Let's say I'm a disgruntled McDonald's employee. One day I walk up to someone and give them a piece of paper saying "McDonald's agrees to give you ONE MILLYUN DOLLARS in exchange for your pocket change. Signed, me, on behalf of McDonald's."

Now, I really doubt that this contract could be enforced against McDonald's in court. Presumably their articles of incorporation specifically set a list of people with the authority to enter into contracts like this, and presumably that list included only high-level directors and such. Yet clearly other people in the organisation have some authority to enter into contracts, for purposes ranging from signing payroll checks to buying supplies.

So how is all this regulated? What determines what agreements a given employee can enter into on behalf of their company, particularly if there aren't any specific provisions in that person's employment contract?


1 Answer 1


In Australia a person must have ostensible authority as an agent (agency by estoppel) to bind their corporation.

If a person claims the authority and a reasonable person would believe in the circumstances that they have the authority then their actions bind the company. See http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s769b.html for the law and http://www.mondaq.com/australia/x/386390/Contract+Law/Companies+and+perils+of+ostensible+authority+the+danger+of+paying+money+to+a+third+party+and+not+to+the+creditor for a case.

To take your example (and putting aside the fact that the purported contract is probably unenforceable in itself), if a reasonable person would conclude you had the authority (in your capacity as director or senior executive) then it would bind McDonalds; if you were a store manager or burger flipper, it wouldn't.

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    This sounds a little scary/surprising: entities can be bound merely by "ostensible authority?" Can you provide any references? Because I might know a guy in a non-extraditing country who is ready to visit Australia, dress up in a suit, print some business cards, and sign a bunch of lucrative contracts on behalf of deep-pocketed entities for the extraordinary benefit of third parties that happen to be publicly traded.
    – feetwet
    Oct 16, 2015 at 21:55
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    Per Hodgson JA "Ostensible authority occurs where the principal, by words or conduct, represents that the agent has the requisite actual authority, and the party dealing with the agent enters into a contract in reliance on that representation". That is, the principal must represent that the agent has authority, and not merely the agent on their own. Here's another case where actions of an ostensible agent does not amount to authority.
    – jimsug
    Oct 16, 2015 at 22:20
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    That is, it appears that a positive act or holding out by the principal is required to delegate ostensible authority to the supposed agent for the company.
    – jimsug
    Oct 16, 2015 at 22:27
  • @feetwet and would the beneficiaries of these "contracts" have reasonably believed he had the authority?
    – Dale M
    Oct 17, 2015 at 0:15
  • @Dale M great answer. You are totally right... If it was a person who had authority, then it could potentially, in the abstract, be binding. Smaller Corporations usually have a few key players (CLO,CEO, COO) who can contact on behalf of the corporate entity with autonomy. That is less so with publicly traded corps or very valuable closely held ones... In those instances a quorum vote if the board is necessary. The articles of incorporation lay out who has this authority and there are legal requisites for publicly traded entities
    – gracey209
    Oct 17, 2015 at 0:16

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