CONTRACT SIGNED BY LEGAL REPRESENTATIVE CAN STILL BE INVALID?

In practice, there have been numerous cases where contracts were declared void due to violations of the representative’s authority. The legal representative of a company plays a pivotal role in acting on behalf of and in the name of the company to conduct transactions in daily business operations, as well as to exercise related rights and obligations. A critical issue often overlooked or misunderstood is that the authority of a representative is not absolute. It is subject to limitations imposed by statutory regulations as well as the internal rules of the company.

Then, in which cases is the contract signed by the legal representative of the enterprise but still determined to be invalid?

Who are entilted to represent for a company in signing contract?

One of the fundamental considerations in commercial contract execution is the authority of the company representative signing the contract. A contract signed by an unauthorized individual will not create rights and obligations for the company as the represented party, except in limited, specific cases explicitly provided by law.

The lawful representative of a company in contract formation and execution can either be the legal representative or an authorized representative.

The legal representative is typically regarded as the company’s “default” representative, designated in the company’s charter, registered with the competent state authority, and recorded in the enterprise registration certificate.

Additionally, other individuals may also represent the company in executing transactions and contracts if they are duly authorized in accordance with legal requirements regarding form and procedure. The scope of such authorization can be established through contracts, powers of attorney, or appointment decisions, provided they comply with applicable laws and the company’s internal regulations.

Contract signed by legal representative without proper delegation of authority?

Not all contracts signed by the “default” legal representative are necessarily valid. A transaction may still be deemed void if the legal representative signs the contract without being delegated the authority to perform the tasks subject to the contract, exceeds their authorized scope, or is no longer serving as the designated representative.

Contracts signed by an unauthorized legal representative in a multi-representative enterprise

Under the 2020 Law on Enterprises, limited liability companies and joint-stock companies are allowed to appoint multiple legal representatives to meet practical needs in daily business management and operations. These representatives may either hold equal authority or have their powers limited to specific scopes, depending on the arrangements tailored to the company’s internal requirements.

The company charter, a mandatory and official document under the law of Vietnam, explicitly stipulates the number, managerial titles, and specific rights and obligations of each legal representative within their respective areas of authority.

In cases where the charter and other internal regulations (if any) are silent, each legal representative is presumed to have equal authority to act on behalf of the enterprise in transactions with third parties.

Consequently, overlooking or misunderstanding the scope of authority in such scenarios can pose significant risks of legal disputes and render the contract legally unenforceable.

Signing contract without approval from authorized levels in specific transaction

In many cases, the legal representative is a managerial or executive personnel hired by the enterprise. Their authority is not absolute but constrained to a defined scope of transactions as determined by the company.

For specific transactions requiring approval under legal or internal regulations, the legal representative must follow the prescribed process and obtain prior authorization from the competent authority. Failure to secure such approval before signing a contract may result in the transaction being deemed unauthorized or invalid.

For example, in a multiple-member limited liability company, contracts and transactions between the company and related parties must be reported by the legal representative and approved by the Board of Members prior to execution.

Citation of Article 67 of the 2020 Law on Enterprises:

“Article 67. Contracts and transactions subject to approval by the Board of Members

1. Contracts and transactions between the company and the following entities are subject to approval by the Board of Members:

a) Members and their authorized representatives, the Director/General Director, the company’s legal representative;

b) Related persons of the persons mentioned in Point a of this Clause;

c) Executives of the parent company and the person having the power to designate them;

d) Related persons of the persons mentioned in Point c of this Clause.

2. The person who concludes a contract or carries on a transaction on behalf of the company shall send a notification to members of the Board of Members and the Controllers of the related entities and interests of such contract or transaction together with the draft contract or description of the transaction. Unless otherwise prescribed by company’s charter, the Board of Members shall decide whether to approve or disapprove the contract or transaction within 15 days from the day on which the notification is received and follow the instructions in Clause 3 Article 59 of this Law. Members of the Board of Members who are related to the parties to the contract or transaction must not vote.

3. A contract or transaction shall be invalidated under a court decision and handled as prescribed by law when it is concluded or carried out against regulations of Clause 1 and Clause 2 of this Article. The person who concludes the contract or carries out the transaction, related members and their related persons shall pay compensation for any damage caused and return the benefits generated by such contract or transaction to the company.“

Thus, failing to comply with the reporting and prior approval procedures by the legal representative will result in the legal consequence of the contract or transaction being invalid. Furthermore, legal responsibility is not limited to the legal representative exceeding their authority but also extends to the related parties involved in the transaction.

The legal representative signs contract after their term of office has ended

The authority of the legal representative to act on behalf of the enterprise is only valid during the term of their office.

Citation of Clause 1, Article 140 of the 2015 Civil Code: “The duration of representation is determined by the authorization document, by the decision of the competent authority, by the charter of the legal entity, or by the provisions of law.”

Positions that may serve as legal representatives include: Chairman of the Board of Members; Chairman of the company; Chairman of the Board of Directors; Director; or General Director, depending on the type of enterprise. The term of office for each position is specified and clearly recorded in the charter, with each term not exceeding 5 years, in accordance with the provisions of the 2020 Law on Enterprises.

It can be observed that verifying the authority and related conditions of the legal representative during the contract formation process is a key factor in ensuring the legality and validity of the contract. The authority to represent, in this context, is not only limited by general legal provisions but must also align with the scope and duration of delegated powers in accordance with the company’s charter and the internal regulations that have been enacted.

A contract that is declared invalid will result in serious legal consequences for both the represented enterprise and the related parties. The parties involved in the contract may face difficulties in fulfilling the obligations committed to their partners, leading to a loss of reputation, affecting business opportunities, or facing claims for damages arising from the invalid contract. Additionally, this could lead to complex and costly legal disputes.

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