Leadership Letter
June 2022
ASK COUNSELOR TARA
ASCE’s General Counsel Tara Hoke responds to legal questions posed by Sections and Branches here each month. Send Tara an email with your question.
How do we ensure proper lines of authority to execute contracts?
Does your Section, Branch, or other group have established rules on who has the authority to sign vendor contracts, execute reciprocal agreements with other organizations, or to make other binding commitments? Do all your volunteer leaders understand their individual authority to act on behalf of your ASCE entity?
Most nonprofit volunteers have a general understanding of the so-called “law of agency,” a legal concept that gives an individual actor (the “agent”) the authority to conduct business on behalf of the nonprofit organization and/or its governing body (the “principal”). As a general rule, when taking on an agent-principal relationship, the agent agrees to act in the principal’s best interests (rather than the agent’s own interests), and in exchange the agent is shielded from personal liability for the agent’s actions taken on behalf of the principal.
The designation of authority from principal to agent can be express – e.g., language in a branch’s operating manual giving the president/chair authority to execute agreements – or it can be implied – e.g., a section treasurer whose duties include procuring an independent audit has implied authority to retain an auditor for that purpose.
In addition, board members should be mindful that their actions can create an agency relationship even where none was intended – and that such unintended acts can create unwanted but inescapable legal obligations. Under the doctrine of “apparent authority,” a principal can be held liable for an agent’s unauthorized commitments to a third party, if the principal’s own conduct made it reasonable for the third party to believe the agent was empowered to make that commitment.
As an illustration, consider a scenario in which a section appoints a committee to plan its annual conference. The conference committee chair is designated as the main point of contact for the event on the section website and in all other correspondence, and this chair is the only person involved in negotiations with the facility hosting the gala. Though the section intended the event contract to be reviewed by the board and signed by the president, the chair either forgot or disregarded this instruction and – unknowing of a recent board decision to downsize the event – signs an agreement that commits the section to a larger gala. Even though the chair was not authorized to sign this contract, the section might still be legally bound to it if it was deemed that the board’s actions in giving this volunteer the title of conference chair and granting the chair authority to handle all negotiations made it reasonable for the facility to believe that the chair also had the authority to sign the contract.
To avoid the risk of an unwanted legal obligation, and as a matter of good governance in general, it is important for all ASCE entities to expressly establish and clearly communicate to volunteers its signing procedures and authority for all contracts, large purchases, or other business transactions.