Is a contract valid if signed by someone without proper authority from the company?

The Basics of Contract Law and Authority

Under the Indian Contract Act, a contract requires an offer, acceptance, consideration, capacity, and a lawful object. But wrapped within "capacity" is the crucial element of authority, especially when dealing with companies or organizations. When an individual signs a contract on behalf of a company, they act as an agent. The law recognizes different types of authority that empower this agent:

1. Actual Authority: It refers to the explicit permission granted by the principal to the agent to sign contracts. It may be expressed or implied. Without this, the contract is generally void or unenforceable against the company.

2. Apparent Authority: It refers to a situation where if there's no actual authority, the contract might still be valid if the company created an appearance of authority. This protects innocent third parties who reasonably believe the signer is authorized. For example, if a company allows an employee to use an official title and negotiate deals without correction, the other party can argue apparent authority.

3. Ratification: It refers to a situation in which if an unauthorized contract is signed, the company later ratifies it, making it a valid one. It must be explicit or implied, either by accepting benefits or receiving goods under the contract. However, it has limits: the company must have full knowledge of the facts, and ratification can't harm third parties retrospectively.

These concepts are not unique; they are echoed in common law systems. Authority ensures the contract reflects the true intent of the entity, preventing rogue actions from binding the whole organization.

Authentication under Companies act, 2013

The provision regarding authentication has been envisaged under Section 21 of the Companies Act, 2013. According to Section 21, the Board of the Company may authorize any managerial personnel, director, secretary, officer, or any employee to sign any documents, proceedings, or contracts on behalf of the Company. Section 21 states “save as otherwise provided in this act." It means this provision doesn’t have an overriding effect. In other words, if any other provision in this act provides any other statement on the same point, that provision will override. This provision is not exhaustive in nature; it means 'expressly used' under this act. “May” clearly says that it's at the discretion of the company to authorize any person to sign or act on behalf of the company.

Consequences of Unauthorized Signatures

When a contract is signed without proper authority, the immediate effect is that the contract is usually voidable or unenforceable against the company. The company can reject it by demonstrating a lack of authority. But this isn't always straightforward. For the unauthorized signer, the repercussions can be severe. They might be personally liable for breach of authority. If they falsely claim authority, the other party may sue for damages.

At the option of the other party, discovering the lack of authority after the performance of the contract can be disastrous if resources have been invested or goods delivered. This is why due diligence is essential.

In corporate settings, especially in India, where family-run businesses are common, authority issues often stem from unclear hierarchies. A FICCI survey found that 35% of small businesses faced contract disputes due to authorization lapses. In international contracts, differing legal frameworks add complexity. For instance, under the UN Convention on Contracts for the International Sale of Goods (CISG), authority is judged based on the agent's apparent powers, which may override local rules.

Practical Tips to Prevent Authority Risks

In today’s global world, protecting businesses is simpler than it sounds. Always document signing authority clearly (powers of attorney, updated board resolutions filed with India’s Registrar of Companies) and insist on seeing proof before you sign—especially on big deals. Incorporate clauses in the contract where the signer guarantees their authority and covers any losses if they make a fault. Train your team so no one oversteps, and use blockchain smart contracts wherever possible to automatically verify authority and eliminate human error.

Conclusion

Indian Contract Law and Companies Law both prohibit unauthorized signs. Signing any document, proceeding, or contract without proper authority and authentication is not permissible under laws. Companies shall not be liable for those acts that have been done by a third person on behalf of the company without proper authorization. Understanding these implications empowers businesses to forge stronger and more secure agreements.