Are Your Contract Signatures Legal?

Topics: Contract Management, Legal

bad-contract.jpgCompanies depend on their contracts to bring in revenue, so it’s imperative that they are carried out and managed legally, and at minimal risk to the company. Typically, companies rely on lawyers or legal teams to mitigate risks within a contract, but not all companies can afford legal backup, especially the smaller ones.

A legal contract contains these elements: an offer, consideration, acceptance, and an overall collaboration of terms. When sealing the agreement, or signing the contract, you must make sure it’s done legally to ensure the terms are carried out and the company recognizes revenue from that deal.

When signing contracts, it’s not always clear what is acceptable and what is not. In court, a judge decides the validity of a contract based on “reasonable-person standards,” meaning “how would a reasonable person interpret this?” With that in mind, here are some methods of signing that are commonly brought to question:

Initials

The validity behind initialed signatures depends solely on the placement of that initial. Typically, there are slots placed near terms in a contract for initials. However, if there are ONLY initials on a contract and not a full signature, there is the possibility for it to be interpreted as agreement only to the initialed terms, and not to terms later in the contract.

Electronic Signatures

While many still believe a paper and ink signature is the only legitimate signature, electronic signatures are perfectly legal in the U.S. and many countries around the world. The ESIGN Act (2000) and UETA (1999) establish that electronic signatures carry the same weight and legal effect as traditional paper documents and handwritten signatures.

In fact, many argue that electronic signatures are more secure than a piece of paper, a name and a date. Electronic signature includes the person, place, content, and the intent are all tied together:

  • Each element is stamped by a third-party component. 
  • Attribution is not an issue. Instead of relying on scribble, the person is verified through an email address and challenge questions.
  • The date and time are stamped within the data of that document.

Third-Party Signatures

Say you found a deal that’s perfect for your company. As you prepare to finalize the agreement, you realize that you will not be available for the final contract signing. In these cases, some companies choose a third-party to sign for them. However, it’s important to consider the degrees of a third-party authority:

  • Expressed Authority: This means giving explicit permission to sign on your behalf. This includes signing a power of attorney or a board giving an employee to authority to sign on behalf of the whole company. Expressed authority is best given in writing.
  • Implied Authority: This occurs when a third party acts in a broad role but is impliedly authorized to perform tasks within the scope of that role. For example, if you were to sign for a package for your boss, you have implied authority to sign, and your boss will be bound to the terms of that signature. 
  • Apparent Authority: Say your boss revokes your privilege to sign for his packages, but never communicates that to the mail carrier and you sign for it anyways. Your boss is still held to that signature. The vendor (mail carrier) makes the determination of what your relationship is to your boss, so it’s important that authority (and non-authority) is communicated to everyone involved.
  • No Authority: Believe it or not, you could still be bound to a signature, even if you’ve given no authority to a third-party. This is the case when nothing is done to reverse the signature after the contract has been signed and discovered. If you begin to carry out the terms of the contract, you will be expected to carry it out in it’s entirety.

Is there such thing as an oral contract?

Some states do consider verbal agreements to be oral contracts, enforceable like a written contract. According to the Statute of Frauds, states that contracts including the sale of goods or real estate valued over $500 must be put in writing. So if any terms within a contract were verbally established without those terms in writing with a signature, those terms can be voided.

We all can’t be lawyers, but companies have too much to lose if their contracts are being illegally signed. While hiring lawyers is always considered the safest way to avoid risks in contracts, smaller companies who don’t have the extra capital can do more increase accuracy in the contract process. To learn more about how companies can do more with less in contract management, download our ebook.

Download 6 CLM Best practices now!

Subscribe to Our Blog