Signing a Contract on Behalf of the Company

A Company is an entity of its own which requires the members of the company to conduct its affairs and make its decisions. As such, who has the necessary authority to sign on behalf of the company to execute such decisions? Is this only limited to the directors of the company or can other members of the company or third parties do so on behalf of the company?

Can an authorized signatory be denied and if so, may the company escape liability arising from the execution of such actions by stating that it was not signed by an authorized person? This article will address such circumstances.            

The Authorized Signatories

It is provided that the law has recognized two main forms of authorities where an employee of the company has been given the necessary authority to sign on behalf of the company which are:

1. Actual authority; and
2. Apparent / Ostensible authority.

Such authorities have also been expressed in section 64 Companies Act 2016 which provides as follows:

        “Company contracts

        64. (1) A contract may be made –

        (a) by a company, in writing under its common seal;

(b) on behalf of a company, by a person acting under its authority, express or implied; or

(c) on behalf of a company, orally, by any person acting under its authority, express or implied.

(2) Any formalities required by law in the case of a contract made by an individual shall apply, unless the context otherwise requires, to a contract made by or on behalf of a company.”

Actual Authority

This form of authority is the clearest form of authority of the two in where a signatory will have actual authority to bind a company regardless of their position in the company (even if they do not hold a position as a director or as a member of the senior management).

Section 66 Companies Act 2016 provides how one may validly execute a document on behalf of the company. For the document to be validly executed by a company, it has to be signed on behalf of the company by at least two authorized officers where one has to be a director. However in the case of a sole director, the sole director may sign but in the presence of a witness who attests the signature. An ‘authorized officer’ is where a director of the company; a secretary of the company; or any other person who has been approved by the board to execute such documents on behalf of the company.

Such authority may also be expressed through a consensual agreement between the principal and the agent (The Federal Court decision in Chew Hock San & Ors v Connaught Housing Development Sdn Bhd [1985] 1 MLJ 350). Such agreements may come in the form of a power of attorney or being listed on an Authorized Signatories List for the execution of very specific documents. Such authority may also be given through a letter of authority issued by the company itself.

Apparent / Ostensible Authority

  Where an employee and / or an agent lacks ‘actual authority’ to sign on behalf of the company, they may acquire the necessary authority to do so where he has created the appearance of authority in where it has caused the other contracting party to reasonably believe that he has the actual authority to do so. This form of authority is known as ‘apparent authority’ or ‘ostensible authority’.

 A company must be very careful with such an authority as they would be held responsible for contracts that were signed by agents with purported apparent authority as well. This is even so if the agent has been found to have acted past or above their given instructions or without authority at all given from the company as long as the other contracting party had ‘reasonably believed’ that the agent did have authority to sign on behalf of the company. The belief has to show that it is ‘traceable to the principal’s manifestations’ or when ‘a principal creates, by its words or conduct, the reasonable impression in a third party that the agent has the authority to perform certain acts on its behalf’ (The High Court decision in Playboy Enterprises International, Inc v Zillion Choice Sdn Bhd & Anor [2011] 2 MLJ 59).

In most cases the third party would have derived such an impression from the conduct of the person acting on behalf of the Company, whether be it by his role and scope he plays in the contract or his position in the Company. More often than not, third parties will not verify or confirm such an authority by writing. This is where most of the issues arise.

 For example, in the High Court case of Playboy Enterprises International, Inc v Zillion Choice Sdn Bhd & Anor [2011] 2 MLJ 59 the Court found that the agent did not have the necessary apparent authority to act on behalf of Playboy. The facts of the case are briefly summarized as follows:

The first defendant who was the contracting party had to prove that he reasonably believed that an agent named Simon Wong had the apparent authority to approve the sale of the products bearing Playboy’s trademarks and designs. The Court however upon analyzing the evidence relied by the first defendant found that the first defendant had not established that Playboy had ever made any representation or created any situation to demonstrate that they had conferred any authority on Simon to give the approval to the first defendant to use of their designs.

An example of a case where the Court found that the agent did appear to have the apparent authority would be the Court of appeal case of Choo Ching Thye v Concrete Engineering Products Bhd & other appeals [2005] 4 MLJ 14. The facts of the case are briefly summarized as follows:

The agent, Choo had given representation that he had apparent authority to act on behalf of CEPCO, the company relevant to this case, to enter into the management agreement. This was further supported by the actions of CEPCO’s staff and its board which had acted in a way which supported Choo’s representation such as appointing Choo to CEPCO’s board of directors and allowing Choo to chair the board meetings.

The Relationship between Actual and Apparent / Ostensible Authority

Seeing that the two forms of authorities are very different, are there times where these authorities may overlap with one another? It was discussed in the leading United Kingdom Court of Appeal decision in Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd and another [Plaint No. S. 215A] [1964] 2 QB 480 which held at page 502 that:

“It is necessary at the outset to distinguish between an 'actual' authority of an agent on the one hand, and an 'apparent' or 'ostensible' authority on the other. Actual authority and apparent authority are quite independent of one another. Generally they co-exist and coincide, but either may exist without the other and their respective scopes may be different. As I shall endeavour to show, it is upon the apparent authority of the agent that the contractor normally relies in the ordinary course of business when entering into contracts.”

Can an Instrument Signed by an Unauthorized Person be Denied?

 This part will deal as to whether where it is found that the signatures were made without the authority of the company, the company is allowed to invalidate the execution of such instruments and thus, such instruments would not be binding on the company

Where it is found that the signatures were genuine signatures (and not forged), then the company is  estopped from denying the authority of the persons affixing the genuine signature (The Court of Appeal decision in Bumiputra-Commerce Bank Bd v Augusto Pompeo Romei & Anor [2014] 3 MLJ 672). In other words, where the instrument which is apparently regular in the form executed by officers or agents acting within the scope of their ordinary authority to execute such instruments but was instead executed and used for the purposes of the company’s business or otherwise for its benefit by someone without the authority of the company, the loss will still fall upon the company as it would still be enforceable.

However, for the company to prevent this from happening, the company has to take certain corrective steps to demonstrate to others so as to ensure that they would not have the impression that the agent signing the contract did not actually have authority beyond what they were initially provided with the sign the contracts on behalf of the company. Some of the steps include putting the person dealing with the company on inquiry. Failure to carry out steps will cause the company to be bound to such instrument and that they would thus not be estopped from denying to it (The Australian High Court decision in Northside Developments Pty Ltd v Registrar-General and Others [1990] 2 ACSR 161).

Conclusion

Based on the aforesaid, it can be concluded that a company should at all times be aware of the actions of their authorized signatories and also be wary of agents or third parties that may have caused others to reasonably believed that they have the power to sign such contracts and / or instruments on behalf of the company.