Who can bind a company? Authority to contract under English Law 

This article was written by Grace Beaton, as part of her work experience week with DRS.

“Do they actually have authority to sign this?” is one of the most frequently asked questions within commercial contracting. It is also one of the most misunderstood. While many assume that a contract is only binding when signed by a director or other authorised representative, the legal position can be more complex. In some circumstances, a company can be bound by the actions of an individual who had no actual authority at all. Determining whether authority exists can therefore have significant consequences for both companies and third parties. This blog examines the principles governing authority to contract under English law, focusing on actual authority, apparent authority, and circumstances in which a company may be bound by the acts of its agents. 

Actual authority 

Actual authority exists where a company has authorised an agent to act on its behalf, whether expressly or by implication. It concerns the relationship between the company (the principal) and the individual acting for it (the agent).  Where an agent acts within the scope of their actual authority, the company will generally be bound by the resulting contract. 

As the name suggests, express actual authority arises where authority has been expressly granted, whether through a company’s articles of association, a board resolution, an employment contract, or other clear communication. For example, a board of directors may expressly authorise a particular employee to negotiate and execute a contract on the company’s behalf. 

In contrast, implied actual authority arises from the circumstances of the relationship between the company and the agent. Authority may be inferred from the agent’s position within the company, the nature of their role, or the conduct of the parties. For instance, a managing director will ordinarily possess implied authority to enter into contracts that fall within the ordinary course of the company’s business. 

The distinction between express and implied authority is important, as disputes frequently arise where no formal authorisation exists. In such cases, the courts will examine the surrounding circumstances to determine whether authority can reasonably be inferred. 

Apparent authority (ostensible authority) 

Apparent authority arises where a company, through its words or conduct, represents that an individual has authority to act on its behalf, and a third party relies on that representation when entering into a contract. In such circumstances, the company may be bound by the contract even if the individual lacked actual authority. 

The principle of apparent authority is concerned with how the situation appears to third parties, rather than the internal arrangements between the company and its agent. The focus is therefore on whether the company has made a representation, either expressly or by conduct, that the individual had authority to enter into the contract in question. 

A representation of authority does not need to be explicit. It may arise where a company allows an individual to occupy a certain role, or to act in a manner which would reasonably suggest to third parties that they are authorised to contract on the company’s behalf. For example, an employee who is presented as holding a senior commercial position and is routinely permitted to negotiate contracts may be taken to have apparent authority, even if internal limitations on their authority exist. 

For apparent authority to be established, the third party must also have relied on the representation when entering into the contract. If the third party knew, or ought to have known, that the individual lacked authority, the principle will not apply. 

Statutory protection (section 40 CA 2006) 

Section 40 of the Companies Act 2006 provides important statutory protection when dealing with a company.  It states that, in favour of a person dealing with the company in good faith, the directors’ power to bind the company which they represent is deemed to be free from any limitation which may exist under the company’s constitution. This is significant as it means that companies cannot escape deals by blaming their own internal mistakes. Moreover, third parties are not required to check whether internal approval procedures have actually been followed. Although this can sometimes create risks for companies, particularly where internal controls are weak or not properly enforced, it reflects a policy choice to favour the provision of commercial certainty and to ensure that outsiders are not disadvantaged by internal governance issues.  

Practical implications 

The distinction between actual and apparent authority has important practical consequences for both companies and third parties entering into contracts.  

For companies, the key risk is that individuals may inadvertently be held out as having authority to bind the business. Even where internal limits on authority exist, those limitations may not be effective against third parties if the company’s conduct suggests otherwise. Therefore, it is crucial for companies to ensure that authority structures are clearly defined and that internal restrictions are communicated with clients and enforced in practice, particularly in relation to senior employees who regularly engage with third parties. 

Clear board resolutions, delegation policies, and approval processes can help reduce the risk of unauthorised contracting. Equally important is ensuring that external communications do not create the impression that an individual has authority beyond that which has actually been granted. 

For third parties, the key consideration is whether it is reasonable to assume that the individual they are dealing with has authority to enter into the contract. Where a person appears to hold a senior position or is routinely involved in negotiating agreements, it may be reasonable to rely on their apparent authority. However, where there are indications that authority may be limited, further enquiries should be made to confirm that the individual is properly authorised. 

Ultimately, disputes over authority often arise where there is a mismatch between a company’s internal arrangements and the impression it presents to the outside world. 

Conclusion

The question of who has authority to bind a company ultimately turns on the distinction between actual and apparent authority. While actual authority is determined by the internal relationship between a company and its agents, apparent authority focuses on how those agents are presented to third parties. As a result, a company may be bound by contracts entered into by individuals who lacked actual authority, provided that a representation of authority has been made and relied upon. Clear internal governance and careful management of external communications are therefore essential to minimise the risk of unauthorised contracting.

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