Company authorization and its potential risks

Company authorization and its potential risks
Company authorization and its potential risks

Regulations on enterprises and civils set out an authorization mechanism to minimize the tasks of the legal representative, as well as help companies that can be operated in the absence of the legal representative. According to regulations, the principal still is responsible to the third party for the works carried out within the authorized scope by an agent. However, in practice—sometimes due to personal gain or lack of attention to the authorized scope—the agent has inadvertently or intentionally performed works that exceed the scope of authorization or are out of the scope of authorization, and this leads to unnecessary losses for the companies.

Exceeding the scope of the authorization.

For companies to facilitate the management, usually the legal representative will authorize one or more individuals to perform the tasks under his/her/their authority. This authorization activity can last for a certain period of time when the legal representative is absent or for regularly. The content of these authorizations can be different based on the operational objectives, organizational structure of the companies, as well as the working position of the agent. The more detailed the contents of the authorization is, the easier the companies can control this authorization.

In principle, if a civil transaction is established by an agent exceeding the scope of authorization, the rights and obligations of the legal representative are not arisen, except for the following cases:

– The principal agrees with it;

– The principal knows about it, but does not have any objection within a reasonable time limit;

– The principal’s fault leads that the other transacting parties do not know or cannot know about the excess of the scope of authorization.

In these cases, the principal remains liable for transactions established by the agent.

Out of the scope of authorization

Civil transactions established by a person without authorization do not give rise to rights and obligations for the principal, except for the following cases:

– The principal has recognized the said transaction;

– The principal knows about it but does not have any objection within a reasonable time limit;

– The principal’s fault leads that the other transacting party does not know or cannot know about the lack of authorization

In these cases, the principal remains liable for the said transactions. To exclude the risks of liability that principal may incur, companies need to review the content of the authorization in the direction of:

– Authorized tasks should be listed in detail, avoiding attribution in a general way;

– The scope of authorization, specifically the right to sign, establish documents, make decisions, etc., should also be specifically noted depending on the content of the authorization. For example, in case of authorization for establishing the contract, the points that need to be cleared include who is the other signing party (a customer or a supplier), the value of the contract, and other documents accompanying the contract or related to business activities (memorandum of understanding, agreements, appendices, liquidations, etc.)

In the labor field, companies must clarify whether the scope of authorization includes recruitment, entering into a labor contract and its annex, conducting disciplinary action or not, there are any limits on salary level, position, or disciplinary action that the agent is entitled to perform or not.

In case of authorization to work with state agencies, the content of the authorization should be compatible with the way each agency works, especially some procedural agencies such as the Police, Courts, enforcement agencies, etc.

– Duration of authorization;

Currently, in addition to transactions established in writing, the method of exchanging and confirming via email is quite popular. In some cases, the parties clearly agree that the exchanged email is also binding. Therefore, the principal also needs to keep track of the emails that he/she is cc’ed throughout the working process of the agent. In internal scope, a workflow for the agent, including working processes in paper documents and working through electronic means (email, telephone, and other applications), processing when the authorization scope is exceeded, monitoring methods, etc. must be built.

Responsibilities of the Agent

As stated above, a principal is a party with rights and obligations arising from transactions that his/her agent established in accordance with the scope of authorization. In practice, some companies have stipulated in a written authorization that the agent is liable to a third party for performing works during the authorized period; however, it would be appropriate only when the agent has violated the authorization document, particularly if the performed task is outside the scope of authorization. In case the authorization document is/was being strictly performed by the agent, the issue of responsibility to the third party belongs to the principal.

The lawmakers understand this issue in the direction that the agent is doing the task for the benefit of the principal, so that if there are any benefits arising from the said task, the principal is the beneficiary. The principal must perform the corresponding obligations with a third party when the authorization relationship terminates, which is appropriate in the context that the principal is the holder of the rights fixed by law (the powers of the legal representative, rights of the chief accountant, or ownership of the assets of the principal).

Therefore, the problem for companies, as well as the principal, is to control the activities of the agent and ensuring that there will not be any consequences or risks for the companies and the principal. This should be the case even if the agent performs the work within the scope of authorization and this risk usually arises due to the agent’s lack of working capacity.

In general, authorization activities always involve risks for companies and the principal, but “authorization” is an effective management tool that reduces the workload for the principal, as well as maintains all business activities in the absence of a said person. Therefore, to maintain authorization, companies need to have regulations and processes to manage said activities, have a control department to monitor, and “blow the whistle” when any actions of the agent are considered inconsistent with the content of the authorization and regulations of the company.

The article is based on applicable law at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable law has changed and the specific case that the reader wishes to apply. Therefore, the article is only for reference.