Apr 15, 2025
Right of representation in legal entities: Who can legally bind companies and organizations?
When legal entities such as companies, associations, or public bodies enter into agreements, the question arises as to who can obligate the legal entity externally. This is the essence of the right of representation - the rules concerning who can act on behalf of a legal entity and enter into binding agreements. The article provides an overview of key rules regarding the right of representation in various organizational forms and highlights the difference between competence and authority.
Competence vs. Authority
A fundamental distinction in the right of representation is between the terms competence and authority:
Competence refers to the authority a person has internally within the organization.
Authority refers to the authority a person appears to have externally towards third parties.
As long as the person acting stays within their competence, the legal entity is bound. However, even when a representative exceeds their competence, the legal entity can still be bound if the representative has sufficient authority and the contracting party is in good faith.
The fundamental condition for the effects of authority to occur is that the contracting party (third party) neither understood nor should have understood that the representative acted in contradiction with their competence.
Significance of the Enterprise Register
The rules on representation rights must be seen in conjunction with the rules on enterprise registration. Business enterprises are obliged to register in the Enterprise Register, where it must also be disclosed who represents the enterprise externally and signs its firm.
The Enterprise Register Act § 10-1 provides two key rules regarding the relationship between registration and representation rights:
What is registered in the Enterprise Register can always be enforced against third parties, even if they were unaware of the registration.
Matters that should have been registered but are not cannot be enforced against a third party who in good faith has aligned their actions based on the registration.
Representation Rights in Limited Companies
In limited companies, the main rule is that the board represents the company externally and signs its firm, cf. the Companies Act § 6-30. The board’s representative capacity is unlimited and includes any disposition on behalf of the company.
If the company has a CEO, their competence includes the day-to-day management, cf. the Companies Act § 6-14. The day-to-day management does not include matters of an unusual nature or great importance. The CEO’s external representation is limited to “matters included in the day-to-day management,” cf. § 6-32.
The CEO may, however, be granted extended authority through signature or procuration:
Signature involves the CEO being delegated the board’s general power of attorney.
Procuration provides the authority to act on behalf of the company in all that pertains to the operation, except transferring or encumbering real estate or chattels.
Effects of Authority in a Limited Company
The Companies Act § 6-33 regulates the effects of authority in the event of competence overreach: If the board or CEO exceeds their authority, the disposition is still binding for the company unless the contracting party understood or should have understood that the authority was exceeded, and it would be contrary to honesty to enforce the disposition.
This means that dispositions by the board or CEO are generally binding on the company, even if the representative exceeded their internal competence. Only toward a "bad faith" contracting party might the company not be bound.
Representation Rights in Partnerships
In partnerships, the participants individually represent the company externally and sign its firm, cf. the Partnerships Act § 2-21. However, this can be restricted by agreement so that only certain participants can represent the company, or those with competence must do so jointly.
If the company has a board, it represents the company externally and signs its firm, cf. § 2-21 second paragraph. In these instances, participants will not have a signature.
If a CEO is appointed, they are authorized to represent the company externally in matters that fall within the daily management.
The Partnerships Act § 2-22 second paragraph regulates legitimate dispositions similarly to the Companies Act: A disposition is binding even with authority overreach, unless the contracting party realized or should have realized this, and it would be contrary to honesty to enforce the disposition.
Representation Rights in Limited Partnerships
In limited partnerships without a board, the general partner represents the company externally and signs its firm, cf. the Partnerships Act § 3-13. If the company has a board, it represents the company externally. The general partner nevertheless has authority in matters concerning day-to-day management.
The rules on authority effects are the same as for partnerships. Limited partners have no contractual competence or authority according to the Partnerships Act.
Representation Rights in Associations
There is no general legislation for associations. The rules on competence and representation are therefore based on case law and associative legal principles.
In associations, the competence to manage the association and represent it externally is usually stipulated in the statutes. The general rule is that the board has the general competence to manage the association and represent it externally.
However, based on non-codified law, the board may be authorized to carry out private law dispositions on behalf of the association that exceed its internal authority, provided the contracting party is in good faith.
A chairperson or business manager will normally have competence and representation rights similar to a CEO in a company.
Representation Rights in the State
The government (the King in Council) has the general competence to obligate the state through agreements and commitments, cf. The Constitution § 3. In practice, this competence is often delegated to administrative bodies.
The delegation may follow indirectly from appropriations decisions or the organization of the administration. Bodies established to provide services or conduct business activities will have the competence to conclude agreements to fulfil their purpose.
It is unclear to what extent authority rules apply to state agencies. Traditionally, there has been little room for contractual power of attorney and representation rules, but employment in public positions may involve authority by position.
Representation Rights in Municipalities and County Municipalities
In municipalities and county municipalities, it is the municipal council (county council) and the executive committee (county committee) that internally has the competence to make decisions regarding agreements. Externally, it is the mayor (county mayor) who represents the municipality and enters into agreements on its behalf, cf. the Municipal Act § 9 No. 3.
The Supreme Court, in recent practice (HR-2016-00476-A), has assumed that a municipality can be bound based on private law authority rules: "Municipalities are also covered by the Contract Act when they enter into contracts in the field of property law."
This means that the Contract Act’s rules, including those on power of attorney, apply to municipal dispositions in the property law field. Nevertheless, it takes a lot for professional contracting parties to claim good faith when entering into agreements with municipalities.
Practical Consequences
The question of who can obligate legal entities has significant practical consequences:
For the legal entity: The risk of being bound by agreements that internal decision-makers do not desire.
For the contracting party: The risk that a seemingly valid agreement is later deemed invalid.
For the representative: The risk of personal liability for exceeding authority.
To reduce the risk of disputes, it is essential that:
Legal entities have clear guidelines on who can act on their behalf.
Contracting parties verify who has representation rights, especially for larger agreements.
Information in the Enterprise Register is kept up-to-date.
Conclusion
The right of representation balances two considerations: On one hand, the need for legal entities to arrange themselves according to their internal decision-making processes, and on the other hand, the need for third parties to rely on the external authority that representatives possess.
To protect their own interests, legal entities should ensure clear authority relationships, while contracting parties should investigate the representative’s authority - especially for larger agreements or agreements with public entities. In commercial contexts, professional actors will rarely be able to claim good faith in issues concerning clarity on representation rights.
