Signature authority: Overview, definition, and example
What is signature authority?
Signature authority refers to the legal right or power granted to an individual to sign documents, contracts, or agreements on behalf of a company, organization, or another party. This authority allows designated individuals to enter into binding commitments, approve transactions, or execute legal documents on behalf of the entity they represent. The extent of signature authority can vary depending on internal policies, legal requirements, and the level of responsibility assigned to the individual.
For example, a company's CEO or CFO may have signature authority to sign contracts worth millions of dollars, while a department manager might only have authority to approve minor purchases or internal agreements.
Why is signature authority important?
Signature authority is important because it ensures that only authorized individuals can legally commit an organization to financial, contractual, or legal obligations. Clearly defining signature authority helps prevent unauthorized transactions, reduces the risk of fraud, and ensures compliance with corporate governance policies. It also streamlines business operations by designating responsibility to specific individuals, allowing for efficient decision-making and contract execution.
For businesses, properly managing signature authority helps maintain accountability and control over financial transactions, vendor agreements, and other critical legal documents.
Understanding signature authority through an example
Imagine a corporation that requires contracts over $100,000 to be signed only by the Chief Financial Officer (CFO) or Chief Executive Officer (CEO). If a department manager without the proper signature authority attempts to sign a contract for $150,000, the agreement would not be legally binding because the manager does not have the authority to commit the company to such an obligation. The company’s policies clearly outline who can sign on behalf of the business at different levels.
In another example, a nonprofit organization may grant signature authority to its executive director to sign grant applications and funding agreements, while lower-level employees may only be allowed to approve routine expenses under a set dollar amount.
An example of a signature authority clause
Here’s how a signature authority clause might look in a contract:
“Only individuals expressly authorized in writing by the Board of Directors shall have the authority to execute contracts, agreements, or financial commitments on behalf of the Company. Any agreement entered into without proper authorization shall be considered null and void unless subsequently ratified by an authorized representative.”
Conclusion
Signature authority is a crucial legal and business principle that defines who has the power to sign contracts and legally bind an organization to commitments. Establishing clear rules for signature authority helps prevent unauthorized transactions, ensures compliance with internal policies, and maintains accountability within an organization. When drafting contracts, companies should specify who holds signature authority to ensure that agreements are legally valid and enforceable.
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.