The end of the year for me in terms of parenting is always touch and go, with an eight-year-old and a six-year-old who are amped up for Christmas. Even above parents, Jolly Old St. Nick has the ultimate authority, particularly for the final page of the calendar, as ending up on the naughty or nice list hangs in the balance with each action. The same holds true in business. Knowing who you’re dealing with, what authority they have and who is the ultimate decision maker is one of the most important elements in negotiating and finalizing a contract. Those with actual authority, in terms of contract law are the principal of a business, or its legally-authorized designees. These are the individuals who from the outset, you should confirm have the ability to bind the entity into whatever agreement you’re negotiating, from a non-disclosure or data security agreement at the outset of the relationship, to the final signed supply or services agreement which delivers the goods or work to be done.
Actual authority is most often vested in employees at the top of the corporate ladder, which as a general guideline is typically anyone with the word “Chief” or “President” in their title. For smaller businesses, it may be a partner in an LLP, or a shareholder in an LLC. For the sole proprietor or small business, it’s usually a good bet that the owner is the principal and has actual authority.
Actual authority, however, can also be delegated by a company to its employees further down the line. It can be bestowed upon Directors by Vice Presidents, who received it from the Chief Financial Officer, and so on. It is there that things can get a bit tricky, as the duties to negotiate contracts – but not necessarily bind a company to them – are handed down to managers, buyers, and others in the employment hierarchy. From the outset, determining the roles of counterparts at the negotiating table, whether they are the principals themselves, or agents who have been granted full, or partial authority, is important in knowing how fast a contract will be approved, who has the ability to change it, and ultimately sign for the company. Knowing these facts will help prevent headaches by setting realistic expectations and execution timelines. If you want to know, just ask the negotiator if he or she has full authority to negotiate, edit, approve and sign off on the agreement, or what process is required to complete those tasks.
Determining the authority of the negotiator and prevents legal problems down the road. It establishes that the individuals conducting business on behalf of a company and communicating changes, requests, and orders with you, are authorized to do so. Failure to establish and understand who has that authority can result in court battles to determine the validity of an agreement. The key issue is whether the individual did in fact have the authority to bind the principal or the company to the terms in the agreement.
As a new year begins and responsibilities for negotiating new supply agreements, services contracts, and other day-to-day business arrangements come to be, make sure you know who you’re negotiating with, and what authorization they have to bind the party they represent. Despite all the appearances that they have the actual authority, much like Kris Kringle and my two true believers, it’s best to remove all doubt and confirm that fact to prevent any lumps of coal that may come later in the year if it’s left to a court to decide.
Simonson is an attorney with Fryberger, Buchanan, Smith and Frederick, P. A. specializing in business, contract, and employment law.