What is a Contract Signatory? Everything You Need to Know

Signed contracts are the heart and soul of any business. Their terms and conditions are discussed, negotiated, changed, and finally laid out in black and white. This is done to ensure that the obligations outlined in the contract are fulfilled, and there are no disputes later on.

But what happens if the person signing the contract lacks legal authority or proper authorization. Will the contract remain valid, or will it be dismissed by a court of law?

This article will go into detail about contract signatories, authorized signatories, and the different possible outcomes for contracts signed by unauthorized personnel. You’ll also learn how to use Docupilot's native eSign functionality to easily manage signatures and signatories.

What is a Contract Signatory?

Contract signatory is a general term that refers to an individual, organization, or country that signs a contract or legal agreement. Signatories can sign contracts for themselves, such as a small business owner signing a purchase contract, or on behalf of an entity, such as a representative of the Department of Energy signing international agreements for new renewable energy projects.

Contracts can have multiple signatories, and each signatory becomes bound to the terms of the contract and must play an important role in ensuring that the involved parties fulfil contractual obligations.

Signatories can sign contracts and agreements using traditional wet signatures or modern electronic signatures, which are legally valid in the US, UK, EU, and most other countries worldwide.

Difference Between a Signature and a Signatory

While signatory refers to the legal entity signing a contract, the signature itself is a unique and identifiable name or mark of the legal entity.

For example, thumbprints are often used as signatures by individuals who are illiterate or physically unable to write. Literate individuals, on the other hand, design unique signatures to convey their identity and style.

Regardless of whether a name or mark is used, signatures will appear at a designated location on the contract, usually at the end, along with the signatures of other co-signatories.

What is a Co-Signatory?

A co-signatory, as the term implies, is a legal entity that signs a contract with other signatories. In a contract between two companies, the respective representatives sign on behalf of their employers and are co-signatories.

Co-signatories are often used to shared responsibility and mitigate risk. For example, if you apply for a loan, the bank can require a co-signatory to qualify you, and the co-signatory will also share the responsibility for repayment.

Who Can Be a Signatory?

For legal validity, contracts and agreements must comply with relevant legal and regulatory requirements .

The law in most jurisdictions dictates that the following types of individuals lack the legal capacity to enter into contracts:

• Minors i.e. those under 18 years of age
• Those with mental severe mental illness or cognitive impairments
• Individuals under the influence of substances that impair their ability to understand contract terms
• Depending on the jurisdiction and the specific circumstances, bankrupt individuals may have limited legal capacity to become a contract signatory
• Individuals forced to sign legal documents

These requirements apply to individuals who sign contracts on behalf of themselves or act as a representative of another individual, business or organisation.

Furthermore, the following types of businesses cannot enter into contracts:

• Companies that have not yet been formed
• Dissolved companies

For businesses with valid legal standing, only authorized signatories are allowed to sign contracts. Documents signed by unauthorized personnel can be declared invalid by courts of law, as will be discussed in more detail later on in the article.

What is an Authorized Signatory?

An authorized signatory is an individual specifically appointed by a business, organization, or country to sign official documents and bind the entity to legal agreements. They essentially have the authority to represent the entity in a formal capacity.

For businesses, the board of directors typically grants authorization to chosen individuals to sign on the company's behalf. These individuals (not necessarily the CEO) have the power to make decisions and act on behalf of the company in matters like opening accounts, borrowing funds, and changing signing authorities.

Authorized signatories can delegate signing authority to another person via a process known as signature delegation. This process is common in business contexts where an individual can authorize someone else to sign documents on their behalf. However, this delegation must follow practices and procedures formalized in a relevant signature policy.

Common Examples of Authorized Signatories

Organizations can have multiple types of authorized signatories, with the role and scope of each defined by official policies.

Sole signatory

A sole signatory authority is an individual who can sign documents and approve transactions without needing to take authorization from other individuals.

Sole signatories are common in small businesses and startups, where the founder/owner has the authority to make decisions, and approve and sign various types of documents.

Financial signatory

Financial signatories are authorized by organizations to approve and sign financial documents, such as payment approvals, budget authorizations, and bank transactions.

The CFO, treasurer, finance manager, or another individual with requisite experience and expertise in financial matters can be a designated financial signatory.

Contract signatory

Contract signatories are authorized to sign and approve legal agreements, such as employment agreements, vendor/supplier contracts, and service agreements

These individuals are usually in the legal, procurement, or executive roles.

