Validity of contracts when a party is not properly represented | In Principle

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Validity of contracts when a party is not properly represented

One of the conditions for the effectiveness of a contract is proper representation of the parties when the contract is concluded. In other words, it matters who signs the contract.

If a party is a natural person acting on his own behalf, the issue of proper representation generally does not arise (assuming that the party has full legal capacity). But the issue becomes crucial whenever a party is a legal person or other organisational unit, or the contract is signed by a proxy.

Under Polish law, failure to comply with the rules for representation of the parties in conclusion of a contract may have various effects on the validity of the obligation contracted by the parties (or in some instances which the parties merely intended to establish).

The most serious consequence of defective representation of the parties to an agreement is for the agreement to be absolutely null and void. For example, under the prevailing view, an agreement between a company and a member of its own management board is null and void if the company was not represented in conclusion of the contract by the supervisory board or a proxy appointed by a resolution of the shareholders. The situation is similar if consent from certain corporate authorities as required by law is lacking and the deadline for obtaining consent has passed (for example, approval by the shareholders’ meeting of a limited-liability company for the sale of the company’s enterprise).

A less serious consequence of violations in representation is the sanction of “suspended ineffectiveness” of the agreement, which permits the agreement to be ratified after the fact. A typical example of such a sanction is when an act is performed by an attorney in fact who did not hold appropriate authorisation at the time.

In certain situations, however, improper representation of a party may result only in liability in damages to the party represented, or internal organisational consequences—for example, if a legal act is performed by a proxy which is within the scope of his original authorisation but the authorisation has expired. Under Civil Code Art. 105, an agreement concluded under these circumstances is valid unless the other party knew or could easily have discovered that the authority had expired.

This is just a general overview of the risks involved, but it is clear that one aspect of due diligence should be to determine that the persons signing an agreement were duly authorised to sign it.

Dr Jarosław Grykiel and Maciej Szewczyk, Mergers and Acquisitions Practice, Wardyński & Partners

See also J. Grykiel, M. Szewczyk & I. Zielińska-Barłożek, “The Manner of Representation of Parties in Conclusion of an Agreement,” in P. Ciećwierz & I. Zielińska-Barłożek (ed.), Legal Risks in M&A Transactions, Warsaw 2013, pp. 476 and following (in Polish).