Out-Law Guide | 06 Dec 2018 | 12:15 pm | 2 min. read
This guide was last updated in December 2018
Authority can either be actual, meaning the activity is authorised expressly or impliedly by the company, or ostensible, which means the authority is apparent to others or appears to others based on the way the person is represented by the company.
The business of a company is managed by its directors acting collectively. They can delegate their powers, for example to committees, individual directors or employees. This is the default position in Irish company law.
In practice most day to day contracts entered into by Irish companies are entered into without formal board approval. Formal board approval is given by a resolution of the board at a directors’ meeting or by written directors’ resolution.
A third party dealing with directors who are contracting on behalf of a company can assume, unless they have knowledge to the contrary, that those directors have the authority to bind the company.
For contracts of a material value or importance to a company it is usual to have either a prior formal board approval or for the contract to be ratified by formal board approval after it has been entered into.
A third party may still be able to rely on actual or ostensible authority in relation to such material contracts, but a prudent third party would seek proof of the authority or approval in the form of board minutes or a written directors' resolution. Most directors would be unwilling or reluctant to enter into material contracts on behalf of a company without prior formal approval or without being certain that such contracts will be subsequently ratified.
There are three ways in which the board of directors can formally approve contracts.
The board can hold a board meeting where resolutions are documented using board minutes. It is usually possible to have this meeting by phone.
It can pass a written resolution of the board of directors which must be signed by all of the directors.
Or it can delegate its powers either to individual directors, to a committee of the board of directors or to other people such as employees. This would depend on the scope of the delegation or terms of reference. A company can also grant a power of attorney giving particular persons or representatives authority to enter into certain types of contracts and it is standard practice for powers of attorney to be approved by the board of directors in a board meeting or a written resolution.
From a corporate governance perspective one approach which could be considered, taking into account commercial realities, would be for the board of directors of a company to formally delegate to particular directors or employees its power to enter into certain types of contract or contracts of a certain value. This would then avoid the need for pre-approval or ratification on an ongoing basis. Committees could also be used for this.
For contracts of a minor nature a view might be taken that no such formal delegation is needed given that most third parties will be happy to work off the basis that the people they are engaging with have authority to act.
For material contracts it might be considered more appropriate to ensure that they are either pre-approved formally by the board of directors or ratified formally by the board of directors after they are entered into. This would assist with mitigating any chance that the company could be restricted from enforcing a material contract against a third party where its agents acted outside their authority.