Confirming Authority in Contractual Agreements

When conducting business, entrepreneurs must consider a number of legal considerations to protect their interests. One critical aspect often overlooked is verifying the authority of the individuals with whom they are contracting, especially when dealing with larger companies. Ensuring that a person has the appropriate authority to enter into a contract on behalf of their company is essential to avoid disputes and potential invalidation of agreements. This article explores the importance of verifying authority, the implications of not doing so, and how entrepreneurs can rely on the Turquand rule for protection.

The Importance of Verifying Authority

When entering into a contract, it's crucial to confirm that the person representing the other party has the authority to bind their company. This is particularly important when dealing with larger organizations, where the internal delegation of authority can be complex and not always apparent.

1. Avoiding Invalid Agreements: If the person signing the contract does not have the proper authority, the contract may be deemed invalid. This can lead to significant financial and operational setbacks, especially if substantial resources have already been committed.

2. Preventing Legal Disputes: Verifying authority helps prevent disputes over the validity of the contract. Such disputes can be time-consuming and costly, diverting focus and resources from the core business activities.

3. Protecting Interests: Ensuring that the contract is valid and enforceable protects the entrepreneur's interests, providing legal recourse if the other party fails to meet their contractual obligations.

How to Verify Authority

To safeguard against unauthorized agreements, entrepreneurs should:

1. Request Written Confirmation: Obtain written confirmation from the other party’s company verifying that the individual has the authority to enter into the contract. This can be in the form of a board resolution or a letter from a senior executive.

2. Review Company Documents: If possible, review the company's governance documents, such as their memorandum of incorporation, which may outline the delegation of authority.

3. Conduct Due Diligence: Perform background checks and due diligence on the company and the individual signing the contract to ensure their credibility and authority.

The Turquand Rule: A Shield for Entrepreneurs

Despite taking these precautions, there may still be instances where an entrepreneur unknowingly enters into a contract with someone who lacks the proper authority. In such cases, the Turquand rule offers a layer of protection.

What is the Turquand Rule?

The Turquand rule, stemming from the case of Royal British Bank v Turquand (1856), is a legal doctrine that protects third parties who enter into contracts with a company. It allows them to assume that internal company rules and procedures have been followed, provided there are no obvious reasons to suspect otherwise. 

Application of the Turquand Rule in South Africa

In South African law, the Turquand rule has been recognized and applied to offer protection to those contracting with companies. This rule implies that an entrepreneur can:

1. Assume Proper Authority: Rely on the assumption that the person acting on behalf of the company has the necessary authority, as long as there are no clear signs to the contrary.

2. Avoid Extensive Investigation: Be relieved from the need to investigate the internal processes and approvals of the other company extensively. This is particularly beneficial when dealing with large companies where such investigations could be impractical.

Limitations of the Turquand Rule

However, entrepreneurs should be aware that the Turquand rule has its limitations:

1. Obvious Irregularities: The rule does not apply if there are obvious irregularities or reasons to doubt the authority of the person signing the contract. For instance, if the signatory is a junior employee without apparent authority to enter into significant agreements, relying on the Turquand rule may not be justified.

2. Fraud or Bad Faith: If the entrepreneur has knowledge of, or colludes in, any fraudulent activity or bad faith concerning the authority of the signatory, the protection of the Turquand rule will not apply.

Practical Steps for Entrepreneurs

To effectively utilize the protection of the Turquand rule while minimizing risk, entrepreneurs should:

1. Perform Basic Checks: Even though the Turquand rule offers some protection, conducting basic checks on the authority of the signatory is prudent. This includes verifying their position and requesting confirmation of their authority.

2. Document Assumptions: Keep records of the steps taken to verify authority and any confirmations received. This documentation can be vital if the authority is later contested.

3. Seek Legal Advice: In complex transactions or when in doubt, seek legal advice to ensure all aspects of the contract are valid and enforceable.

Conclusion

For South African entrepreneurs, verifying the authority of individuals when entering into contracts is a crucial step in safeguarding their business interests. While the Turquand rule provides a valuable safety net, it is not a substitute for due diligence. By combining careful verification with an understanding of the protections offered by the Turquand rule, entrepreneurs can confidently engage in business transactions and mitigate the risks associated with unauthorized agreements.

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