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Guest Post: What To Do When You Hear “That Employee Did Not Have The Authority To Sign That Contract”

Reprinted by permission of The Kaplan Group

As a Receivable Savvy Collaborator, The Kaplan Group provides insightful information for the benefit of our readers in the area of commercial credit collections.  

We hear it all the time: “We are not going to pay those invoices because the person who signed the contract didn’t have authority.” Many go on to say: “It says right in our By-laws that only an officer can bind the company.”

This tells us several things:

  • The debtor does not want to pay;
  • The debtor is aware of this outstanding payable;
  • There is a good chance the debtor has the money to pay;
  • The debtor either does not know the law or is pretending to not know the law.

As a B2B collection agency specializing in large claims, we know the law is on our side. But, our initial response is not about the law, but to ask questions to learn more. We want to know why they don’t want to pay, because that is the real problem to solve.

We encounter this situation most frequently with service contracts. Typically the debtor signed up for a service of some type, such as advertising, email list access, or an information database. The most frequently explanations we hear as to why they don’t want to pay are:

  • We never used the service;
  • We didn’t get any benefit from the service;
  • The service didn’t work the way we thought it would;
  • Our business changed directions and we didn’t need the service;
  • Our revenue declined and we just can’t afford it.

Once we hear the explanation, we’ll ask a few more probing questions to fully understand the real issue we need to resolve. We also make sure to contact the client regarding the debtor’s actual usage of the service in case that information will help us with the debt collection effort.

Then we pivot to the issue of Apparent Authority, the excuse the debtor is trying to hide behind. Under the law of agency, an Agent (employee) is able to bind the Principal (company) in a contractual relationship with a third party (customer or vendor). Business could not function efficiently if purchasing people could not order supplies and if sales people could not quote prices and complete sales. While these employees may not be Agents of the company able to execute a contract to sell the entire company to someone, they typically do have the authority to bind the company to these daily transactions.

Under Apparent Authority, if it appears that the employee has authority then their actions bind the company. This appearance can be accomplished by providing the employee with company identifiable forms or stationery, a truck with a company logo, or just having them work from the company office. In all of these cases, it is reasonable for the other person to assume that this employee has authority to enter into the transaction being discussed and therefore the threshold of Apparent Authority has been met. Our client’s contract with the debtor is legally binding.

Our collection strategy will be different if we are dealing with a sophisticated business person who is just trying to snow us with a bad excuse versus an unsophisticated business person who is just hoping this excuse will work. So, we typically don’t just explain the concept of Apparent Authority, but ask a series of questions to learn more about who we are dealing with while leading the debtor to this conclusion.

For example: how many people work for the company, who purchases the office supplies, who makes the sales, where do they work from, do they have business cards or access to company stationery, do they bind the company to these transactions? From there it is easy to explain Apparent Authority and volunteer to send them links on the Internet where they can see for themselves that this is a binding contract. From that point forward, we refuse to discuss that issue and get back to the real issue of collecting the money that is legally owed.

Dean Kaplan is Principal at The Kaplan Group. Dean’s expertise is widely rec­og­nized in the debt col­lec­tion industry. His advice has been published in a number of industry newsletters such as Credit Today and InsideARM and he is a frequent speaker at industry events.

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