Types of authority to act on behalf of a company

When you do business with another company, you want to make sure that the person you are dealing with has the authority act so that any contract you enter into is valid. We take you through the points to consider.

Types of authority

There are three types of legal authority that a director or other person who acts on behalf of a company can have. The strongest is called “express actual authority”: an express delegation of authority to that director to act on the company’s behalf, either for that specific transaction or generally for business of a similar nature. If you are entering into a significant contract with another company, it is prudent to ask for evidence of a delegation of authority to the person you are dealing with. This could take the form of a board minute, or written confirmation from a senior figure on the board.

Another form of actual authority is “implied actual authority”. This means that anybody dealing with, for example, a managing director of a company can assume that they have authority to act on the company’s behalf.

The final form is “ostensible authority”, also known as “apparent authority”. This occurs where the company, or someone with actual authority of the company, holds a person out as having authority to do business on the company’s behalf. For example, if a person wanted to enter into a contract with a company and the company’s director told them to “deal with A”, that person would be entitled to assume that A had the relevant authority to conduct the deal. However, beware of relying on this sort of authority for significant business deals because there are other factors to consider.

Delegating authority

If your own company is entering into a significant transaction, it is a good idea to appoint a specific director or committee to deal with the negotiations. It is better for all parties to know exactly who should be dealing with what aspects of a transaction, rather than relying on assumptions.

Acting in breach of authority

A director who goes beyond their delegated authority, or acts when they have none, is in breach of their duties as a director and can be held personally liable. The transaction itself is also at risk, as the shareholders may decide to declare it void. See our Consequences of Breach of Duty table for further information.