Organization and authority: Overview, definition, and example
What is organization and authority?
Organization and authority is a clause in a contract that confirms a party is properly formed (organized) under the laws of its jurisdiction and has the legal power (authority) to enter into and perform the agreement. It’s a type of representation and warranty that gives the other party confidence that the entity they’re contracting with is validly existing and has the internal approvals needed to legally bind itself.
Why is organization and authority important?
This clause helps prevent future challenges to the enforceability of the contract. Without it, one party could later claim that the agreement isn’t valid because it wasn’t properly approved or the signer lacked authority. It also protects against dealing with fake, dissolved, or unauthorized entities. Lenders, investors, and counterparties often rely on this clause to reduce legal and financial risk.
Understanding organization and authority through an example
A venture capital firm signs a term sheet with a startup. In the definitive agreement, the startup includes an “organization and authority” clause stating that it is a Delaware corporation in good standing and that its board has approved the deal. If a shareholder later tries to challenge the agreement by saying it wasn’t properly authorized, the clause helps protect the VC firm by confirming that the startup already made those internal approvals at signing.
Example of an organization and authority clause
Here’s how an organization and authority clause may look like in a contract:
The company represents and warrants that it is duly organized, validly existing, and in good standing under the laws of its jurisdiction of formation, and has full power and authority to execute, deliver, and perform its obligations under this agreement. All necessary corporate action has been taken to authorize the execution and delivery of this agreement.
Conclusion
The organization and authority clause gives each party confidence that the other side is legally capable of entering into the contract. It confirms that the right approvals are in place and the business entity is properly formed and active. Especially in deals involving companies, this clause is essential for enforceability and risk management.
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.