Your Employee Signed A Contract Without Permission - Is Your Business Still Bound?

In business, it’s important to be clear about who can sign what. However, those lines can still get blurred - and next thing you know, an employee has signed a contract they were never supposed to approve.

So, is your business still bound by their signature?

Possibly. An employee signing something without permission does not automatically mean the contract can be ignored.

The answer can depend on whether the employee had authority to act for the business, whether the business made it appear that they had that authority and what happened after the agreement was signed.

These rules largely come from agency and state law, so the exact position can vary depending on where your business operates and the circumstances surrounding the agreement. However, there are a few key principles US businesses should understand.

When Can An Employee Bind A Business To A Contract?

Many businesses have internal rules around who can enter into contracts.

For example, a salesperson might be able to agree to standard customer contracts, while larger deals need approval from the CEO. A purchasing manager might be able to place routine orders but need additional approval before committing the company to a major supplier agreement.

Having these rules is important. However, they don't always determine whether a contract is binding when dealing with someone outside the business.

Under general US agency principles, an employee can act as an agent of the business. This means that, in the right circumstances, their actions can create legal obligations for the company.

The key questions are generally:

Did the employee actually have authority to make the agreement?

Or, if they didn't:

Did the business make it reasonable for the other party to believe that they did?

This is where the difference between actual and apparent authority becomes important.

It is also worth remembering that authority issues are not limited to handwritten signatures. Depending on the contract and applicable law, an employee agreeing to terms by email, accepting an order or otherwise indicating agreement on behalf of the company may also create questions about whether they had authority to do so.

What Is Actual Authority?

Actual authority is relatively straightforward: the business has given the employee authority to act on its behalf.

There are two common ways this can happen.

Express Authority

Express authority is where the business directly gives someone permission to do something.

For example, you might tell your sales manager they can approve customer agreements worth up to $25,000.

The authority might be documented in a company policy, board resolution, employment arrangement or delegation of authority. In some circumstances, it can also come from clear oral instructions.

Implied Authority

Authority doesn't always have to be expressly written down.

An employee may also have implied authority to do things that reasonably form part of the role they have been asked to perform.

For example, if someone has been appointed purchasing manager, routinely orders stock and has done so on the company's behalf for some time, purchasing ordinary stock may fall within the authority associated with their position.

Past conduct can matter too. If the business has repeatedly allowed an employee to enter similar agreements without objecting, that history may help establish that the employee had authority to continue doing so.

This is why simply saying, "We never gave them written permission to sign anything," may not resolve the issue.

What Is Apparent Authority?

This is where things can become more complicated.

Apparent authority can arise where an employee did not actually have permission to make an agreement, but the business made it reasonably appear to the other party that they did.

The focus is therefore not just on what the employee was told internally. It is also on what the business communicated or represented externally.

For example, imagine your business has a sales director who:

• Negotiates directly with customers
• Uses a company email address and a "Sales Director" title
• Has previously finalized similar contracts
• Is presented to customers as the person responsible for closing deals.

Internally, you may have a rule saying all agreements over $50,000 require CEO approval.

But if that restriction was never communicated to the customer, and the way your business operated reasonably suggested that the sales director had authority to enter the agreement, apparent authority may become relevant.

US courts generally look for words or conduct attributable to the principal - the business - that created the appearance of authority. An employee generally cannot create apparent authority simply by telling someone, "Don't worry, I'm authorized."

That distinction is important.

Your business can control what an employee is allowed to do internally, but it should also think about what authority that employee appears to have to customers, suppliers and other third parties.

What If A Salesperson Makes A Deal The Company Didn't Approve?

Sales teams are a good example because negotiating deals is already part of their job.

A salesperson may routinely discuss pricing, quantities, delivery arrangements, standard discounts or customer terms.

If your business allows them to negotiate and agree to these matters regularly, it may be much easier for a customer to reasonably believe that the salesperson has authority over an ordinary sale.

The position can look different if the employee agrees to something far outside the normal scope of their role.

For example, a salesperson might agree to:

• A significant exclusivity arrangement
• An unusually large discount
• A multi-year commitment outside the company's usual contracts
• Transferring valuable intellectual property
• Unusually broad indemnity or liability obligations.

The more unusual an agreement is for that employee's position, the more questions there may be about whether the other party could reasonably assume they had authority to approve it.

This works both ways.

If you're entering an important agreement with another business and the person you're dealing with is making commitments that seem unusual for their role, it may be worth confirming their authority before relying on the agreement.

Does A Job Title Mean Someone Can Sign For The Company?

Not automatically.

A title such as "Sales Director", "Purchasing Manager" or "VP of Operations" does not give someone unlimited power to enter contracts on behalf of the company.

However, their position can still matter.

Certain job titles may reasonably suggest that a person has authority over decisions normally associated with that position. US agency law recognizes that putting someone in a role carrying commonly understood responsibilities can contribute to apparent authority.

For example, it may be reasonable to expect a purchasing manager to make ordinary purchases.

It would be much harder to assume that the same purchasing manager could sell the company's intellectual property or enter a major financing arrangement simply because they hold a management title.

Authority should therefore be considered in context rather than based on someone's title alone.

What If Your Internal Policy Says The Employee Could Not Sign?

This is one of the most important distinctions for businesses to understand.

Imagine your internal policy says:

All contracts worth more than $50,000 require approval from the CEO.

