In the business environment, signing contracts is an indispensable part, especially when parties represent organizations and enterprises. However, sometimes, signing contracts may exceed the scope of authority delegated to the signatory, leading to legal issues of concern. This article provides some notes for enterprises when determining the validity of contracts, the responsibilities of legal entities and individuals in cases where signing contracts exceeds the delegated authority, by approaching and analyzing relevant concepts based on current regulations of Vietnamese legal system, specifically the Civil Code of Vietnam 2015 and the Enterprise Law of Vietnam 2020. Through this, each organization and individual can maximize the protection of their rights and interests if they have signed a contract or can avoid signing contracts with unauthorized persons.
WHAT IS AUTHORITY IN ENTERPRISES?
Overview of authority
Authority is the act of granting someone else the power and responsibility to perform certain tasks. It can be understood as allowing an individual or organization to represent and carry out a legal action, with responsibility from the authorizer.
Cases of representation by legal representatives of legal entities (Enterprise Law 2020)
According to the provisions of Article 12 of the Enterprise Law 2020, the legal representative of an enterprise is an individual representing the enterprise to exercise rights and obligations arising from the enterprise’s transactions, representing the enterprise as a party requesting settlement of civil matters, plaintiff, defendant, person with rights, obligations related to arbitration, court, and other rights, obligations as prescribed by law.
Enterprises must ensure that there is always at least one legal representative residing in Vietnam. When there is only one legal representative residing in Vietnam and this person leaves Vietnam, they must delegate in writing to another individual residing in Vietnam to exercise the rights and obligations of the legal representative. In this case, the legal representative still bears responsibility for the delegated rights and obligations.
In cases where the authorization period expires, and the legal representative of the enterprise has not returned to Vietnam and there is no other authorization, the following provisions apply: (i) The authorized person continues to exercise the rights and obligations of the legal representative of the sole proprietorship enterprise until the legal representative of the enterprise returns to work at the enterprise; (ii) The authorized person continues to exercise the rights and obligations of the legal representative of the limited liability company, joint-stock company, partnership until the legal representative of the company returns to work at the company or until the owner of the company, the members’ council, the board of directors decides to appoint another person as the legal representative of the enterprise.
(Articles 14 and 15 of the Enterprise Law 2020 stipulate on the authorized representatives of the owner, members, shareholders of the company as organizations to perform the rights, obligations of the represented person at the enterprise, in other words, this is the authorization to represent the contributed capital. The article does not cover this case because the scope of exchange is related to authorizing to perform contracts, civil transactions).
Representation by delegation as stipulated in the Civil Code 2015
Article 85 of the Civil Code 2015 stipulates that the representative of a legal entity can be a legal representative or a representative by delegation.
Article 138 of the Civil Code 2015 stipulates on representation by delegation: Individuals, legal entities may authorize other individuals, legal entities to establish, carry out civil transactions. Members of households, cooperatives, other organizations without legal personality may agree to appoint other individuals, legal entities to represent by delegation, carry out civil transactions related to common property of members of households, cooperatives, other organizations without legal personality. Individuals from fifteen years old to under eighteen years old can be representatives by delegation, except in cases where the law stipulates that civil transactions must be established, carried out by individuals from eighteen years old and above.
For example: In the case of establishing a new enterprise, the founders, if they do not have knowledge of legal regulations, can authorize individuals or organizations with experience to represent them.
Authorization is expressed through specific management documents or civil transactions.
Authorization can only be carried out by individuals and legal entities, and the authorized party is only responsible for the scope of authorization, without being responsible for the legal consequences of performing the content of the delegated work.
Content of authorization of legal representatives of legal entities being enterprises
Authorizing party: According to the provisions of Article 12 of the Enterprise Law 2020, only the legal representative of the enterprise is authorized to represent the enterprise to exercise the rights and obligations arising from the enterprise’s transactions. Therefore, for enterprises, only the legal representative is authorized.
