Legal issues when executing contracts on behalf of the company

In business operations, executing contracts on behalf of a company is a common practice to establish cooperation and transactional relationships with business partners. In practice, numerous disputes have arisen where individuals entered into contracts in the name of the company without authorization or exceeded the scope of delegated authority. It exposes enterprises to risks concerning contractual validity, legal liability, and resulting financial obligations.

I. Introduction to issues relating to executing contracts on behalf of the company

In commercial activities, executing contracts on behalf of a company is an essential step in establishing rights and obligations between an enterprise and its counterparties. Through contractual execution, a company may lawfully conduct commercial transactions, investment cooperation, or service provision with a clear legal basis.

However, for a contract to be legally binding upon the company, the person executing the contract must possess representative authority under the law or act under valid authorization granted by the company. In practice, many disputes arise where individuals independently execute contracts in the company’s name or act beyond the scope of delegated authority, resulting in uncertainty regarding the enforceability of the contract and the legal responsibilities of the parties involved. Such circumstances not only create risks for the enterprise but may also adversely affect the legitimate interests of counterparties.

Accordingly, understanding the applicable legal framework, identifying the proper authorized signatory, and verifying the legality of contract execution on behalf of the company are matters requiring particular attention in business operations.

II. Understanding contract execution on behalf of the company

1. What does executing contracts on behalf of the company mean in daily business transactions? 

Executing a contract on behalf of the company refers to an individual acting as a representative of the enterprise signs a contract in order to establish, amend, or terminate the company’s legal rights and obligations for the other contracting party. The signatory in such cases may be either the company’s legal representative or an individual lawfully authorized under applicable law and the company’s charter. 

In daily transactions, executing contracts on behalf of the company enables enterprises to participate in commercial activities such as the sale and purchase of goods, provision of services, business cooperation, or leasing of assets. If a contract is executed within proper authority, all rights and obligations arising from that contract belong to the company rather than the individual signatory. Therefore, clearly identifying the signing authority is essential to ensuring the legality and enforceability of contracts in business operations.

2. Who is considered to have sufficient authority to execute contracts on behalf of the company in practice?

According to common business practice, the person with authority to execute contracts on behalf of the company is first and foremost the company’s legal representative. Accordingly, such an individual is recorded in the enterprise registration records and has the authority to represent the company in conducting transactions, signing contracts, and establishing legal rights and obligations with counterparties in accordance with the law.

In addition, companies may authorize other individuals to execute contracts on behalf of the company, including branch directors, department heads, or personnel responsible for business operations. Such authorization is typically recorded through a written power of attorney, or an internal corporate decision.These documents should clearly specify the scope, content, and duration of authorization. If contract execution is implemented within lawful authority or a valid scope of authorization, the resulting contract will create legally binding obligations for the company.

3. What is the difference between executing contracts on behalf of the company and signing in a personal capacity?

Executing contracts on behalf of the company means that an individual enters into a transaction on behalf of a company to establish its rights and obligations. In cases, the company becomes the legal entity responsible for performing obligations under the contract, and the signatory merely acts as a representative within delegated authority or lawful authorization.

Conversely, signing a contract in a personal capacity means an individual personally enters into the transaction and assumes direct responsibility for all rights and obligations agreed under the contract.

Therefore, the fundamental distinction lies in the legal status of the contracting party and the entity taking legal liability when contractual obligations arise.

4. How can a counterparty verify the legality when someone claims to execute contracts on behalf of the company?

To verify the legality of a person executing a contract on behalf of a company, the counterparty should first determine whether the signatory is the enterprise’s legal representative.

Accordingly, such information may be verified through the Enterprise Registration Certificate or the National Business Registration Portal, which identifies the individual authorized to represent the company in transactions.

Where the signatory is not the legal representative, the counterparty should request a valid authorization document issued by the company. Specifically, such authorization should clearly state the authorizing party, the authorized person, the scope of authority, and the duration of authorization. Additionally, counterparties should review supporting documents such as the company charter, appointment decisions, and other internal corporate documents to ensure that the contract execution falls within proper authority and creates binding obligations for the enterprise.