An employee signs a $60,000 customer agreement without getting that approval.

The employee may have clearly breached your internal policy.

However, that does not automatically mean the other party is unable to enforce the agreement.

If the customer knew that CEO approval was required, that may be significant.

But if your business had allowed the employee to negotiate the transaction, presented them as having authority and never communicated the internal restriction, the question of apparent authority may still arise. General agency principles recognize that undisclosed restrictions on an agent's authority do not necessarily defeat apparent authority that the principal has created.

In other words, there are really two separate issues:

Did the employee follow the company's internal rules?

and

Is the company legally bound in its dealings with the other party?

The answers will not necessarily be the same.

What About Managers, Officers And Directors?

Authority can become more complicated higher up a company's structure too.

Managers and corporate officers may have broader authority because of their responsibilities, the company's governing documents, resolutions of the board, specific delegations and the way they have historically acted for the company.

However, seniority does not automatically mean unlimited authority.

A director, for example, should not simply be assumed to have individual authority to enter any contract they choose merely because they sit on the board.

The exact rules depend on the state and corporate structure.

Delaware provides a useful example: under its General Corporation Law, the business and affairs of a corporation are generally managed by or under the direction of its board, while officer titles and duties can be established through the company's bylaws or board resolutions.

LLCs can have different rules again, particularly depending on whether they are member-managed or manager-managed and what their operating agreement provides.

Rather than assuming someone's title settles the issue, significant transactions should be checked against the company's governing documents and applicable state law.

What If The Business Finds Out And Does Nothing?

There is another way an initially unauthorized agreement can become binding: ratification.

Ratification broadly refers to the business later accepting or adopting an act that was originally performed without sufficient authority.

Imagine an employee signs a contract they were not authorized to enter.

Management finds out about it a week later but decides to continue with the deal. The business starts delivering the services, invoices the customer and accepts payment.

That conduct can make it much harder to later argue that the agreement should be disregarded simply because the original employee lacked authority.

Depending on the circumstances and applicable law, accepting the benefits of an agreement or otherwise acting consistently with it can amount to ratification.

This is why discovering an unauthorized agreement should prompt action.

Continuing with the contract while planning to rely on the employee's lack of authority later may undermine that position.

What If The Employee Has Already Signed The Contract?

If you've discovered an employee has entered a contract they were not supposed to sign, don't immediately assume the agreement is invalid - but don't simply carry on with it either.

Start by finding out exactly what happened.

Look at the agreement itself and what the employee actually committed the business to. Check their role, employment arrangements, internal policies and any authority limits that applied.

You should also look outside the company.

Had this employee signed similar contracts before? How had the business presented them to the other party? Was the customer told that additional approval was required? Had management previously approved similar deals made by that employee?

Then consider what has happened since the agreement was made.

Has your business accepted payment? Delivered services? Ordered products? Sent communications confirming the agreement? Any of these facts may become relevant when considering authority and ratification.

For a significant agreement, this is a good time to get the contract reviewed before telling the other party that it is cancelled or refusing to perform.

A Business Contract Review can help determine what the agreement says and identify the contractual issues that need to be considered alongside applicable state law.

How Can Businesses Prevent Unauthorized Contracts?

The best time to deal with signing authority is before an unauthorized agreement appears in your inbox.

Businesses should make it clear who can approve different types of contracts and where additional approval is needed.

That might include:

• written signing-authority limits
• financial approval thresholds
• different authority levels for sales staff, managers and officers
• additional approval for unusual or high-risk terms
• contract-management and approval processes
• training employees on what they can negotiate and what they cannot approve.

Your Employment Agreements and internal policies can also help define employee responsibilities and expectations.

However, internal documentation is only part of the picture.

Internal rules work best when the way your business operates externally is consistent with them.

If an employee cannot approve a particular agreement, avoid repeatedly allowing them to act as though they can. Where appropriate, make approval requirements clear during negotiations rather than relying entirely on an internal policy the other party has never seen.

Should Your Contracts Say Who Can Approve A Deal?

Your contracts and sales processes can also help make approval requirements clearer.

For example, depending on the transaction, a proposal or agreement might specify that it is:

• Subject to management approval
• Not binding until signed by an authorized officer
• Subject to a particular countersignature
• Conditional on final company approval.

This can be particularly useful where employees are allowed to negotiate commercial terms but are not authorized to give final approval.

However, wording like this should be drafted carefully. A signature or approval clause should not be treated as a guaranteed solution to every agency or apparent-authority issue, particularly where the company's actual conduct tells a different story.

If you're setting up or reviewing the way your business enters agreements, Sprintlaw's Contracts services can help make sure your documents reflect how approvals and commercial decisions actually work within your business.

Key Takeaways

An employee signing a contract without permission does not automatically mean your business is free from the agreement.

The employee may have had actual authority because authority was expressly or impliedly given to them. Even without actual authority, the business's conduct may have created apparent authority in the eyes of the other party. And if the business discovers the agreement and later accepts or performs it, ratification can become another important consideration.

The practical lesson is that signing authority is not only about internal policies.

Businesses should be clear about who is authorized to act internally and who appears authorized to customers, suppliers and other third parties.

If an important contract has already been entered without approval, get the position reviewed before assuming you can cancel the agreement, ignore it or continue performing it without consequences.

If you would like a consultation on employees signing contracts, you can reach us at (888) 449-8437 or team@sprintlaw.com for a free, no-obligations chat.