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 a concluding person has no competence to conclude any contract.

In order to conclude contract different corporations like limited liability companies, trusts and cooperatives has to be registered in proper registers. Not a foundation of a corporation with an agreement is sufficient but the registration of a limited liability company in the Commercial Register shall grant the company the competence to conclude an agreement. A person made an agreement in the name of company before the registration shall be responsible for the agreement in person. See more about acting on behalf of a company in a paragraph [1.1.3 Measures on Behalf of a Limited Liability Company before Registration].

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 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 into 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 it is unclear whether a representative of the other contracting party has authority to sign the agreement, it is advisable to check in the trade register whether the person has the authority based on her or his 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 him/her individually or jointly with another person. If the person has a procuration right, the scope of the authority must be checked in order 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 [4.1.5 Representing a Company].