WHY ALWAYS CHECK SIGNING AUTHORITY OF BUSINESS PARTNERS IN HUNGARY?

12 June 2019

In business, signing a contract or making a declaration on behalf of a company is daily task. During this “routine” process, the parties often do not check whether the signatory of the other party can represent the company. Is the contract valid in Hungary if the signatory has no signing authority, or it is limited? Who, what and from whom can claim in such a case? In our article, you will find the answers to these questions.

Representation in a nutshell

In the case of business associations, the right of representation typically means the right to make statements and signature right, which may arise from two types of legal relations:

• Statutory representation (according to the Articles of Association)
• Representation by authorisation (based on Power of Attorney)

The statutory representation of the companies is normally exercised by executive officers, but in the case of larger companies, it is usually necessary to have additional persons to sign on behalf of the company. For this purpose, for example, company directors and employees can also be registered in the Company Register as representatives.

In this regard, it is a common practice for companies to restrict the right of representation of certain personnel with internal rules, for example, an employee may only sign a contract above a certain value with the approval of the management.

Checking the right of representation

The Company Register is the authentic source in Hungary providing information about company representatives, which is important, since the partners contacting the company can usually inform about the representation of the company on the basis of this source. We recommend actually performing this check as your contract can easily be used only as a scrap paper if it is signed by an unauthorised person.

The serious problem with the limited right of representation is that possible restrictions are not included in the Company Register, there is no technical possibility to indicate it, so it is not possible to determine such limitations from an authentic source.

Legal effect of a missing or limited right in case of statutory representation

In the table below we summarised the legal consequences of missing of limited right of representation in Hungary.

Right of representation	Is the contract concluded?	Who and against whom can have claims?
a) missing	NO, in general (but the represented party may approve later)	The other party may claim damages from the unauthorized signatory (pseudo-representative).
b) limited	YES, in general (except if the other party has known about the limitation)	The company applying the limitation may act against the employee or agent who exceeded the limitation.

And no let’s see the above cases in detail.

Missing right of representation

If the signatory has no right of representation, the contract will not be concluded unless it is subsequently approved by the represented company.

The Hungarian Civil Code provides for two exceptions to the above:

• In business premises, those who can be presumed for a good reason to be entitled to make juridical acts shall be considered representatives. (eg.: cashier)
• A person who can be presumed for a good reason, on the basis of his acts and the conduct of the person being represented, to be entitled to make juridical acts on behalf of the person being represented shall be considered a representative. (eg.: the partner sends its usual lawyer, who used to have the representation, but later it turns out that he was no longer authorized.)

Limited right of representation

What happens if an employee of a company is entitled to represent the company on the basis of the company register, but the company later claims that, according to their internal rules, the employee was not entitled to conclude a contract of a value exceeding 100.000 EUR?

According to the Civil Code, restricting the representation rights conferred upon the registered representative of the legal person shall not be effective against third parties unless the third party knew or should have known of the restriction.

Since the burden proof whether the other party has known of the limitation is a risk factor, the company applying limitation must take into account that the limitation may not have external effect, meaning that they will not be able to rely on the fact that their employee exceeded their powers.

In some evident cases, the limitation should be suspected, for example, if an employee who has previously concluded minor deals, suddenly wants to conclude a contract with you about selling a plant of their company worth million euros.

As far as the internal relations of the company is concerned, an employee or agent exceeding their powers is not a pseudo-representative, therefore the company may claim damages from them on the grounds of violation of work rules or the assignment.

Conclusion

The devil is always in the details, this is especially true for the right of representation, because it is extremely uncomfortable if the contract becomes unusable due to a formal error.

You can see from our article that the limitation of the right of representation does not apply to third parties if the other party was not aware of it. Conversely, in the absence of the signatory's right of representation, the contract will not have legal effect. In order to avoid unpleasant surprises, we recommend that you always pay attention to the examination of the right of representation and, if necessary, contact your lawyer.