What Happens if Someone Without Authority Signs a Contract?

In an ideal world, only authorized representatives would sign contracts, there would be no disputes, and no one would need to challenge a contract in a court of law. In the real world, however, unauthorized personnel do sign contracts, and therefore it is necessary to learn about the legal implications and ramifications of such actions.

Invalid or unenforceable contract

If you enter into a contract with a company, but your counterpart did not get the necessary approval or did not have authorization, the contract can be considered null and void.

Consider the case of CPR Restoration, LLC, v. Department of Veterans Affairs that was decided on in May of 2012. CPR Restoration performed $280,000 worth of restoration and cleaning work for a Veterans Administration hospital in Philadelphia. The Civilian Board of Contract Appeals ruled that the contract was invalid because the person who signed it lacked the necessary contracting authority.

Therefore, to protect yourself from legal proceedings and financial losses, make sure that the person you are contracting with has the necessary authority.

Ratification

It's not all doom and gloom: it can happen that the company, whose unauthorized employee signed a contract, could knowingly and willingly ratify the contract, in which case the contract would become valid and binding on the parties involved.

Doctrine of apparent authority

There is another possibility, which relates to the doctrine of apparent authority. This doctrine .states that a principal is bound by the actions of their agent if a third party reasonably believes the agent does have that authority based on the principal's conduct or representations, even if the agent does not have actual authority.

Consider the case of Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. Mr. Kapoor, one of the directors of Buckhurst Park Properties (Mangal) Ltd, engaged architects Freeman and Lockyer to design plans for a property under development. Mr. Kapoor acted without the formal authority of the board of directors, and Buckhurst Park Properties argued that it was not bound by the contract.

The Court of Appeal ruled in favor of Freeman & Lockyer, because, as per the court's findings, Mr. Kapoor had acted within his apparent authority, as the board had known about his general activities and permitted him to engage in such matters.

Here, it is important to emphasize that regardless of whatever a relevant court of law decides about an under-dispute contract, employees who act outside their authority can face disciplinary action, including possible termination, and their professional reputation can be damaged, possibly beyond repair.

What Makes a Signature and a Contract Legally Valid?

Legally binding agreements and contracts have five essential elements:

1. Offer: One party must make a clear offer
2. Acceptance: The other party must accept that offer without major changes (otherwise it’s a counteroffer)
3. Consideration: Something of value must be exchanged (money, services, goods, a promise, etc.)
4. Intention to create legal relations: Both parties must intend the agreement to be legally binding
5. Capacity to contract: Both parties must have the legal ability to enter into a contract

Signatures, wet or digital, are legally valid if:

• They clearly identify the signatory
• Demonstrate intent to implement contract terms
• Comply with relevant laws and regulations. For example, some jurisdictions require Digital Signature Certificates (DSCs) to verify the identity of an individual or organization

How to Set Up a a Contract Signatory Digitally

Docupilot is a leading document automation solution for this purpose. You can use it to create virtually any type of business document, including contracts, proposals, invoices, quotes, business reports, and tax documents.

To create a contract with Docupilot, you can use a custom template or upload an existing contract template in PDF or Word format. Once your template is loaded, you can make changes using Docupilot's powerful feature set:

• Add static and dynamic content, and populate documents with data extracted from supported databases
• Apply basic and advanced conditional logic
• Add dynamic tables, maps, and QR codes
• Add custom branding and apply advanced formatting
• Collaborate on documents with other team members to speed up signing

Docupilot supports native eSign functionality, and you can use it to easily manage signatories. After creating and testing your template, you can set up delivery options to send the generated document to designated individuals for signing.

In addition, Docupilot integrates with numerous e-signature solutions, including DocuSign, Eversign, Signable, and Yousign, and you can use these services if you prefer.

How Docupilot Helps with Contract Signatories

When you create contracts with Docupilot, you can easily designate signatory roles, route contracts to the right individuals for approval, and ensure that only authorized personnel sign key documents. 

Remember, during disputes and legal proceedings, each section of a contract is closely scrutinized, and minor details can have wide-ranging implications for all parties involved. Contracts signed by unauthorized signatories face the risk of legal dismissal, which can lead to grave financial and legal consequences for an affected party.

The automated signing process enabled by Docupilot ensures secure and legally binding signatures while maintaining an audit trail.

Sign up today to create legally compliant contracts and manage signatories at scale.