III. Legal regulations relating to executing contracts on behalf of the company

1. How does the Law on Enterprise regulate authority to execute contracts on behalf of the company?

Pursuant to Clause 1, Article 12 and Clause 1, Article 13 of the Law on Enterprise 2020, the legal representative is an individual representing the enterprise in exercising rights and performing obligations arising from company transactions, including contract execution and transactions conducted in the company’s name. Such a representative takes responsibility before the law and third parties within the scope of representative authority.

In addition, under Article 138 of the Civil Code 2015 stipulating authorization, individuals and legal entities may authorize others to establish and perform civil transactions within the authorized scope.

Therefore, the legal representative or another competent authority within the company may authorize another individual to execute contracts on behalf of the company, provided such authorization is lawful and falls within the prescribed scope.

2. Can the company charter restrict contract execution authority and what is its legal effect?

Under Article 24 of the Law on Enterprise 2020, the company charter governs the organization, management, and operation of the enterprise, including provisions regarding the rights and obligations of company managers and governance mechanisms. Accordingly, a company may specify in its charter, such as competent positions for executing contracts, value limits for contracts, or requirements for internal approval before entering significant transactions. These provisions mainly have binding effects internally within the enterprise to control transactions and allocate responsibilities among management positions.

If managers or authorized signatories fail to comply with limitations prescribed in the charter, they may take internal liability to the company in accordance with applicable law and the charter.

3. Common violations in cases of executing contracts on behalf of the company

In practice, contract execution on behalf of the company is not always conducted within proper authority or in compliance with legal and internal corporate requirements. It may result in legal risks and disputes among the company, signatories, and counterparties.

Common violations include:

• Individuals without authority independently executing contracts in the company’s name, such as employees or middle managers acting without valid authorization;
• Executing contracts beyond the scope of authorization, including exceeding authorized content, value thresholds, or authorization periods;
• Failure to comply with internal company rules on contract authority, such as requirements under the charter or internal regulations for prior approval by the Board of Directors, Members’ Council, or management board;
• Executing contracts without clearly indicating representative capacity, making it difficult to determine whether liability belongs to the individual or the company;
• Improper use of the company seal or signature, including unauthorized affixing of seals or use of electronic signatures without approval or valid authorization.

IV. Questions relating to executing contracts on behalf of a company

1. Is executing a contract on behalf of a company using an electronic signature different from using a handwritten signature?

Under current laws, both electronic signatures and wet signatures may be used to express a party’s intention when entering into transactions. 

Pursuant to Clause 11, Article 3 of the Law on Electronic Transactions 2023, an electronic signature is a signature created in the form of electronic data that is attached to or logically associated with a data message to identify the signatory and indicate that person’s approval of the content of the data message. Meanwhile, a wet signature refers to a signature physically affixed by an individual to a paper document to confirm consent and assume responsibility for the document’s contents in accordance with general civil law principles and commercial practice.

From a legal perspective, executing a contract on behalf of a company by electronic signature does not alter the representative or signing authority compared with a wet signature. The signatory must still be either the company’s legal representative or a person duly authorized to execute contracts on behalf of the company.

2. When executing a contract on behalf of a company, may the signatory authorize another person, and what form should such authorization take?

Pursuant to Article 138 of the Civil Code 2015, individuals or legal entities may authorize another individual or legal entity to establish and perform civil transactions within the scope of representation. In addition, under Clauses 2 and 3, Article 12 of the Law on Enterprise 2020, the legal representative of an enterprise is entitled to represent the company in transactions and may authorize another person to exercise certain rights and obligations in accordance with applicable laws and the company charter.

In practice, authorization to execute contracts on behalf of a company is commonly documented through a letter of authorization or authorization document issued by the competent person within the company.

