Remedying and preventing risks to contracts entered and performed by unauthorized

When we reference a representative, we usually think of two cases: legal representative or authorized representative. However, there are civil transactions although entered and performed by the legal representative or authorized representative, they don’t have the right to enter into and perform the civil transactions. In this case, whether the signed contract will be invalidated or not and how to mitigate or restore damage from them. Please read this week’s article of TNTP.

1. Cases of civil transactions entered and performed by unauthorized persons or representatives beyond scope of representation

Some cases where civil transactions entered and performed by unauthorized persons or representatives beyond scope of representation (known as unauthorized persons) such as:

The signatory is the legal representative of the juridical persons but does not have the authority to sign. This case usually occurs when the representative signs transactions that must be approved by the Members’ Council for Limited Company, the General Meeting of Shareholders, or the Board of Directors for a Joint-stock company.
The signatory is not the legal representative of the Enterprise and does not have the legal authorization of the person competent to sign. In some contracts, the signatory is the Deputy Director, head of department/de…but not legally authorized.
The signatory has a written authorization, but the content of the transaction is beyond his/her scope of authorization.
The signatory is not a person who is authorized by a member of a household, co-operative group, or a non-juridical person

2. Consequences

In principle, civil transactions entered by unauthorized persons shall not be invalid but prescribe in non-giving rise to rights and obligations, except for any of the following cases. Specifically, Clause 1, Article 142, Article 143 of the Civil Code in 2015 stipulates:

For the principal: in the case where a civil transaction is entered into by unauthorized persons, shall not give rise to the rights and obligations of the principal, except for any of the following cases: (i) The principal recognizes the transaction; (ii) The principal knows it without any objection within an appropriate time limit; (iii) It is the principal’s fault that the other party does not know or is not able to know that the person entering into and performing the civil transaction there with was unauthorized.

For the unauthorized persons who entered and performed civil transactions: the unauthorized person must fulfill the obligations to the person with which he/she transacted unless such person knew or should have known that the representative was unauthorized.

For a person having transacted with an unauthorized person: he/she has the right to terminate unilaterally the performance of or to terminate the civil transaction entered and to demand compensation for any damage, except where he/she knew or should have known that the representative was unauthorized, or the principal recognizes the transaction.

In addition, if the unauthorized person and the other party in a civil transaction deliberately enter into and perform a transaction and thereby cause damage to the principal, they must jointly compensate for the damage

3. How to prevent risk and remedy the consequences

Remedying consequences:

If entering a transaction with an unauthorized person, in order to limit the risk, a person having transacted needs to prove that the enterprise, the principal recognizes the transaction or knows it without any objection. For example:

The person authorized to sign was present at the meetings, negotiations, or at the signing meeting and had no objections.
The enterprise has used the assets obtained from the performance of the contract for the purpose of the company’s business or the general operation of the enterprise and these activities of the enterprise are information that the principal already knows is obliged to know.
Enterprises have been signing and performing contracts that are not in accordance with their own private authority.

Preventing risk before entering and performing contracts:

To limit risks, before signing the contract, it is necessary to note and carefully check the information and documents showing the authority of the signatory such as Certificate of business registration, Company Charter to determine the authority to sign, etc. documents appointing representatives for households, cooperative groups or other organizations that do not have legal status.
In case the signatory is not the legal representative, it is necessary to verify the competence to approve the Decision of the Members’ Council for a limited liability company with two or more members, the Decision of the General Meeting of Shareholders, or the Board of Directors for a joint-stock company.
If you have asked the partner to provide the necessary documents but are refused, you should consider them carefully before signing the contract.

Here is our experience with the contracts entered into and performed by unauthorized persons or representatives beyond scope of representation.

Best regards