authority to bind

No, this is not borrowed from an S&M Encyclopedia. Someone with “authority to bind” has the power to sign agreements on behalf of another person or entity. Under state laws, an officer of a corporation, a managing member of a limited liability company, or a general partner in a partnership all have the authority to bind their respective entities. The individual owner of a sole proprietorship can always bind that business although in community property states, the signature of a spouse is sometimes also advised, just to make sure all parties are on board.

Status of authority. The status of the signing parties should be reflected in the signature block of the document, which should indicate whether that person is an officer, a general partner, etc. In addition, many legal documents contain a statement such as “Each party has signed this Agreement through its authorized representative,” or similar language.

Avoiding fraud. As a preventative measure—to avoid being improperly bound to contracts—businesses often take the following actions:

• Notice. Companies often provide written notice to customers, vendors, and others as to who in the company has authority.
• Contract notice. Companies often include a notice on all contracts indicating the names of those persons who can bind the business.
• Establish limitations. Companies establish limitations on authority to bind in their agency and contractor agreements.

See: agent, signatures

attorney in fact

An attorney-in-fact does not have to be an attorney; it can be any person named in a power-of-attorney document to act on behalf of someone else (the “principal”). The attorney-in-fact doesn’t have unlimited powers, however. All of the powers and responsibilities are set forth in the power-of-attorney document. They often include the authority to sign contracts on behalf of the principal.

See: agent

arms-length

The world would be a better place, at least hygienically, if we could keep everyone at a distance equal to the length of an arm—the literal meaning of this tem. In contract law, an agreement is considered to be “arms-length” if the parties acted independently and the resulting agreement reflects what would be negotiated on the open market. Whether an agreement is “arms-length” is sometimes an issue of great interest to the government.

EXAMPLE. A grandfather wants to give his granddaughter $100,000 but he is concerned about gift taxes. Instead, he prepares a “loan” agreement, lending her $100,000 interest free and with no schedule for repayment. The IRS would not consider that to be an arms-length agreement and would instead insist that the amount be treated as a gift for tax purposes.

Contracts made with the U.S. government should be arms-length and federal law determines what is and isn’t arms-length by using a “standard of comparability,” in which the arrangement is measured against similar transactions on the open market.[i] When courts measure an arms-length decision, they commonly use three factors: market price, relationship of the parties, and comparable agreements.

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[i] 26 CFR Section 1.482

agent

Remember Tom Cruise as a sports agent in Jerry Maguire, or Jeremy Pivens as the Hollywood agent Ari Gold, in Entourage. We know they’re important, but what exactly do these people do? Basically, an agent is authorized to act on behalf of someone else (the “principal”). In return for their deal making, agents usually receive a cut of the money the principal makes on the deal. Because an agent usually has authority to negotiate contracts that are binding on the principal, the agent has a legal duty to be scrupulously loyal and honest to the principal, fully disclosing all of the information the principal needs to make a fully informed decision. (This higher standard is known as a “fiduciary relationship.”) For example, it would be a breach of your agent’s duty if she failed to disclose that she also represented your competitor.

An agent is not the principal’s employee because the principal does not control how the agent performs (a standard requirement for employees). Also, most agents typically represent a number of clients. To ensure that a court does not misinterpret the relationship, agency contracts often contain a clause like the one below. Note, this clause references other relationships besides agent-principal including joint ventures (any joint economic activity between two or more people) and partnerships:

EXAMPLE: No Joint Venturer: Nothing contained in this Agreement shall be deemed to constitute either agent or company as a partner, joint venturer, or employee of the other party for any purpose.

When an agent can bind the principal (“actual authority”). The agent’s power to enter into contracts and make promises that the principal must keep usually happens in one of two ways:

• By contract. The agent and principal sign an agency contract, establishing the agency’s power to bind the principal.
• By law. Either a statute or case law establish the relationship. For example, in a general partnership, any partner can bind the other partners.

When an agent’s power to commit the principal is explicitly spelled out by law or contract, the agent is said to have “actual authority.” This means that the agent and principal both know, and agree to, the agent’s role in acting for the principal.

Apparent authority. In some cases, an agent lacks actual authority but leads someone to reasonably believe that he or she has the power to enter into contracts. This is called “apparent authority.” In order to protect the party that was misled, a court will uphold the agreement if that party reasonably believed that the principal endorsed the deal, because of statements, actions, or even inaction.

EXAMPLE: A former insurance agent, recently fired by SLYCO, arrives at Max’s home. The ex-agent was supposed to turn in his company car (emblazoned with the SLYCO logo) but kept it for an extra week. The ex-agent convinces Max to pay several thousand dollars for a newer policy. The agent pockets Max’s money and disappears, never informing SLYCO. Later, after a car accident, Max asks for repayment under his policy. Max reasonably relied on the fact that the ex-agent had a company car in assuming that he still worked for SLYCO. Because Max’s assumption was reasonable, SLYCO would probably be obliged to provide the coverage purchased by Max. Courts refer to situations like this, in which someone who once had actual authority no longer does, as “lingering apparent authority.”

How to avoid apparent authority problems. To avoid being bound to contracts by someone with apparent authority, the principal should:

• Provide notice. Alert third parties thief an agent no longer has authority. For example, if you’ve switched agents, notify your customers.
• List actual agents. Periodically distribute a statement to customers and clients on company letterhead indicating the agents who have actual authority, and update the last quickly when necessary.
• Keep the agent informed. Let the agent know, in writing, whether or not you have conferred actual authority, and as to which issues.