Perspective | How to Identify Unauthorized Representatives and Apparent Representatives in Commercial Contracts
Published:
2024-12-31
Introduction: Article 11 of the "Company Law of the People's Republic of China (2023 Revision)" states: "The legal consequences of civil activities conducted by the legal representative in the name of the company shall be borne by the company. Restrictions on the powers of the legal representative set forth in the articles of association or by the shareholders' meeting shall not be opposed to good faith counterparties. If the legal representative causes damage to others while performing their duties, the company shall bear civil liability. After the company bears civil liability, it may seek recourse from the legal representative at fault in accordance with the law or the provisions of the articles of association." This article is a new provision in the Company Law, incorporating content from Articles 61(2-3), 62, and 1191 of the Civil Code. The first paragraph clarifies the attribution of legal effects of representative actions, which is essentially consistent with Article 61(2) of the Civil Code, except that the Civil Code applies to all legal persons, while this article of the Company Law applies only to companies. Representative actions and agency actions differ as companies are not natural persons. A company's external expressions of intent rely on its internal organizational structure, and all intentions and actions of the company arise from its organizational structure. The company's organizational structure is necessarily composed of different natural persons, including the legal representative, directors, managers, supervisors, and staff, who together form the shareholders' meeting, board of directors, and board of supervisors. The expressions of intent generated by various organizational structures within the company are externally expressed by the legal representative. However, our country not only establishes the representative power enjoyed by the legal representative but also sets up agency power. The legal basis for representative power is provided in Article 61 of the Civil Code, which states: "The person who represents a legal person in civil activities according to the law or the articles of association is the legal representative of the legal person. The legal consequences of civil activities conducted by the legal representative in the name of the legal person shall be borne by the legal person. Restrictions on the representative power of the legal representative set forth in the articles of association or by the legal person's power institutions shall not be opposed to good faith counterparties." Article 62 states: "If the legal representative causes damage to others while performing their duties, the legal person shall bear civil liability. After the legal person bears civil liability, it may seek recourse from the legal representative at fault in accordance with the law or the articles of association." Agency power comes from two aspects: civil agency and duty agency. The legal basis for duty agency is provided in Article 170 of the Civil Code, which states: "Personnel executing the work tasks of a legal person or an unincorporated organization shall implement civil legal acts in the name of the legal person or unincorporated organization within the scope of their authority, which shall be effective for the legal person or unincorporated organization. Restrictions on the scope of authority of personnel executing the work tasks of the legal person or unincorporated organization shall not be opposed to good faith counterparties." By comparing the provisions, it can be found that the content of Article 61 of the Civil Code states "the legal consequences shall be borne by the legal person," while Article 170 states "shall be effective for the legal person or unincorporated organization." The normative language of these two provisions represents different connotations. In the relationship of representative actions, there are only the represented party and the counterparty; the representative is not an independent subject. When the legal representative conducts civil activities in the name of the company, their representative power comes from the authorization of the law and the articles of association, thus no authorization letter from the company is required. Therefore, the external duties of the legal representative are company actions, and the consequences are naturally borne by the company. In contrast, in the agency relationship, there is a three-party relationship: the agent, the principal, and the counterparty. The agent is an independent subject, so Article 170 emphasizes that it must be within the scope of authority for it to be effective for the principal. From this, it can be seen that the legal representative is the legally designated expression organ of the legal person, but the legal representative is only an expression organ and is not the decision-making body of the company. The functions of the legal representative are primarily external. The powers exclusive to the legal representative can generally be summarized as follows: (1) External judicial litigation (signature of the legal representative on the complaint and identification); (2) Administrative applications (signature of the legal representative on commercial change registration and identification); (3) Non-routine significant business management actions: external investment, guarantees, financial support, donations; (4) Major actions of the company: company mergers and acquisitions, significant asset transfers, etc.; (5) Important internal document signing: capital contribution certificates, stocks, bonds, etc. Common situations of exceeding authority can be summarized as follows: the legal representative resigns but does not timely change the registration, or although registered, the actual legal representative has been dismissed. Alternatively, according to Article 10 of the Company Law, if the company does not determine a new legal representative within 30 days after the resignation of the legal representative. By comparing Article 11(2) of the Company Law: "Restrictions on the powers of the legal representative set forth in the articles of association or by the shareholders' meeting shall not be opposed to good faith counterparties," and Article 61(3) of the Civil Code: "Restrictions on the representative power of the legal representative set forth in the articles of association or by the legal person's power institutions shall not be opposed to good faith counterparties," it is not difficult to conclude that the restrictions on powers that cannot be opposed to good faith third parties come from the articles of association and the shareholders' meeting, excluding laws and provisions mentioned in the law. For instance, the provisions in Article 15 of the Company Law regarding external investment and guarantees imply that everyone should be aware of the restrictions on the representative power of the legal representative in such situations, thus allowing them to oppose any counterparties. The validity of contracts exceeding authority is addressed in Article 504 of the Civil Code: "Contracts entered