The reality of day-to-day life in a company requires employees to execute corporate documents on behalf of their employers. The is especially true for employees in an administrative, managerial and/or financial capacity. While employees are integral to a company’s success, they don’t fall within the recognised category of ‘corporate officers’ – that is, they are neither company directors nor secretaries.
Corporate officers have the legal right and capacity to bind the company to any transaction or dealing. So, the question arises – what is the status of dealings and transactions entered into by an employee on behalf of the company? More importantly, can a company escape liability under a dealing that a corporate officer did not expressly agree or enter into (spoiler alert: the answer is almost always no). The law recognises three distinct kinds of authority that an employee may have – actual authority, implied or apparent authority and ostensible authority. We step through these below.
An employee will have the express authority to bind a company where the company has via its corporate officers undertaken steps to ensure that the employee has the authority to, for example, contract on the company’s behalf. This authority can be expressed by:
- Including the employee’s name on a list of signatories;
- A letter of authority; or
- Granting the employee a power of attorney (this rarely happens).
The scope of the employee’s authority will then depend on the document which confers the same.
Implied or Apparent Authority
At times, the nature of an employee’s role can require that they have implied authority to undertake certain actions and/or activities. As mentioned, this is particularly the case for those employees who occupy administrative, managerial or financial positions. In such circumstances, the employee can be assumed to have the right and power to undertake activities which are reasonably necessary for the effective performance and discharge of their employment function. What actions are reasonably necessary is a question of fact answered on a case by case basis.
Ostensible authority is harder to define. In layman’s terms, it refers to situations where a reasonable third party would understand that the employee has the authority to act in the circumstances. For example that the employee has the right to sign a contract on the company’s behalf. This will be the case even if the employee had no actual express authority to act, provided a reasonable assumption is created in the mind of the third party (Story v Advance Bank Australia Ltd (1993) 31 NSWLR 772).
This can, at first instance, seem like a broad legal principle that has the potential to open up the floodgates and rectify any rogue employee’s behaviour undertaken in breach of their express and implied authority. That is not the case. The principle is limited by the notion of ‘reasonableness’. Accordingly, a third party would not be able to rely on the doctrine of ostensible authority in circumstances where they had no basis upon which to reasonably assume that they were i.e. contracting with a party who has authority to engage in the same. Nevertheless, the principle is of great protection to those who engage in repetitive dealings with company employees.
The Corporations Act
Sections 128, 129 and 769B of the Corporations Act 2001 (Cth) sets out this authority which allows individuals and entities dealing with a company to make certain assumptions. For example, under section 129(3) of the Corporations Act 2001 (Cth), a person can assume that anyone who is held out by the company to be an officer or agent of the company:
(a) Has been duly appointed in that role; and
(b) Has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent.
In assessing the duties an officer or agent ‘customarily’ exercises or performs, the usual duties of an officer or agent of a similar company are used as a benchmark (NCR Australia Pty Ltd v Credit Connection Pty Ltd  NSWSC 1).
Importantly, where a person or entity is entitled to make an assumption under section 129 of the Corporations Act 2001 (Cth), the company is not entitled to assert later that the assumption is incorrect or unfounded (sections 128(1) and 128(2) of the Corporations Act 2001 (Cth)).
As a general rule of thumb, there are some steps that a company can implement to ensure that its employees are acting within their authority and that it avoids liability for dealings and transactions employees enter into in breach of their authority.
These include, but are not limited to:
- Clearly defining corporate roles, job descriptions and role specifications which outline the rights, powers and limitations of employees;
- Quickly acting upon and remedying any breaches of authority;
- Clearly conveying to third parties with whom the company contracts who has authority to bind the company; and
- Reprimanding employees who continue to act outside of their scope of authority.
The lines between express, implied and ostensible authority can be muddled at times. Even though companies are typically found liable for the actions of their employee’s, this is not always the case. If you would like to know more about the types of authority that an employee can hold, and your rights and liabilities concerning a breach, get in touch with our commercial lawyers on 1300 544 755.