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Taking Care of Business Law

Apr 13, 2015

Can an Employee Bind a Corporation to a Contract?

On a daily basis, parties dealing with corporations rely on the fact that signatories have authority to sign on the corporations' behalf.  Generally, for larger transactions, it is customary that contracting parties obtain a certificate of incumbency (a certificate certifying the officers of a corporation), together with a certified authorizing resolution and a legal opinion from the signatory’s legal counsel assuring that contracts have been authorized and fully signed. With this assurance, the other contracting party has more comfort that the signatory has requisite signing authority on behalf of his or her corporation. Often these documents are not practical to obtain. In such situations in Ontario, one may rely on the “indoor management rule” which holds if one contracting party receives a contract executed by an officer or director of a corporation, the first contracting party may assume that the contract is enforceable against the corporation. However, what if the signatory is not an officer or director?

The indoor management rule which was first established in the 19th century is a fundamental part of Canadian law codified in section 19 of the Business Corporations Act (Ontario), section 18 of the Canada Business Corporations Act and statutes in other provinces governing business corporations. Essentially, the indoor management rule protects third parties in their dealings with corporations. The rule is predicated on the principles of fairness and business practicality. Recent case law in British Columbia explores the authority of a corporation's employee, who was neither an officer nor a director, to bind the corporation.

The recent case of Accra Wood Products Ltd., Re 2014 BCSC 1259, ("Accra") resulted in a positive decision for creditors and parties who rely on a signatory's authority to bind the corporate contracting party. The issue in Accra was whether the supplier of goods on credit, Formations Inc. ("Formations"), could rely on the assumption that Lisa Golding ("Golding"), the office manager for Accra Wood Products ("Accra Wood"), had authority to enter into a credit agreement and provide security on behalf of Accra Wood. The decision affirmed the notion that parties may rely on the indoor management rule in their dealings with others in certain circumstances.

The Court identified certain factors which led to its determination that the indoor management rule applied in Accra. Firstly, the court recognized that there was an ongoing relationship between Accra Wood and Formations which indicated that the credit agreement was standard protocol between the two parties. The Court placed significant weight on the length and type of relationship that existed between Accra Wood and Formations. Secondly, the Court noted that Golding routinely signed credit applications on behalf of Accra Wood and her authority had never been questioned before Accra Wood's insolvency. Finally, the Court noted that Golding clearly read and understood the application as she crossed-out certain sections but not the section reading, "the undersigned individual is authorized to execute this application on behalf of the Customer." The stated factors led the court to hold in favour of Formations by determining that the indoor management rule applied.

Accra held that a party contracting with a corporation can rely on the indoor management rule when contracting with a corporation if the contract is signed by an employee of the corporation who is not an officer or director, provided that:

  1. entering into the subject contract is a longstanding and frequent part of the ordinary course of business between the parties;
  2. the signatory routinely executes contracts between the parties on behalf of the corporation, without protest from the other contracting party; and
  3. the signatory unequivocally expresses his or her authority to bind the corporation on behalf of which she or he is signing.

Since Accra is a British Columbia case, it is not binding in Ontario. Nonetheless, it does have persuasive precedential value for Ontario courts. Still, when contracting with a corporation, we suggest that the best practice is to ensure that all contracts with the corporation be signed by an officer or director of the corporation. For a large or material contract, consider obtaining a certificate of incumbency, a certified copy of a directors' resolution authorizing the contract and a solicitor's opinion. On the flip side of the coin, if a corporation wants to control who can bind it and when, the corporation needs controls in place which prevent its employees from dealing with its long-term customers, suppliers and other contracting parties in a manner that inadvertently binds the corporation.

more Taking Care of Business Law posts

Related Practice Areas

Corporate Finance  |  Business Law

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