As a procurement professional, one of the key elements of managing contracts is understanding how critical it is for them to be executed in compliance with proper legal standards and in accordance with internal company processes. Having the assurance that the signatures on the contracts are legally binding will ensure teams can focus on more critical elements of creating agreements, such as efficiency or negotiation.
However, determining the legality can often be confusing, especially if there are no in-house attorneys available. This is a brief overview outlining what it means to have legally binding signatures on contracts.
Worst case if 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
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 their 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.
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 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 example, a business lease would fall under this regulation.
Third Party Signatures
If team members are signing for others on their team, especially if key signers are 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 a company’s interests, it’s crucial to understand each level. They are:
- No Authority to Sign. If a third party signs a contract in place of another person, even the person has not given them the authority to sign it in their place, some courts will still hold them responsible to carry out the contract’s terms. If an unauthorized person signs a contract in place of someone else who doesn’t agree with the contract’s terms, they should immediately begin the steps to reverse it, or the court may see inaction as acquiescence to the deal.
- Apparent Authority. If a team member regularly signs contracts for someone else in their absence, but they decide they no longer want this person to sign for them, it’s important everyone is told of this new process, including the old signer as well as others who will be affected by the decision. Without this clarification, if the other co-worker signs, the original signee could be held to the contract. To prevent this from happening, make sure to communicate clearly about who does and does not have the authority to sign in someone’s 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 procurement and helps to solicit and manage contracts might be 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 signing documents online, the contract is just as enforceable as it would be if signed with pen and ink. According to the ESIGN Act of 2000, 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. This is due to the many check and balances in place that don’t exist when signing contracts on paper. For instance, with today’s contract automation, there is a time stamp for all online interactions between the parties and each negotiation point is documented.
Remember, before signing a contract, it’s important to ensure 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.