Tuesday, July 9, 2013

Authority and Authorized Representatives

Every company doesn’t want everyone within the company to be able to make changes to either the scope of the work or the terms of an agreement. Authority to sign agreement or act on behalf of the company related to agreement is delegated to individuals. For example, a purchasing organization on their own has no authority to sign contracts that bind the corporation. What usually occurs is the board of directors passes a resolution providing specific titles (such as the VP of purchasing or VP of sales) with the rights to sign agreements that are applicable to them. The resolution usually also allows them the right to further delegate authority to individuals in within their organizations to sign agreements. Those groups will usually have a policies or procedure on further delegation of authority. The normal approach is to have financial limits on the value of an individual contract that they can sign, with the amount based upon their position and experience. They may also have limits on the value of the amendments or changes they can sign so higher level review and approval is required once the value exceeds a cumulative amount.

An important fact about authority for companies with a number of subsidiaries, is that your authority is only limited to the specific company that granted the authority. For example, an employee of a subsidiary does not have authority to change another subsidiary or parent company’s contracts and vice-versa. To have authority the company that owns the contract needs to grant authority for others to act on their behalf.

Some people learn about authority the hard way. When I was in the Air Force many, many, years ago I was a contracting officer. We had a paving contract and when I received the request for payment there was an extra $500 on the bill. When I dug into the fact I found that a small paved walkway was added at the direction of a Colonel (who of course had no authority to make the change). I pointed out to the contractor the specific section of the agreement that identified who had authority to make changes. They agreed that the Colonel wasn’t authorized and I told them they should have known better than to do the work at his instruction. If they wanted to be paid, needed to collect it from the Colonel, which they did. The Colonel wasn’t too happy but he paid the bill and he learned about his authority.

To avoid this type of problem, when you write contracts you want to limit individuals from other groups from being able to either make changes to the terms and conditions or changes to the scope. Contracts will usually require that any changes or amendments to the agreement need to be signed by an authorized representative. That puts the contractor or supplier on notice that they can’t take direction from anyone in the buyer’s company, the individual needs to have authority. Many times the individual that signs the agreement can’t be in all places at all times and may need to have other parties act on their behalf. To do that you need to designate those as an authorized representative. That can be done in the contract or by a separate authorization letter from a party that has authority. The designation will usually include the scope of their authority and any financial limits to their authority.

For example in construction you may need to make a small change to the design. It needs to be done immediately or work will stop and it would subject the owner to claims for delay. As such we would designate both the project manager and site engineer with limited authority as owner representatives. The site engineer would have the authority to accept or reject work as it was being performed if there was a quality or non-compliance the drawings or specifications problem. The project manager would have the authority to agree to limited changes in the scope of the work up to a specific dollar amount.

The use of authorized representatives isn’t limited to construction. For example, with remote suppliers you may need to have your local subsidiary personnel or a third party perform actions on your behalf such as performing inspections of the progress of the work, checking quality, checking compliance with the terms of the agreement. Those local personnel do not have authority to do anything on your contract as they are employees of a subsidiary that is a separate legal entity. There needs to be a delegation of authority authorizing them to act on behalf of your company. If you hire a third party to perform such services, they too do not have authority to do those on your behalf. You need to designate them as an agent of your company so they have the authority to take those specific actions you authorized them to perform.