Introduction

In corporate practice, managerial officers frequently represent companies in conducting external transactions. However, it is not uncommon in practice for a managerial officer to sign a contract with an external party on behalf of the company without authorization or exceeding the scope of authorization, resulting in the company asserting that the contract was not formed, with the counterparty contending that the contract was signed by the managerial officer and thus has been validly formed.

At this juncture, the company faces two questions:

“Is the company bound by this contract?”

“If the company is ultimately required to perform the contractual obligations, can it pursue liability against the managerial officer?”

In this regard, how a court determines whether the act of signing a contract falls within the scope of duties and powers of a managerial officer often becomes the pivot for a company’s attribution of liability and allocation of risk.

In cases involving “third parties to a transaction,” courts have generally adopted a lenient approach in determining the scope of authority of a managerial officer and upholding the validity of contracts signed by them, which contributes to safeguarding transaction security and the reliance of third parties. Once the scenario shifts to a company pursuing internal liability against a managerial officer, courts tend to more strictly scrutinize the company’s articles of incorporation, relevant contracts, and other instruments to determine the scope of authority of the managerial officer.

By examining several cases, this article will illustrate how courts determine the external validity of a managerial officer’s acts and their internal liability, while reminding enterprises of some matters that may pose an issue in terms of corporate governance and internal authorization. 

External Validity of Managerial Officer’s Acts: A Lenient Approach in Determining the Validity of Acts Necessary for Business

In 2001, Taiwan amended its Company Act adding a provision—which remains in force today—stipulating that a managerial officer has the power to manage affairs and sign for the company within the scope of authorization specified in the articles of incorporation or contracts. Nevertheless, both before and after this amendment, a controversy has persisted in practice: in the absence of express authorization in the articles of incorporation or contracts, can a managerial officer act in the course of business on behalf of the company?

One opinion takes the view that the duties and powers of a managerial officer should be strictly bound by the scope of authorization specified in the articles of incorporation or contracts, and that a counterparty to a transaction has a duty to verify the scope of authority of the managerial officer. However, the majority of courts in Taiwan adopt a different view, holding that even if the articles of incorporation or contracts do not explicitly grant authorization, a managerial officer is still deemed under the Civil Code to have the power to do “all acts necessary for the management” of the company, branch office, or affairs within their management authority; moreover, the managerial officer may represent the company in litigation with respect to affairs within the scope of their duties and powers, and their external acts within that scope are valid.[1] While this approach contributes to maintaining commercial efficiency and protecting transaction security, it may also expand the scope of risk a company may bear externally when its internal authorization relationships are more complex or unclear.

In a lawsuit where Metal Cap Company A claimed payment for a purchase price against Can Manufacturing Company B, Company B argued in defense that the two parties had reached a settlement through Company A’s general manager and managerial officer, under which Company A was required to pay compensation for defective eco-friendly caps it delivered, and Company B therefore sought to set off the compensation amount against the purchase price payable by it. Company A asserted that its general manager and managerial officer lacked its special authorization and therefore refused to recognize the settlement agreement. The lower court accepted Company A’s argument. However, the Supreme Court held that managerial officers of a company have a general authority under law to do acts for the company that are necessary for its business. If the settlement was based on business necessity and not subject to special legal restrictions, it did not require separate special authorization from the company.[2] According to this Supreme Court view, whether the settlement fell within the scope of acts necessary for the business of Company A constituted a critical issue in the case.

A similar situation can be seen in another dispute regarding theater operation and renovation. Theater Company D entrusted its theater to Multimedia Company C for movie scheduling, operation, and management, and agreed on a method for the distribution of theater revenues between the two parties. To renovate the theater to attract customers and increase revenues, managerial officer X of Company D signed, on its behalf, a theater renovation agreement with Company C, stipulating that Company C was to advance the payment of renovation expenses and subsequently Company D was required to repay the advanced payments to Company C out of the theater’s monthly surplus. Later, Company C filed a lawsuit requesting Company D to repay the advanced renovation payments. Company D argued in defense that managerial officer X, who signed the theater renovation agreement, was only responsible for affairs relating to movie scheduling, while finance and accounting fell outside the scope of their duties and powers; furthermore, managerial officer X lacked special authorization and had no power to sign the contract on behalf of Company D. The lower court held that the portion of the agreement with respect to renovation payments was a contract of a loan for consumption outside the scope of Company D’s business. Since no special mandate was given, managerial officer X had no power to sign the agreement on behalf of Company D. However, the Supreme Court held that a company’s managerial officers, acting within the scope of their duties, are responsible persons of the company; for affairs within the scope of business, they have the power to do all acts for the company without its separate authorization. The evidence showed that the operational affairs of the theater had been managed by managerial officer X for many years, and Company D’s bank account also designated managerial officer X as a representative. Since the theater renovation and the payment of renovation expenses fell within the scope of business of Company D’s theater, it could not be automatically assumed that such a matter was unrelated to Company D’s business, or that managerial officer X lacked the power to handle it.

In another case, the defendant was Company F engaging in the business of construction development. Plaintiff E asserted that they had signed a construction project investment contract with Company F’s site manager, Y, and Company F subsequently denied the investment relationship. The court held that a company’s managerial officer does not need to obtain its prior special authorization to do acts necessary for its business. Upon examining the evidence, the court found that Company F’s articles of incorporation provided for the appointment of managerial officers, and site manager Y actually participated in the company’s fund allocation, assumed responsibility for construction business, and kept custody of the seals of the company and its responsible person; thus, site manager Y was indeed a managerial officer of Company F. Accordingly, the court determined that site manager Y had the power to sign the investment contract on behalf of Company F.[4]

The above-cited judicial opinions all recognize, in terms of a company’s external relations, the validity of acts necessary for business done by a managerial officer. Furthermore, pursuant to Article 36 of Taiwan’s Company Act, a company may not assert any restrictions imposed on the duties and powers of managerial officers as a defense against a good-faith third party.[5] Therefore, if a company wishes to deny the external validity of a managerial officer’s act, it may need to convince the court that the actor was not a managerial officer of the company,[6] or argue that the managerial officer’s act did not constitute an act necessary for its business,[7] or that the counterparty was not acting in good faith.

