  Authority to Execute Contract

This loss prevention alert has been produced by the Loss Prevention Working Group (LPWG) of the AGS. It highlights issues that the LPWG considers may be of relevance to members. It is not intended to provide a definitive response to any issues and before taking action members should consider carefully whether they need to seek independent legal advice.

Whilst sometimes AGS members contract with individuals, most often they will be entering into contracts with artificial entities, such as partnerships, companies and local authorities. Such artificial entities can only negotiate via human beings; in other words, through directors, officers or employees who have authority to negotiate on behalf of the entity and to bind it to a contractual relationship. The question arises, how can an AGS member be sure that the person he/she is dealing with has authority to enter into a contract of the type envisaged. 

It must be borne in mind that similar problems arise with respect to variations of contract. In strict terms, variations involve the creation of new contracts for which all the ingredients of contracts are necessary such as offer, acceptance, consideration and, when dealing with an artificial entity, the existence of someone who has authority to bind that artificial entity to the agreed variation. In contrast, AGS members will be aware that variations under a formal form of contract (such as the ICE Conditions of Contract, 7th Edition) merely alter the existing contract by addition, omission or substitution, though such variations must still be ordered and documented in compliance with the requirements of the form of contract concerned. 

The problems that arise can be serious. In certain circumstances an AGS member might find him/herself negotiating with someone who, in fact, does not have authority to bind the entity with whom the AGS member believes he is dealing. The AGS member might believe that a valid contract has been executed when in fact that is not the case. The member may incur considerable expense performing his/her part of the contract (for example, he/she might hire drilling equipment, employ sub-contractors or sub-consultants or refrain from taking on other remunerative work) in circumstances where the other entity cannot be regarded as being bound. Although the AGS member might have a claim against the apparent agent on the basis that he/she wrongly held themselves out as having authority to enter into the contract the agent (often being a salaried employee) will have insufficient assets to meet any significant claim. 

Dealing with limited liability companies 

The practical difficulties facing those looking to contract with companies used to be almost insurmountable. Within a company's constitution (its memorandum or articles of association) typically certain individuals might be given authority while others, who ordinarily might be regarded as people who would have authority, such as directors, would have their authority curtailed. Further, the memorandum contains an objects clause which specifies the activities that the company can lawfully undertake and it was regarded as being ultra vires (that is, beyond the powers of) the company to enter into contracts for purposes outside the terms of the objects clause. Accordingly, those dealing with companies needed to have a detailed knowledge of the company's internal constitution to be sure that they were dealing with an agent authorised to act on behalf of the company. 

Many of the difficulties have been removed although there are still traps for the unwary. As a result of statutory company law, any person dealing with a director in good faith is entitled to assume that that director has authority to bind the company. However, in respect of other agents the AGS member would be in a less protected position. It is therefore suggested that when an AGS member is dealing with someone other than a director he/she asks for a letter from a director or company secretary confirming that the person that he/she is dealing with has authority to enter into the contract. Alternatively, the agent might produce a power of attorney or other instrument of delegation making clear his/her authority. If no such letter or power is produced then the member should be wary about entering into any contract. 

It is sometimes thought that where an employee is held out by the company as being its "Contracts Manager" (and indeed this title might appear on the employee's business card) that that person has apparent authority and therefore, it can be assumed, authority, to enter into the contract. This would be a dangerous assumption. The term "Contracts Manager" does not necessarily mean that a person has authority to enter into contracts (for example, he might be someone who merely advises others on contract issues) and it also begs the question what types of contract might he/she have authority to enter, and what financial limitations are there on the value of contracts the manager can let on the company's behalf. Thus, even when dealing with a 'Contracts Manager', a letter of authority or power should be requested from a director of the company. 

Local authorities 

Statutory law affords local authorities extensive powers for the delegation of their functions. Local authorities are able to arrange for the discharge of their functions by a committee, a sub-committee or an officer. 

It is normal practice for a local authority to have a delegation scheme set up. This will provide that a decision can be taken in the name of, although not necessarily by, the chief officer of a department or a relevant committee. 

It is suggested that where an AGS member is dealing with someone other than a chief officer he/she asks for a letter from a chief officer confirming that the person he/she is dealing with has the requisite authority to enter into the contract.

Partnerships 

A contract entered into with a partner will bind the partnership as a whole so long as that partner's actions are within the scope of his actual or implied authority. It will be clear to an AGS member where a partner has actual authority as there will be express documentation reflecting the delegation of power. 

A partner will be deemed to have implied authority to bind the partnership where the acts in question form part of the usual course of the partnership business. This principle will only hold true where the contracting AGS member acts in good faith. Thus transactions which would ordinarily be within the implied authority of a partner will not bind the firm as a whole where the AGS member is aware that the partner in question does not in fact have the requisite authority to carry out the transaction. 

Acts done by employees of the partnership will also similarly bind the firm. Thus any contract or other documentation relating to the businesses of the partnership will bind the firm if it is executed in the firm's name (or in any other manner showing an intention to bind the firm) and is entered into an authorised person - whether he/she is a partner or not. So, when dealing with employees of partnerships, AGS members should once again request a letter from a partner to confirm that the employee concerned has appropriate authority.

Prepared for the AGS by Steven Francis, DLA

Date of Issue: 10 January 2005