Have You: Created A Process For Contracts?

Contracts. Necessary for the facilitation of business but can be the rue of an organization. Few fully understand how easy it is to wind up bound for contracts you either don’t want responsibility for or, worse, don’t even know about.

I will spare the dissertation over agency law. But under common law there is the concept of agency, whereby someone can bind another person for contracts and obligations. Sometimes these individuals are given actual authority to act as agent. But others can be given an implied authority; this is the one to watch out for. So, if you were to tell a staff member that their sole existence and every breath should concern the purchase of printer toner, then you’ve arguably given them the implied authority to enter agreements dealing with the purchase of toner. Another type of “agency” to watch out for is apparent authority where you give a third party the impression that someone may act on your behalf. So if you tell Mr. Office Max that your employee is your right-hand man for toner, and the sole contact for it, then that might serve as evidence that your staff member could enter toner contracts.

More issues can arise with discharged employees. In some states, proper precautions must be taken to ensure vendors and others you do business with know that the employee has been discharged. Failing to do so could end up with you holding the bag for any contracts that discharged employee enters under the auspices of business. Of course, you’ll likely have a fraud claim against the employee, but that’s not really going to help you with the contract holder.

The moral of this story is, you don’t necessarily have to draft a manifesto in order for staff to bind your organization. Just the mere perception could leave you responsible for any contracts they enter. To avoid disaster, organizations should implement some type of process that contracts must go through for review and/or approval. Depending on your size and resources, you may decide to create a process for contracts that are over a certain amount. Or you may only want to deal with contracts concerning certain aspects of the business. Either way, here are a few suggestions to get you along the way:

 

  • You might want to include discussion as to why your organization specifically needs a process put in place. What are you trying to avoid? What issues could come up? Stress that an employee signing a contract without authority (i.e. not following the process) could result in their being personally liable for any obligations they enter.
  • When does the policy apply? Just contracts or all legal documents?
  • What does the policy govern? When does the policy come into play? Does the policy cover just approval? Or review as well?
  • Define who may sign and what exactly they may sign on. For example, you may allow a deputy or assistant director to sign off on lower amounts.
  • Can that authority be delegated? If someone isn’t in the office, can someone else sign on their behalf?
  • Break down the different types of agreements people in the organization may encounter and point out if any of them will need to be treated differently.
  • Are there any items that require the approval of only an executive director? Outline these.
  • You might cover any pertinent formation issues. Require that all contracts be written. Detail any provisions (such as price, quantity, termination, etc.) that must be included in all contracts before approved.
  • To expedite an approval process you might require that a questionnaire outlining the agreement be attached when submitted.
  • Have a process for informing vendors and contractors about recent terminations. Create a response for emails of those recently terminated stating that they are no longer with the organization.
  • Ensure that all employees sign an acknowledgment that they’ve received this process and understand what it entails.

These are just a few suggestions. But there are plenty of sample policies floating around the Google-net. Check those out, and as always be sure to keep the organization in mind.