Credit and Collection News : A Division of Elsos



What to Do When You Hear “That Employee Did Not Have the Authority to Sign that Contract”

posted on 2014-04-28 by Dean Kaplan


We hear it all the time: “We are not going to pay those invoices because the per­son who signed the con­tract didn’t have author­ity.” Many go on to say: “It says right in our By-laws that only an offi­cer can bind the company.”

This tells us sev­eral things:

  • The debtor does not want to pay;
  • The debtor is aware of this out­stand­ing payable;
  • There is a good chance the debtor has the money to pay;
  • The debtor either does not know the law or is pre­tend­ing to not know the law.

As a B2B col­lec­tion agency spe­cial­iz­ing in large claims, we know the law is on our side. But, our ini­tial response is not about the law, but to ask ques­tions to learn more. We want to know why they don’t want to pay, because that is the real prob­lem to solve.

We encounter this sit­u­a­tion most fre­quently with ser­vice con­tracts. Typ­i­cally the debtor signed up for a ser­vice of some type, such as adver­tis­ing, email list access, or an infor­ma­tion data­base. The most fre­quently expla­na­tions we hear as to why they don’t want to pay are:

  • We never used the service;
  • We didn’t get any ben­e­fit from the service;
  • The ser­vice didn’t work the way we thought it would;
  • Our busi­ness changed direc­tions and we didn’t need the service;
  • Our rev­enue declined and we just can’t afford it.

Once we hear the expla­na­tion, we’ll ask a few more prob­ing ques­tions to fully under­stand the real issue we need to resolve. We also make sure to con­tact the client regard­ing the debtor’s actual usage of the ser­vice in case that infor­ma­tion will help us with the debt col­lec­tion effort.

Then we pivot to the issue of Appar­ent Author­ity, the excuse the debtor is try­ing to hide behind. Under the law of agency, an Agent (employee) is able to bind the Prin­ci­pal (com­pany) in a con­trac­tual rela­tion­ship with a third party (cus­tomer or ven­dor). Busi­ness could not func­tion effi­ciently if pur­chas­ing peo­ple could not order sup­plies and if sales peo­ple could not quote prices and com­plete sales. While these employ­ees may not be Agents of the com­pany able to exe­cute a con­tract to sell the entire com­pany to some­one, they typ­i­cally do have the author­ity to bind the com­pany to these daily transactions.

Under Appar­ent Author­ity, if it appears that the employee has author­ity then their actions bind the com­pany. This appear­ance can be accom­plished by pro­vid­ing the employee with com­pany iden­ti­fi­able forms or sta­tionery, a truck with a com­pany logo, or just hav­ing them work from the com­pany office. In all of these cases, it is rea­son­able for the other per­son to assume that this employee has author­ity to enter into the trans­ac­tion being dis­cussed and there­fore the thresh­old of Appar­ent Author­ity has been met. Our client’s con­tract with the debtor is legally binding.

Our col­lec­tion strat­egy will be dif­fer­ent if we are deal­ing with a sophis­ti­cated busi­ness per­son who is just try­ing to snow us with a bad excuse ver­sus an unso­phis­ti­cated busi­ness per­son who is just hop­ing this excuse will work. So, we typ­i­cally don’t just explain the con­cept of Appar­ent Author­ity, but ask a series of ques­tions to learn more about who we are deal­ing with while lead­ing the debtor to this conclusion.

For exam­ple: how many peo­ple work for the com­pany, who pur­chases the office sup­plies, who makes the sales, where do they work from, do they have busi­ness cards or access to com­pany sta­tionery, do they bind the com­pany to these trans­ac­tions? From there it is easy to explain Appar­ent Author­ity and vol­un­teer to send them links on the Inter­net where they can see for them­selves that this is a bind­ing con­tract. From that point for­ward, we refuse to dis­cuss that issue and get back to the real issue of col­lect­ing the money that is legally owed.