11 March 2015

Doing business with foreign companies – who has authority to sign contracts?

This article was written by Edmund Tyler (Professional Support Lawyer, Corporate) and Michael Goldberg (Partner, Corporate).

A recent English Court of Appeal decision provides a reminder of the need to investigate signing authorities carefully when contracting with foreign companies. It underlines the message that it is not possible to assume that what works for an English company will work for a foreign company, even when English law governs the contract.

In this case, the contract was between two Swiss companies, but its terms said that it was governed by English law. For one of the companies, the contract had been signed by one of its two "prokurists" – authorised signatories. However, under Swiss law, the company required both its two prokurists to sign a contract, jointly. This enabled the company to argue that it had not signed the contract properly and it should not be binding on it.

The party seeking to enforce the contract made a number of arguments as to why the contract should still be binding under English law, including arguments based on the “Rome I” Regulation on cross-border contracts within the EU (which generally gives effect to the parties’ choice of law for a contract). It also tried to rely on long-standing UK regulations that specify how foreign companies sign English law contracts. These seem to give some protection to those contracting with foreign companies who act in good faith and pay the contract price, provided the contract “purports to be” signed by someone who is authorised in accordance with the law of the company’s country of incorporation.

Unfortunately for the claimant, these arguments were dismissed by the Court of Appeal. Regarding Rome I, it ruled that the question of who has authority to sign for a company has to be decided by the local law of the company's country of incorporation – i.e. Swiss law, in this case – regardless of the law governing the main contract. In relation to the UK regulations on foreign companies, it was not enough for the contract to appear to be signed by someone authorised, it was still “necessary to ask oneself what the requirements of Swiss law are and whether the contract purported to be signed in accordance with them".

The upshot was that the contract had not been signed properly and would not be binding on the company that had only used one of its two required signatories.

This narrow reading of Rome I and the UK regulations will be frustrating for those hoping for a more pragmatic approach from the courts, given that it is often not straightforward to find out how a foreign company signs documents. The case makes clear, however, that it is always necessary to establish who has authority to sign for a foreign company under its local law and then ensure that the contract appears to be signed by them. It is not enough, for example, for the contract to be signed by someone who states that they have the necessary authority to sign for the company under local law.

From a practical point of view, when contracting with a company based in an unfamiliar jurisdiction, as a minimum, proof of authority should be requested from the proposed signatories. While on its own this has evident limitations, it should at least focus the minds of the signatories on the issue, given that they may have personal liability if they misrepresent their authority. However, this may not address any other formalities that may be needed (such as whether a notary needs to be involved). Best practice, clearly, is to obtain a formal legal opinion from a lawyer based in the company’s country of incorporation, but this will not always be practical or cost-effective for smaller deals. A compromise solution may be to seek less formal legal advice on the typical position for companies based in the jurisdiction.

The position remains unsatisfactory for those trying to conduct business across borders, but the clear message of this case is that caution needs to be exercised.

Case: Integral Petroleum S.A. v SCU-Finanz AG [2015] EWCA Civ 144

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