Company Pursuing Liability Against Managerial Officer for Acting Beyond Authorization: A Strict Approach in Determining Authority Based on Articles of Incorporation and Contracts

In contrast to the above-cited judicial opinions regarding the validity of a managerial officer’s external acts, the following cases demonstrate that courts apply a stricter standard of scrutiny to the scope of duties and powers of a managerial officer when a company pursues internal liability against a managerial officer for acting beyond authorization.

In a case where a company’s general manager approved a re-investment without its authorization, the court indicated in its judgment that the Company Act provides that a managerial officer has the power to manage affairs and sign for the company within the scope of authorization specified in the articles of incorporation or in a contract. However, the articles of incorporation of the company in this case did not specify the scope of duties and powers of managerial officers, the scope of business specified in the articles did not include investment business, and the company’s Delegation of Authority (DOA) matrix did not list re-investment matters among the company’s operations items. Under such circumstances, even if the general manager held the position of highest approving authority, approving the external investment without the company’s authorization constituted an act beyond the scope of powers, and the general manager was required to compensate the company for the loss incurred due to the investment.[8] Here, the court did not deny the validity of the investing act itself, but strictly determined the managerial officer’s authority based on the company’s internal regulations when judging whether the managerial officer should be held liable to the company for acting beyond authority.

Similarly, in a case where the general manager of an electromechanical company signed a high-value factory expansion contract externally without the authorization from the chairperson, the court indicated that a managerial officer’s exercise of powers remains subject to resolutions of the board of directors. A special board meeting resolution of the company in this case explicitly specified that “large procurements of NT$5 million or more shall be submitted to the chairperson for review.” However, the general manager failed to follow this internal decision-making procedure and signed the factory construction contract with a total price reaching NT$21 million, thereby exceeding their authority. Accordingly, the court, without denying the validity of the contract, held that the general manager was liable for damages for the construction fees thus paid by the company.[9]

Furthermore, in a case where a bank’s branch manager exceeded authority in approving loans, the court also strictly examined the branch manager’s liability based on the bank’s internal credit extension rules. The bank’s hierarchical authorization rules for credit extension cases clearly stated that a branch manager’s authority for approving a loan was capped at NT$20 million. However, despite being fully aware that multiple individuals were borrowing separately using the same collateral to circumvent the aforesaid loan approval cap, the branch manager nevertheless approved the loans. The court held that this act substantively exceeded the internal approval authority and thus rendered a judgment holding the branch manager liable for damages for the bad debt losses that the bank was ultimately unable to recover.[10]

 Conclusion

Through the foregoing cases, it can be seen that regarding a managerial officer’s acts done externally on behalf of the company, courts tend to recognize the acts as valid without requiring the company’s separate special authorization if they fall within the scope of business necessity, an approach that contributes to safeguarding transaction security and the reliance of third parties. Conversely, with respect to a company pursuing internal liability against a managerial officer, courts shift to strictly determine the scope of duties and powers of the managerial officer based on the company’s articles of incorporation, contracts, and internal authorization regulations. That is, judicial practice is oriented toward an approach of being “lenient externally and strict internally” in determining the scope of managerial authority.

This two-track approach of judgment implies that even if a contract signed externally by a managerial officer is valid against the company, the managerial officer still faces the risk of internal accountability for damages if the act lacks clear internal authorization. Unclear authorization in the articles of incorporation or contracts may expose a company to a greater likelihood of undertaking undesired contracts or transactions externally. For managerial officers, such lack of clarity may, on one hand, bring undue caution to enterprising management, while leaving the company without a distinct basis for enforcing internal managerial accountability on the other. Consequently, in corporate governance and internal management, enterprises are advised to regularly monitor their articles of incorporation, managerial officer contracts, and DOA matrices to mitigate legal risks and additional costs arising from unclear authorization.

This article is written by Gary Kuo, Andrew Lei, and Wei-Shan Hsu.

If you would like to learn more about matters related to corporate laws and regulations or commercial litigation, please feel free to contact us at gkuo@winklerpartners.com and alei@winklerpartners.com.

[1] See Supreme Court Civil Judgment No. 67-Tai-Shang-2732; Supreme Court Civil Judgment No. 42-Tai-Shang-554.

[2] See Supreme Court Civil Judgment No. 92-Tai-Shang-2536.

[3] See Supreme Court Civil Judgment No. 92-Tai-Shang-2605.

[4] See Taiwan High Court Kaohsiung Branch Court Civil Judgment No. 99-Shang-Yi-75.

[5] Article 36 of the Company Act: “Any restriction imposed by a company on the duties and powers of managerial officers is not valid as defense against a bona fide third person.”

[6] See Taiwan High Court Civil Judgment No. 99-Shang-897.

[7] See Taiwan Taipei District Court Civil Judgment No. 91-Zhong-Su-2465. The court in this judgment held that the company’s assignment of shares constituting a substantial portion of its property did not fall within the scope of its business necessity; therefore, absent the company’s authorization, the general manager had no power to represent the company in making the assignment.

[8] See Taiwan High Court Civil Judgment No. 110-Zhong-Shang-Geng-1-173.

[9] See Taiwan High Court Civil Judgment No. 103-Zhong-Shang-7.

[10] See Taiwan High Court Civil Judgment No. 107-Zhong-Su-Geng-1-2.