into by the legal representative of a legal person or the head of an unincorporated organization that exceed their authority shall be valid unless the counterparty knows or should have known that they exceeded their authority." The Supreme People's Court's interpretation regarding the application of the General Principles of the Contract Compilation of the Civil Code (2023) No. 13, Article 20 states: "If laws and administrative regulations restrict the representative power of the legal representative of a legal person or the head of an unincorporated organization, stipulating that matters involved in the contract should be resolved by the power institutions or decision-making bodies of the legal person or unincorporated organization, or should be decided by the executive institutions of the legal person or unincorporated organization, if the legal representative or head has not obtained authorization and enters into a contract in the name of the legal person or unincorporated organization without fulfilling reasonable review obligations, the people's court will not support the counterparty's claim that the contract is effective for the legal person or unincorporated organization and that it bears liability for breach of contract. However, if the legal person or unincorporated organization is at fault, it may be judged to bear corresponding compensation liability according to Article 157 of the Civil Code. If the counterparty has fulfilled reasonable review obligations and constitutes apparent representation, the people's court shall handle it according to Article 504 of the Civil Code. If the matters involved in the contract do not exceed the legal and administrative regulations regarding the representative authority of the legal representative or head, but exceed the restrictions on representative power set forth in the articles of association or by the power institutions, the people's court shall support the counterparty's claim that the contract is effective for the legal person or unincorporated organization and that it bears liability for breach of contract, unless the legal person or unincorporated organization can prove that the counterparty knew or should have known of such restrictions. After the legal person or unincorporated organization bears civil liability, it may seek recourse from the legal representative or head at fault for losses caused by exceeding authority, and the people's court shall support this according to the law. If there are other provisions regarding the civil liability of the legal representative or head in the law or judicial interpretations, those provisions shall apply. Through the analysis of the above Article 20 provisions, for the first paragraph, the legal limits of the legal representative do not generally constitute apparent representation, except in cases where the counterparty is acting in good faith, which may constitute apparent representation; for the second paragraph, the intentional limits of the legal representative generally do not oppose good faith counterparties, constituting apparent representation; for the third paragraph, after the company bears external liability, it can internally hold the at-fault legal representative accountable, and the accountability principle generally applies to Article 62 of the Civil Code. However, attention should be paid to Article 191 of the Company Law: "If directors or senior management personnel cause damage to others while performing their duties, the company shall bear compensation liability; if directors or senior management personnel are found to have acted with intent or gross negligence, they shall also bear compensation liability." When these provisions are in conflict, the provisions of Article 191 shall apply as the special law.
Introduction:Article 11 of the Company Law of the People's Republic of China (2023 Revision): "The legal consequences of civil activities conducted by the legal representative in the name of the company shall be borne by the company. Restrictions on the powers of the legal representative set forth in the articles of association or by the shareholders' meeting shall not be opposed to good faith counterparties. If the legal representative causes damage to others while performing their duties, the company shall bear civil liability. After the company bears civil liability, it may seek compensation from the legal representative at fault in accordance with the law or the provisions of the articles of association."
This article is a new provision in the Company Law, incorporating the content of Article 61, paragraphs 2-3, Article 62, and Article 1191 of the Civil Code. The first paragraph clarifies the legal effect of representative actions, and its substantive core is consistent with paragraph 2 of Article 61 of the Civil Code, except that the Civil Code applies to all legal persons, while this article of the Company Law applies only to companies.
Representative Actions and Agency Actions
A company is not a natural person; its external expressions of intent rely on its internal organizational structure. All intentions and actions of the company arise from its organizational structure, which must consist of different natural persons, including the legal representative, company directors, managers, supervisors, and staff. Together, they form the shareholders' meeting, board of directors, and board of supervisors. The expressions of intent generated by the internal organizational structure are conveyed externally by the legal representative. However, our country not only establishes the representative power enjoyed by the legal representative but also sets up agency power.
The legal basis for representative power is provided in Article 61 of the Civil Code: "The person responsible for representing a legal person in civil activities according to the law or the articles of association is the legal representative of the legal person. The legal consequences of civil activities conducted by the legal representative in the name of the legal person shall be borne by the legal person. Restrictions on the representative power of the legal representative set forth in the articles of association or by the legal person's power institutions shall not be opposed to good faith counterparties." Article 62 states: "If the legal representative causes damage to others while performing their duties, the legal person shall bear civil liability. After the legal person bears civil liability, it may seek compensation from the legal representative at fault in accordance with the law or the provisions of the articles of association." Agency power comes from two aspects: civil agency and official agency. The legal basis for official agency power is provided in Article 170 of the Civil Code: "Personnel executing tasks for a legal person or an unincorporated organization may implement civil legal acts in the name of the legal person or unincorporated organization within the scope of their authority, which shall be effective for the legal person or unincorporated organization. Restrictions on the scope of authority of personnel executing tasks for the legal person or unincorporated organization shall not be opposed to good faith counterparties."
