Authority to contract: Overview, definition, and example
What is authority to contract?
Authority to contract refers to the legal power or authorization a person or entity has to enter into a binding agreement on behalf of themselves or another party, such as a company. This ensures that the person signing a contract has the proper legal right to commit to its terms.
For example, a company’s CEO typically has the authority to contract on behalf of the business, while a junior employee may not unless explicitly authorized.
Why is authority to contract important?
Authority to contract is crucial because agreements signed by unauthorized individuals may be unenforceable or lead to legal disputes. If a contract is signed by someone without proper authority, the other party may not be able to hold the company or organization accountable.
For businesses, ensuring that contracts are signed by authorized representatives helps prevent unauthorized commitments, financial risks, and potential legal challenges. Many contracts include a clause stating that signatories confirm they have the necessary authority.
Understanding authority to contract through an example
Imagine a business enters into a major supply agreement. The contract is signed by a mid-level manager who does not have the authority to contract on behalf of the company. Later, the company disputes the contract, arguing that the manager was not authorized to commit to the terms. Without proper authority, the agreement could be considered invalid.
In another case, a real estate agent signs a lease on behalf of a company, but the company’s internal policy requires board approval for such commitments. If the board had not authorized the agent, the lease could be challenged as unenforceable.
An example of an authority to contract clause
Here’s how an authority to contract clause might appear in an agreement:
“Each Party represents and warrants that the individual signing this Agreement has full authority to contract on behalf of the entity they represent, and that this Agreement constitutes a binding obligation upon such entity.”
Conclusion
Authority to contract ensures that only legally authorized individuals or entities can enter into binding agreements. It protects businesses from unauthorized commitments and potential legal disputes.
By including a clear authority to contract clause in agreements, businesses can confirm that all signatories have the necessary power to enter into legally enforceable commitments, reducing the risk of contract disputes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.