Limitation of authority: Overview, definition, and example
What is limitation of authority?
Limitation of authority refers to restrictions placed on an individual or entity regarding the decisions they can make or actions they can take on behalf of a company or organization. These limits are typically outlined in contracts, company policies, or legal documents to prevent unauthorized commitments or financial risks.
For example, an employee may have the authority to negotiate with vendors but not to sign contracts on behalf of the company.
Why is limitation of authority important?
Setting clear limits on authority helps businesses control risks, prevent unauthorized commitments, and maintain proper decision-making processes. Without these limits, employees or representatives could make binding agreements that the company may not want—or be able—to fulfill.
For companies with multiple decision-makers, defining who has the authority to sign contracts, approve expenses, or make binding commitments helps avoid confusion and legal disputes.
Understanding limitation of authority through an example
Imagine a sales manager at a retail company who is responsible for negotiating deals with suppliers. While they can discuss pricing and delivery terms, they do not have the authority to sign contracts. Instead, only the company's CEO or legal team can approve and finalize agreements.
In another example, a branch manager at a franchise restaurant may have the authority to approve small purchases for supplies but is restricted from signing long-term lease agreements or making financial commitments beyond a set limit.
An example of a limitation of authority clause
Here’s how a contract might define a limitation of authority:
“No employee, agent, or representative of the Company shall have the authority to bind the Company to any contractual obligation, financial commitment, or legal agreement unless expressly authorized in writing by the Board of Directors.”
Conclusion
Limiting authority ensures that only authorized individuals can make important decisions on behalf of a business. It helps prevent unauthorized commitments, financial risks, and legal complications.
Businesses should clearly define and document these limits in contracts and policies to maintain control over decision-making and avoid misunderstandings.
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.