5 CAPACITY AND AUTHORITY LET US IMAGINE THAT YOU HAVE BEEN NEGOTIATI...

Let us imagine that you have been negotiating with representatives of a party

to a project for the design and construction of a chemical plant in the Gulf;

you are the French design-build contractor, and the other party is a Korean

joint-venture owner. You and the owner ’ s representatives have recorded in

detail the terms of the intended contract between you in a formal document.

After much discussion, the details of every aspect of your agreement have

been reduced to writing, and everything appears ready now for the signing, or

‘execution’, of the contract. The other side ’ s senior representative and you then

both duly sign the contract in each other ’ s presence.

Now you think that you have a binding contract. However, you might not

have a binding contract if the person who signed the contract for the other

party was not authorised to do so.

One very important, but sometimes overlooked, feature of contracts in

general concerns the authority of the person signing or executing the contract

on behalf of the named party. Does that person truly have power or authority

to bind the named party by signing the contract, apparently on its behalf?

This question arises most commonly in connection with companies or

corporations rather than with individual people. Most legal systems contain

rules for the formation, constitution and regulation of companies or corpora-

tions; they are treated as legal persons, just like real people, having legal rights

and obligations themselves and being able in particular to enter into con-

tracts in their own names. So ‘A Ltd.’, or ‘A Corporation’, or ‘A Incorporated’

might be names of a distinct legal person, the company or corporation

named.

Construction projects of any size will almost invariably involve contracts

between companies rather than real people. But because companies are only

abstract legal persons, they cannot act except by real people with authority, or

power, to act for them; these authorised people are the agents of the company.

So in dealings with third parties, including entering into contracts with them,

companies will act by or through their agents.

A company ’ s agents will include a whole range of people, with different

levels of authority. Some people may have authority, given by the company, to

enter into contracts on the company ’ s behalf but only up to a certain financial

limit; others may be able to enter into contracts of any size, but only in certain

geographical areas, or where the contract concerns a particular subject matter.

Whether, and if so what, contracts a person is authorised to enter into on

behalf of a company will depend on the constitution and internal organisation

of the company and, more generally, upon the system of law that applies to

that company.

If a person is authorised to enter into contracts of a certain size or type, then

he may be said to have actual authority to bind the company by executing

contracts of that size or type. However, many legal systems also have a concept

of

apparent or

ostensible authority, whereby a company could still be bound by

the acts of a person who does not have actual authority. If a company, by its

words or conduct, represents or holds out to the other party that a particular

individual has authority to contract with it then it may be open to the other

party to argue that the company is bound by the individual who signs the

contract, even if that individual lacked actual authority to do so.

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This concept of ostensible authority is very important because it is often not

possible to tell, without making detailed inquiries of a kind which are not

always made, whether the particular person signing the contract is actually

authorised to do so. If he has apparent or ostensible authority then, as

described above, the company could still be bound.

We have highlighted the distinction between these two kinds of authority

because it is surprisingly common in international projects for questions of

authority to arise if there is later a dispute. One party might argue that the

contract was not validly concluded because the person signing it did not have

authority or power to do so on the company ’ s behalf, and in this way seek to

avoid a payment or liability. In order to protect yourself from such an argu-

ment it is very important to obtain legal advice. Your legal adviser should

satisfy himself that the person purporting to execute a contract on behalf of

the named party has authority to do so.

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Another, related matter of great practical importance is the

capacity of the

company named as the other party to the contract. In some legal systems there

is a doctrine or rule to the effect that a contract entered into with a company

which, by virtue of its constitution, is unable or lacks the capacity to enter into

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Many (although not all) legal systems have a concept of apparent or ostensible authority.

The details of this doctrine will vary from system to system.

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This could involve examining whether the relevant person has actual authority according

to the laws of the country of incorporation of the named party to the contract.

contracts of that kind is null and void and cannot be enforced.

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Your legal

adviser should take steps to ensure that no problems of capacity arise should

the project later encounter difficulties.

We shall be looking shortly at BOT or concession-type projects, in which

there is a contract or contracts between a government or government agency

and another party or parties. In any contract with such a body it is essential to

ensure that it has the legal capacity to enter into the contract; special rules

could apply to such bodies that do not apply to private entities. In addition, it

is important to ensure that the individual or individuals signing on behalf of

the official body have authority to do so.

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