When do Agents Have Authority to Bind Principals to Contracts?

Construction attorney’s deal with construction contracts on a daily basis.  We are constantly drafting, editing, negotiating, and interpreting construction contracts for clients.  Yet, seldom are we ever involved with the execution of those construction contracts upon which we advise. Rather, we send the final documents off to clients who handle all aspects of execution, unless and until a problem arises. Only then, does anyone focus upon who executed the contract and question whether they had authority to do so.

Obviously, individuals and sole proprietorships have authority to sign contracts on their own behalf.  Likewise, partners have authority to sign binding contracts on behalf of general partnerships.  But who has authority to sign binding contracts on behalf of other forms of legal entities or “legal fictions”.  Nowadays, virtually every commercial and industrial construction contract is executed between corporations – INC’s, limited liability companies – LLC’s, limited liability partnerships - LLP’s, or some combination thereof.  Such “legal fictions” are not tied to or otherwise identified by individuals, but are rather used to avoid personal liability and protect the personal assets of the officers, partners, principals and stockholders.  At the same time, the individuals involved with these legal entities who have authority to execute binding contracts are not as easily identified as with sole proprietorships or simple partnerships.  [But see, “Can C Suite Members be Personally Liable for Corporate Torts, Including Construction Defects?”, posted 8/23/23].

Legal entities such as INC’s, LLC’s, and LLP’s are “legal fictions”, and unlike sole proprietorships or simple partnerships the individuals who control these “legal fictions” can be difficult to identify, and can be removed or changed without notice to third parties.  Consequently, it is critical to understand who can execute binding contracts on behalf of these “legal fictions”, and under what circumstances they can do so.  There are generally four types of authority by which a “legal fiction” can be bound to a contract in the construction industry.

• Actual Authority vests in an individual by virtue of their unique title within a “legal fiction”, such as the CEO/President of an INC or LLC or a general partner of an LLP.
• Express Authority vests in an individual who is given written or verbal authority to act on behalf of a “legal fiction”, such as a vice president of an INC or LLC authorized by corporate resolution or a limited partner granted authority by the general partners.
• Apparent Authority vests in an individual when an individual possessing Actual or Express Authority says, does, or omits from doing something before the unauthorized act causing third-parties to reasonably believe the individual is authorized to bind the “legal fiction”.
• Ratification vests in an individual when an individual possessing Actual or Express Authority says, does, or omits from doing something after the unauthorized act that evidences the “legal fiction” accepts the benefit of the unauthorized act with clear and unequivocal knowledge of the the act and its lack of authorization.
• While these four forms of authority also apply to individuals, sole proprietorships, and simple partnerships, they generally have far more application to “legal fictions” such as INC’s, LLC’s and LLP’s.

Many of the construction contracts executed between “legal fictions” that cross our desks are signed by project managers, facilities managers, salespeople, or other non-C-level managers.  While these individuals do not possess actual authority, their respective “legal fictions” are typically  bound by express or apparent authority before the unauthorized execution or ratification thereafter. 

A client recently was held responsible towards a sub-subcontractor who sought to hold the contractor responsible for the unauthorized execution of a contract by a subcontractor.  The unauthorized  act consisted of the subcontractor executing a sub-subcontract by signing the name of the contractor and its vice president.  The contractor was never told of the unauthorized act, never provided with a copy of the unauthorized contract, and did not receive any benefit from performance of the unauthorized sub-subcontract.  The Judge nonetheless ruled that the contractor was responsible for the unauthorized contract by virtue of actual, express, and or apparent authority despite the complete lack of authorization. 

The most important takeaway is to always question the circumstances surrounding execution of construction contact, including who is executing the contract, and the terms under which is is executed. [See, "What's the Significance of Executing a Construction Contract Under Seal", posed 4/12/23].