Right to Conclude a Contract
The contracting parties must have the required competence to perform a legal act. Some legal acts, which are of small significance, may for instance be concluded by minors and persons of limited legal competency, whereas other contracts may only be concluded by legally competent adults, legal persons and organizations, such as limited liability companies, the state, trusts and limited partnerships. The contract is invalid and not binding, if the concluding person has no competence to conclude any contract.
To conclude contracts different legal entities like limited liability companies, trusts and cooperatives have to be registered in proper registers. The mere formation of a company by contract is not enough: a limited company, for example, is only eligible to conclude contracts in its name after it has been entered into the Commercial Register. Contracts concluded in the name of a company before its registration are the personal responsibility of the person who concluded the contract. See more about acting on behalf of a company in a paragraph [Measures on Behalf of a Limited Liability Company before Registration].
When concluding contracts on behalf of companies, the power of the person representing the company must also be taken into account. For an agreement to be valid and binding on the company, its representative should be an appropriate authority to conclude contracts on behalf of the company. The authority may be based, for example, on the person's position in the company (e.g. Board member), procuration or power of attorney.
A company’s board of directors and persons holding a right of representation are authorized to sign contracts on the company’s behalf. The right of representation in general and limited partnerships is held by the general partners. The managing director has authority to enter transactions which are within the ordinary course of business. Employees may sometimes, by reason of their position within the company or with a power of attorney, conclude contracts on the employer’s behalf.
If there is any uncertainty about whether a representative of the other contracting party has the authority to sign the agreement, it is advisable to check in the trade register whether the person has the authority based on their legal position in the company, or has the person e.g. been granted a right of representation or procuration right. If the person has a registered right of representation, it is also important to check whether this right may be used by them individually or jointly with another person. If the person has a procuration right, the scope of the authority must be checked to establish whether it extends to the legal act in question. The articles of association may also provide that the company is represented by e.g. the chairman of the board of directors alone in addition to the board itself. If this is the case, the chairman is competent to sign binding contracts on behalf of the company.
See more about representation of a company in paragraph [Representing a Company].