Breaches of corporate representation rules and their consequences

The case in question involved a violation of the two-person (four-eye) rule that followed from the company’s memorandum of association and should have been properly recorded in the Commercial Register as the manner of acting on behalf of the company. Under these circumstances, the company shall not be bound by the contract, as it was not duly represented in concluding it. If the company wishes to take up the effects of the contract, it must subsequently approve its conclusion, without undue delay after it has learned of the excess of the authority to represent. The decision on such a subsequent approval falls under the business management, and is usually within the powers of the statutory body as a whole: if there is a collective statutory body, the decision shall be passed by a majority of votes present; if each statutory representative is an individual statutory body, the consent of a majority counted from all statutory representatives is required. These rules apply unless the memorandum of association stipulates otherwise.

In general terms, however, any person authorised to represent the company in the matter at hand may express the company’s will on its behalf, i.e. conclude a contract from which rights and obligations will ensue for the company. This means that, apart from members of statutory bodies, a contract may also be sanctioned by proxy holders, by authorised representatives to the extent of their authorisation, or by employees to the extent of their authorisation to carry out certain activity within the operation of a business enterprise. No decision on subsequent approval is required here if the authorised representative has duly expressed the will to be bound by the contract on behalf of the company. Such expression of will may also take the form of performing the obligations under the contract. However, for the performance of obligations to have the effect of expressing the will to be bound by the contract, the company has to be duly represented by an authorised person or persons, who, for instance, supportably make a payment or deliver goods.

If the conclusion of the contract is not sanctioned, it shall be binding directly upon the representative who had exceeded their authority to represent. The other contracting party may demand of them to perform what has been agreed or to compensate them for damage incurred, however, only as long as the other party was in good faith as to their authority to represent. If it is clear from the entry in the Commercial Register that at least two statutory representatives shall act jointly on behalf of the company, there is no good faith, as the other contractual party could and should have checked the representative’s authorisation, and, had they done so, they would have known that the statutory representative was not authorised to act independently on behalf of the company. Therefore, a contract thus concluded will not be binding upon the company or its statutory representative.

The SC also emphasised that it is necessary to differentiate between the subsequent approval of an excess of the authority to represent, and successive acts by members of a statutory body who attach their signature to the contract one by one; this is quite common, as the time and place of signing a contract does not always suit all statutory body members. If it is clear from the beginning that the contract will be signed in this manner to comply with the two-person rule, this does not constitute an excess of the authority to represent. Nevertheless, the company’s will to conclude the contract will only be expressed once the last of the requisite signatures is attached to it. In contrast, where the subsequent approval of an excess from the authority to represent is involved, the company shall be bound by the contract already from the date when it was signed by the statutory body member exceeding their authority to act (and by the other contractual party).