Authorized person: Based on the provisions of Article 138 of the Civil Code 2015, Individuals from fifteen years old to under eighteen years old can be representatives by delegation, except in cases where the law stipulates that civil transactions must be established, carried out by individuals from eighteen years old and above. Of course, for the activities of the enterprise, the authorized person must meet the conditions stipulated in the charter or internal regulations of the enterprise, ensuring the management and operation of the enterprise. Typically in this case, authorization is related to the issue of delegation of authority within the enterprise, or so-called internal authorization (for example, the Director authorizes the Deputy Director, …).
Time of authorization: Based on the regulations, the legal representative can authorize at any time. In addition, the legal representative must authorize in cases specified in Article 12 of the Enterprise Law 2020, which is: In cases where the enterprise has only one legal representative residing in Vietnam and this person leaves Vietnam, they must authorize.
Reauthorization: The authorized person also has the authority to reauthorize, meaning to delegate again according to the provisions of Article 564 of the Civil Code 2015. Accordingly, the authorized person has the right to reauthorize when: Having the consent of the authorizer; due to force majeure events if not applying reauthorization, the initial authorization cannot be implemented. Reauthorization must not exceed the scope of the initial authorization.
Scope of authorization: The legal representative authorizes others to perform tasks within the scope of their functions and tasks. At the same time, note the cases where the law does not allow authorization in the management of the enterprise.
EXCEEDING AUTHORIZATION LIMITS IN ENTERPRISES
According to Vietnamese law, exceeding the authorized scope is not separately defined in the Civil Code, but it is part of the provisions regarding exceeding the representative’s authority. For authorized representatives, determining the scope of authorization depends on the content of the authorization, and the authorized person only has the right to perform tasks within the scope of the authorization. When they perform tasks outside the authorized scope, it is considered exceeding the authorization limits.
Characteristics of Exceeding Authorization Limits
Firstly, there is a basis for establishing a representative relationship: Exceeding authorization limits shares the common characteristic of representation, which is having a basis for establishing a representative relationship. When the issue of exceeding authorization limits arises, there must have existed a legal relationship between the authorizer and the authorized party, which means there was authorization serving as the basis for establishing a representative relationship. This is an essential characteristic because without a basis for establishing a representative relationship, the authorized person may be considered without representation rights. Without authorization, it is impossible to determine the scope of authorization to ascertain whether the authorized party’s actions exceeded the authorized scope.
Secondly, the authorized person acts on behalf of the authorizer: Even though the actions exceed the authorization limits, the authorized person still acts on behalf of the authorizer. Normally, the authorized person acts on behalf of the authorizer within the authorized scope. However, for some reason, the authorized person continues to act on behalf of the authorizer, but those actions are beyond the authorized scope. The characteristic of “acting on behalf of the authorizer” is an indispensable condition for considering actions that exceed the authorization limits. If the authorized person does not act on behalf of the authorizer, the representation in the transaction cannot be considered.
Thirdly, the authorized person exceeds the authorization limits: The final characteristic of exceeding authorization limits is that the authorized person acts beyond the authorized scope. As analyzed, the authorized person is only allowed to act within the scope permitted by the authorizer. Actions beyond this limit are generally not recognized by national laws, but depending on various factors, such actions may be considered depending on the circumstances. Firstly, the action must possess this characteristic; if it does not exceed the authorization limits, it may be considered from a different legal perspective.
LEGAL CONSEQUENCES IN CASES OF ENTERING INTO CONTRACTS BEYOND THE AUTHORIZATION LIMITS
EFFECTIVENESS OF CONTRACTS
Generally, contracts signed by individuals lacking authority on behalf of a company are void. However, when resolving the consequences of these contracts, depending on the specific circumstances, the company or the signatory will be responsible to the counterparty.
According to Article 143(1) of the Civil Code 2015 regarding the consequences of civil transactions established or executed by a representative exceeding their authority: “Civil transactions established or executed by a representative exceeding their authority do not generate rights or obligations for the represented person regarding the part of the transaction executed or established beyond the authority.” However, transactions beyond the authority still generate obligations for the represented person if one of the following conditions is met: (i) The represented person recognizes the transaction; (ii) The represented person knows but does not object within a reasonable time; (iii) The represented person’s fault leads to the person with whom the transaction was made being unaware or unable to know that the representative lacked authority to establish or execute the civil transaction.
