If you are a procurement professional, you more than anyone else understand just how critical it is that the contracts you manage are executed in compliance with proper legal standards and in accordance with your internal company processes. And the must fundamental aspect to assure yourself of is that the signatures on the contract are legally binding.
But if you don’t have an in-house attorney, you may be left on your own to determine if the contract has been legally executed. Here’s a brief overview outlining what it means to have legally binding signatures on contracts.
If the worst happens, and the validity of a contract ends up being contested in court, the issue will likely fall into the hands of a judge. The following are some of the possible scenarios where a judge may call the signatures on a contract into question—and how to avoid them.
Using Only Initials
Under the reasonable person standards, if a contract is only initialed on portions of the contract instead of signed with a full signature, a judge could call into question whether the person initialing the contract truly intended to fully sign it, or just initialed portions of the document before changing his mind about signing the contract. For example, in a procurement contract you may include blank lines for initials next to key financial terms and ask the seller to initial them. If all the blank lines are initialed, but the signature lines are left blank, a judge may decide that the party who only initialed certain portions of the contract did not mean for those initials to constitute the signing of the document. As a result, it’s important to make sure all parties not only add their initials where appropriate, but also fully sign the contract on the signature lines.
In the same vein, if a contract contains signature lines, but one or more parties sign the contract using only initials—even if those initials are written on the signature line—a court may determine that the contract is invalid. In other words, if the contract has signature lines, be sure that all parties sign it with a full signature to ensure that its validity is unquestionable.
What about Oral Contracts?
In limited circumstances, an oral contract may be found to be enforceable by courts in some states. However, if your contract value is greater than $500 and deals with the sale of goods or real estate, it must be in writing and will require a valid signature. In addition, the Statue of Frauds dictates that other specific types of contracts, such as those with obligations that can’t be completed within one year of signing, have to be put in writing and signed in order to be valid. Here is a list of the types of contracts that must be in writing and have the signatures of both parties in order to be recognized by law:
- Surety and guaranty contracts
- Long term contracts that cannot be fulfilled within one year of signing
- A contract that involved the sale of goods for $500 or more, or a the lease of goods for $1,000 or more
- A contract that involves the selling of stocks and bonds
- A contract that deals with the exchange of real property or land, or involves any interest in real property. For instance, a business lease would fall under this regulation.
Third Party Signatures
If you often sign for other members of your team, or have others sign your procurement contracts while you’re away, it’s important to understand the rules guiding such signatures. There are varying levels of authority that a third party signer can have, and in order to protect your company’s interests, you should understand each level. They are:
- No Authority to Sign. If a third party signs a contract for you, even though you have not given them authority to sign it in your place, some courts will still hold you responsible to carry out the contract’s terms. If you discover that an unauthorized person has signed a contract in your place and you don’t agree with the contract’s terms, immediately begin the steps to reverse it. If you don’t, the court may see your inaction as acquiescence to the deal and hold you to it.
- Apparent Authority. If you are accustomed to having a co-worker sign contracts in your absence, but decide that you no longer trust them to do it, it’s important that you not only tell them of the change, but also those who are affected by your decision. If you don’t and the other party assumes the co-worker still has the authority to sign, you could be held to the contract. To prevent this from happening, make sure you communicate clearly about who does and does not have the authority to sign for you in your absence.
- Implied Authority. This happens when someone acts in a role that encompasses many facets of responsibility, and it is implied that signing contracts is one of them. For instance, someone who works side by side with you in procurement and helps to solicit and manage contracts might be have implied authority.
- Expressed Authority. This type of authority is exactly what it sounds like—it applies when someone has been given expressed authority to sign contracts on behalf of a person or business. This authority is usually expressed in writing, and is often done via a power of attorney, a contract, or in the way a corporation structures its management processes.
When you sign documents online, the contract is just as enforceable as it would be if you signed the document with pen and ink. That’s because in 2000, the ESIGN Act was signed making it law that e-signatures now carry the same legal weight as traditionally signed contracts. In fact, they may be more easily enforced in a court of law. That’s because there are many check and balances in place that don’t exist when signing contracts the traditional way. For instance, with today’s contract automations, there will be a time stamp for all online interactions between the parties, each negotiation point will be documented, and you will have the ability to instantly generate a PDF version of the newly signed contract.
Remember, before you sign a contract, you should ensure that both parties are represented by individuals with signatory rights so should the validity of the contract be contested in court, the validity of the signature will not be an aspect that can be questioned.