By comparing the provisions, it can be seen that the content of Article 61 of the Civil Code states, "the legal consequences shall be borne by the legal person," while Article 170 states, "shall be effective for the legal person or unincorporated organization." The normative language of these two provisions represents different connotations. In the relationship of representative actions, there are only the represented party and the counterparty; the representative is not an independent subject. When the legal representative conducts civil activities in the name of the company, their representative authority comes from the authorization of the law and the articles of association, thus there is no need for a power of attorney from the company. Therefore, the legal representative's external official actions are company actions, and the consequences are naturally borne by the company. In the relationship of agency actions, there is a three-party relationship: the agent, the principal, and the counterparty. The agent is an independent subject, so the content of Article 170 emphasizes that it must be within the scope of authority for it to be effective for the principal.
Powers of the Legal Representative
It can be seen that the legal representative is the legally designated agency for the legal person's expressions of intent. However, the legal representative is merely an agency for expressions of intent and is not the agency for the formation of the company's intent or the decision-making body of the company. The functions of the legal representative are primarily reflected externally.
The powers exclusive to the legal representative can generally be summarized as follows: (1) External judicial litigation (signature of the legal representative on the complaint and identification); (2) Administrative applications (signature of the legal representative on commercial change registration and identification); (3) Non-routine significant business management actions: external investment, guarantees, financial support, donations; (4) Significant actions of the company: company division, merger, significant asset transfer, etc.; (5) Important internal document signing: capital contribution certificates, stocks, bonds, etc.
Exceeding Authority Representation
Common situations of exceeding authority representation can be summarized as the legal representative resigning but not timely changing the registration, or although registered, the actual legal representative has been dismissed. Alternatively, according to Article 10 of the Company Law, if the company does not determine a new legal representative within 30 days after the resignation of the legal representative.
By comparing Article 11, paragraph 2 of the Company Law: "Restrictions on the powers of the legal representative set forth in the articles of association or by the shareholders' meeting shall not be opposed to good faith counterparties," and Article 61, paragraph 3 of the Civil Code: "Restrictions on the representative power of the legal representative set forth in the articles of association or by the legal person's power institutions shall not be opposed to good faith counterparties," it is not difficult to conclude that the restrictions on powers that cannot be opposed to good faith third parties come from the articles of association and the shareholders' meeting, excluding laws and the provisions of the articles of association mentioned in the law. For example, the provisions in Article 15 of the Company Law regarding external investment and guarantees imply that everyone should be aware of the restrictions on the representative power of the legal representative in such situations, thus they can oppose any counterparty.
Validity of Contracts Exceeding Authority Representation
Article 504 of the Civil Code: "Contracts concluded by the legal representative of a legal person or the head of an unincorporated organization that exceed their authority shall be valid unless the counterparty knows or should know that they exceed their authority; the contracts shall be effective for the legal person or unincorporated organization."
Interpretation No. 13 [2023] 20 of the Supreme People's Court on several issues concerning the application of the General Principles of the Contract Compilation of the Civil Code: "If laws and administrative regulations restrict the representative power of the legal representative of a legal person or the head of an unincorporated organization, stipulating that the matters involved in the contract shall be resolved by the power institutions or decision-making bodies of the legal person or unincorporated organization, or shall be decided by the executive body of the legal person or unincorporated organization, if the legal representative or head has not obtained authorization and concludes a contract in the name of the legal person or unincorporated organization, and the counterparty fails to fulfill the obligation of reasonable review, the people's court shall not support the counterparty's claim that the contract is effective for the legal person or unincorporated organization and that it bears liability for breach of contract. However, if the legal person or unincorporated organization is at fault, it may be judged to bear corresponding compensation liability in accordance with Article 157 of the Civil Code. If the counterparty has fulfilled the obligation of reasonable review, constituting apparent representation, the people's court shall handle it in accordance with Article 504 of the Civil Code.
If the matters involved in the contract do not exceed the legal, administrative regulations regarding the representative authority of the legal representative or head, but exceed the restrictions on representative power set forth in the articles of association or by the power institutions of the legal person or unincorporated organization, and the counterparty claims that the contract is effective for the legal person or unincorporated organization and that it bears liability for breach of contract, the people's court shall support it according to law. However, this excludes cases where the legal person or unincorporated organization proves that the counterparty knew or should have known about the restriction.
After the legal person or unincorporated organization bears civil liability, if it seeks compensation from the legal representative or head at fault for losses caused by exceeding authority representation, the people's court shall support it according to law. If there are other provisions in the law or judicial interpretations regarding the civil liability of the legal representative or head, they shall be followed.
By analyzing the provisions of Article 20 mentioned above, for the first paragraph, the statutory limits of the legal representative do not, in principle, constitute apparent representation; however, in exceptional circumstances, the good faith of the counterparty may constitute apparent representation. For the second paragraph, the discretionary limits of the legal representative do not, in principle, oppose good faith counterparties, constituting apparent representation. For the third paragraph, after the company assumes external responsibility, it can hold the legally responsible representative accountable internally for any fault. The principle of accountability is generally governed by Article 62 of the Civil Code, but attention should be paid to Article 191 of the Company Law: "If directors and senior management personnel cause damage to others while performing their duties, the company shall bear the liability for compensation; if directors and senior management personnel have intentional or gross negligence, they shall also bear the liability for compensation." When there is a conflict between the above provisions, Article 191, as a special law, should be given priority.
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