RESPONSIBILITIES OF THE ENTERPRISE AND THE CONTRACT SIGNATORY
Responsibilities of the Enterprise
The responsibilities of the enterprise when the authorized representative signs a contract beyond the authorization limits are specifically stipulated in Article 143(1) of the Civil Code 2015.
A contract signed by a representative beyond their authorization limits does not create rights and obligations for the enterprise regarding the part of the transaction that exceeds the limits, except in specific cases.
The enterprise is still considered to have rights and obligations and must fulfill the contract in the following cases:
Responsibilities of the Contract Signatory
According to Article 143(2) of the Civil Code 2015: “In the case of a civil transaction established or executed by a representative beyond their authority not generating rights or obligations for the represented person regarding the part of the transaction established or executed beyond the authority, the representative must fulfill obligations concerning the part of the transaction established or executed beyond the authority to the person who made the transaction with them, except when the person who made the transaction knows or must know about the representative exceeding their authority and still makes the transaction.” Therefore, if the person making the transaction knows or must know about the representative exceeding their authority, the signatory of the contract beyond the authorization limits is not required to fulfill obligations regarding the part of the transaction that exceeds the limits. Conversely, if the person making the transaction is unaware of the representative exceeding their authority, the signatory of the contract beyond the authorization limits is responsible for fulfilling obligations regarding the part of the transaction that exceeds the limits.
PRACTICAL IMPLICATIONS
According to the above provisions, the enterprise will be responsible to the counterparty if they agree or are aware but do not object to the signing of a contract by a representative beyond their authorization limits. The signatory will be responsible to the counterparty if the enterprise does not agree or objects to their signing. In practice, there are many cases where although the legal representative of the company knows that the representative has exceeded their authority, they remain silent and do not object. A typical example is the delegation of tasks within a company’s legal representative to its subordinates, enabling this legal representative to conclude certain transactions with relevant third parties. When disputes arise, to protect their rights, third parties need to gather evidence to prove that the authorized representative knew but did not object. For example, in a sales transaction, the purchase contract was signed by the buyer without proper authority. However, later, the legal representative of the buyer company, acting within their authority, signed the purchase order or payment order for the goods. Thus, such evidence demonstrates that the purchase contract created rights and obligations for the buyer because the legal representative of the buyer knew but did not object. Additionally, another example in reality concerns dispute resolution by the courts or arbitrators regarding a company’s legal representative whose authority is partially restricted by the company’s internal regulations. The question arises as to whether these regulations bind third parties entering into transactions with the legal representative. Let’s refer to a decision of the court when dealing with such a situation. In Decision No. 177/2014/QDST-KDTM dated March 5, 2014, the People’s Court of Ho Chi Minh City reasoned: “In the case of Mr. H acting as the General Director, a legal representative of the Company, signing a contract beyond the authority prescribed in the Company’s charter, if it causes damage, they must be held accountable before the law and compensate the Company for the damage. The opinion of the Company (requesting the contract to be null and void) is not a basis for the Board of Meetings to accept. Therefore, the contract has created rights and obligations between the two parties (i.e., between the Company and the third-party counterparty).”
Therefore, although the provisions of Article b, Clause 1, Article
143 of the Civil Code 2015 stipulate that if the legal representative knows and acknowledges the transaction beyond the authorization limits or is aware but does not object within a reasonable time, the company will still be responsible, in practice, the company should still take legal measures to protect its legitimate rights and interests, such as immediately notifying the third party that the transaction is null and void or filing a lawsuit to request the court to handle the case in accordance with the law.
CONCLUSION
Entering into contracts beyond the authorization limits is a common issue in the operation of enterprises. Therefore, it is necessary to know the provisions of Vietnamese law to resolve disputes in the best possible way, ensuring the rights and legitimate interests of the parties involved.