Such authorization documents should clearly specify:

• Information of the authorizing party and authorized party;
• Scope and content of authorization (e.g., type of contracts permitted and maximum contract value);
• Duration of authorization;
• Rights and responsibilities of the relevant parties.

3. If an employee independently executes a contract on behalf of the company without authority and a dispute arises, what are the legal consequences for the company and the individual?

Where an employee independently executes a contract on behalf of a company without authority or without valid authorization, such a transaction is considered a transaction established by a person without representative authority. Under Articles 142 and 143 of the Civil Code 2015, a transaction established by a person without authority shall not create rights and obligations for the company unless the company subsequently approves or ratifies such transaction.

If the company refuses to recognize the transaction, the contract may not bind the company, and the individual who executed the contract without authority may be personally liable to the counterparty for any resulting damages. In addition to civil liability toward the counterparty, the employee may also take disciplinary measures or liability for compensation toward the company if the unauthorized execution causes damage to the business.

Conversely, if the company was aware of and accepted the execution, or acted in a manner indicating recognition of the transaction, the contract may still become effective, and the company may be required to perform its obligations under the agreed terms.

4. If an authorized person signs beyond the authorized scope when executing a contract on behalf of the company, is the contract invalid?

Article 143 of the Civil Code 2015 regarding legal consequences of transactions established beyond representative authority. Under this provision, the portion of the transaction exceeding the scope of authorization does not create rights and obligations for the represented person unless the represented party (i.e., the company) approves it or knowingly fails to object within a reasonable period.

The portion within the authorized scope may remain valid and legally binding upon the company. For the portion exceeding the authorization, if the company refuses to approve it, that portion may not bind the company, and the signatory who exceeded authority may take personal responsibility toward the counterparty.

If the counterparty knew or should reasonably have known that the signatory exceeded the authorized scope but nevertheless proceeded with the transaction, the counterparty may also take the associated risk for that unauthorized portion.

5. After discovering that a contract was executed on behalf of the company without proper authority, what legal steps should the company take to remedy the situation?

Upon discovering that a contract has been executed on behalf of the company without proper authority, the company should promptly implement appropriate corrective measures to minimize legal and commercial risks.

Recommended legal actions include:

• Reviewing the signatory’s authority and the contract terms to determine whether authorization existed and whether the transaction exceeded representative authority under applicable laws or internal regulations;
• Assessing the impact and legality of the transaction to evaluate whether it benefits the company or creates legal, financial, or reputational risks;
• Deciding whether to ratify or reject the transaction pursuant to Articles 142 and 143 of the Civil Code 2015, which allow the company to recognize or refuse transactions executed without authority;
• Promptly notifying the counterparty regarding the signatory’s authority status to clarify the company’s position and avoid unintended legal obligations;
• Taking internal action against individuals who improperly executed contracts, including disciplinary measures or claims for compensation if losses occurred;
• Reviewing and strengthening internal procedures governing contract signing authority to enhance internal controls and prevent future unauthorized execution.

V. Looking for a trusted legal expert to support issues relating to executing contracts on behalf of a company?

When legal concerns arise in connection with executing contracts on behalf of a company, consulting lawyers specializing in corporate and contract law is an important step to minimize legal exposure and protect the company’s legitimate interests in commercial dealings.

NPLaw’s legal team has practical experience in:

• Reviewing contractual signing authority within enterprises and assessing the legality of executing contracts on behalf of a company;
• Advising on current legal regulations concerning legal representation, representation by authorization, and legal liabilities arising from transactions;
• Assisting in handling cases involving unauthorized execution of contracts or execution beyond the authorized scope in compliance with applicable laws;
• Advising on the development of internal procedures governing contract-signing authority to reduce legal risks in business operations;
• Representing or supporting enterprises in resolving disputes arising from contracts executed on behalf of the company with counterparties.

The above information is provided for reference purposes only. If your business is facing challenges or requires in-depth advice regarding the execution of contracts on behalf of a company, please contact NPLaw for timely and comprehensive legal support from our lawyers.