BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Corporations Signing Contracts
Q: I am representing a buyer on a purchase where the seller is a corporation. The purchase contract came back with just the signature of the president of the corporation. My buyer said that she thought that a corporation requires the signatures of two officers to be binding. I hadn’t heard that; is that true?
A: Sort of….California Corporations Code Section 313 provides, in pertinent part:
“any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof, executed or entered into between any corporation and any other person, when signed by the chairman of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same.”
But then, in a California Supreme Court case in the year 2000, the court stated that the contract signature by a single corporate officer was not necessarily sufficient to bind the California corporation under Section 313.
The court reasoned that, because Section 313 sets up two classes of signatures by corporate officers (the “operational” group and the “financial” group), combined with the word “and,” one member of each class of officer must sign the contract in order to bind the corporation under Section 313.
The effect is that the signing corporate officers must be:
A. One from the Operational group: chairman of the board, president or vice president; and,
B. One from the Financial group: secretary, assistant secretary, chief financial officer or assistant treasurer.
To confuse matters more, the Court pointed out that the lack of two corporate officers' signatures does not automatically mean the corporation is not bound by the contract. All it means is that the corporation is not conclusively presumed to be bound under Section 313.
For example, there are other ways that a corporation may be found to have accepted the contract, such as:
1. Implied authority,
2. Partial performance of the contractual obligations,
3. Acceptance of the benefits of the contract, or
4. Subsequent ratification of the contract.
But these alternative methods of establishing that the corporation is bound to the contract are much more fact-dependent, and can lead to more, and difficult, disputes.
ONE OFFICER WITH TWO TITLES: The Supreme Court also concluded that a single officer who holds corporate positions in both the Operational and Financial Groups can bind the corporation for purposes of Section 313 even if that officer signs only once, with a single title.
LIMITED LIABILITY COMPANIES: LLC’s are not actually corporations and the rules are different. For example, most smaller LLC’s are member managed, meaning that it is managed much like a partnership or sole proprietorship with each member managing the day-to-day activities of the LLC. The members may have titles, such as “President,” “Vice President,” and the like, or they may just refer to themselves as “Member” or “Managing Member.”
All legal documents of the LLC should be signed as the officer-title if there are such titles conferred on the members. Most small LLC’s may require, by virtue of the LLC documents themselves, that all members, or at least a majority of members, are required to sign.
PRACTICE TIPS:
1. When dealing with a corporation it is always best to either have two officers sign with one from the Operational Group and one from the Financial Group. Or, obtain the signature from one officer who holds titles in each Group.
2. For LLC’s, check the LLC documents to see what is required to bind the LLC.
3. If a client wants to challenge whether a signature of a corporation or LLC is binding and valid, send that client to their attorney for advice.
4. For further protection, if you are concerned about the authority of the corporation officers, or LLC officers or members to sign the contract, you can add a paragraph to the contract, or other document, that states:
“ By signing below, the parties acknowledge and represent that they hold the offices represented, and are authorized to sign this contract (or other document) on behalf of the Corporation (or LLC).”
This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2008 06/13/08
