In today’s world, it is remarkably easy to commit yourself (or your company) to an agreement. All it takes is a mouse click or screen tap. While historically a contract meant that two people, or companies, both signed a piece of paper detailing all terms, modern technology has all but removed this requirement. Knowing how to avoid accidentally binding yourself to a contract while getting quotes for goods or services is crucial to operating your business. This is important for many types of agreements, such as leases, purchase orders, settlement agreements, and sales contracts, among others.
So, what IS required to create an enforceable contract?
Contracts need four elements to be enforceable:
Parties must be able to contract (of legal age, sound mind, etc.)
Consideration (both parties must have to do something, in other words, each must have some “skin in the game”)
Assent of the parties to the terms of the contract (both must expressly indicate their agreement)
Clear subject matter (everyone has to be on the same page about the essential terms)
Although these elements may seem simple, the reality is anything but. For instance, in the case of the first requirement, in the context of a company, you would assume the owner of the company would be able to enter into a contract. But what about another employee? While the owner’s ability to create a contract is obvious, another employee’s ability is sometimes not quite so clear.
Who can contract for your company?
There are two types of authority that agents of a company can use to create a contract: Actual Authority and Apparent Authority.
Actual authority means the authority comes from express permission, such as company Bylaws or an Operating Agreement, an employment contract, or authorization from a managing agent of the company. If an agent’s authority comes from a document or express permission from a managing agent, then any contracts that the agent makes on behalf of the company are going to be authorized. Typically, general managers, vice-presidents, presidents, or officers of the company are all given actual authority to bind the company (though the authority may only be extended to certain contracts).
Apparent authority is authority established through the conduct of the parties during their employment and the creation of the contract. Under Georgia law, when a company has hired an agent and “vested with him apparent authority,” the company will be bound to the contracts that the agent makes. Apparent authority comes from the actions and evidence surrounding the contract’s formation. This would include the agent representing that they are able to contract, their title, and the words that the agent uses in the negotiations or formation of the contract. So even if a lower level employee doesn’t have the actual authority to enter into a particular contract, they can still bind a company under certain conditions.
Bottom line: Both actual authority and apparent authority can bind a company to a contract.
There are limitations on apparent authority. If the other party to the contract is aware of the limited authority of the company’s agent, then that contract becomes unenforceable against the company. Limitations can be expressed or reasonably inferred. For example, if a manager says, “I have to get approval from my boss,” that will terminate the idea of apparent authority because the other side would reasonably understand they are not working with the person with whom authority lies. Likewise, it would be unreasonable for the company’s intern to negotiate a new lease, so any such agreement would be void.
If you are unsure about who can contract for your company, or if you have questions about how to set yourself up for success, contact Downs Law today. We have extensive experience in handling contracts for our clients and will be happy to help make sure your business is protected and able to thrive.