In business, executing deals and finalizing transactions is conducted by signing a contract. Aside from ensuring the contents of the contract is in line with the prevailing laws and regulations, it is also important to know which person can sign a contract on behalf of a company, so that the contract can be legally executed.
Companies’ bread and butter are contracts, especially business contracts which ensure that it stays running. The bigger the company gets, the more contracts it will face in its operations, starting from employment contracts for hiring employees, rental contracts for renting office spaces, up to the big contracts like joint ventures and partnership agreements.
One of the most important aspects when making contracts in Indonesia is the importance of dealing with the right person when making a contract. It is crucial to understand that not everyone can sign a contract in Indonesia, and have the wrong person sign the contract can have a significant impact, especially when there are a lot of risks involved for the company in that contract.
Once signed, a contract shall be valid and binding as a law to the parties who signed it, as stipulated in Article 1338 of the Indonesian Civil Code. Therefore, it is very important for the company to understand which person can sign a contract on behalf of a company, and what to do to authorize people who do not have such authority if the company requires them to sign a contract.
LEGAL REPRESENTATIVE OF THE COMPANY
Pursuant to the Indonesian Company Law, the people who are legally authorized by law to represent a limited liability company in Indonesia are the members of the Board of Directors. Once appointed by the General Meeting of Shareholders (“GMS”) and accepted by the Minister of Law and Human Rights, the Board of Directors have the authority to represent the company whether in or outside the courts. This includes representing the company in signing contracts.
Is it possible that a member of Board of Directors, or a Director, is not authorized to sign a contract? It is possible, pursuant to the Articles of Association of the company. Not only is it possible to limit the authority of the Director, but for some contracts, the GMS can determine that the Board of Directors require approval from the Board of Commissioners and/or the GMS. Directors who are not listed in the Articles of Association are also not authorized to sign a contract on behalf of a company.
In such cases, the contract can be signed by both Director and Commissioner, as stipulated in the Articles of Association of the company. One of the most common examples is in signing loan agreements, whether for the company as a lender or as a borrower.
AUTHORIZED REPRESENTATIVES OF THE COMPANY
While the Indonesian Company Law made it clear that the official and lawful representative of the company is the Board of Directors, in practice, to have the Board of Directors sign for all contracts and/or agreements every single day at the office is impractical, especially for a large number of contract in a specific field, such as the employment contracts for Human Resources.
To ensure the smoothness of the business process, the Board of Directors can issue a Power of Attorney to authorize certain parties or high-ranking employees in the Company to sign certain contracts and/or agreements.
Pursuant to the Indonesian Company Law, the Board of Directors has the right to grant a power of attorney in writing to 1 (one) or more employees of Company or other persons, to perform for and on behalf of the Company the certain legal acts specified in the power of attorney.
In practice, the Board of Directors commonly issues a special power of attorney for high-ranked management staffs such as the Head of Operation, Head of HR, which gives them the authority to sign the contracts and/or agreements relevant to their field, or even conduct other activities still in line with their job description. Usually, such Power of Attorney is revoked upon termination or resignation of the staff from their position.
LEGAL IMPLICATIONS OF SIGNING WITH NO AUTHORITY
In the event that it is found that an unauthorized party signed a contract on behalf of the Company, the legal implication is that he/she is not authorized to bind the company in the contract. Therefore, he/she can only bind the party he/she is authorized to represent, which is them.
Of course, this can result in a huge setback for the company. Not only is the wrong party bound in the contract, but another legal implication is that the court can declare such contract invalid, on the basis that the subject of the agreement does not have the authority to represent the company, thereby violating the legitimacy requirement for contracts as stipulated in the Indonesian Civil Code.
Therefore, knowing which person can sign a contract on behalf of a company is highly important, and should be one of the matters secured in executing a contract.
HOW CAN SMART CONSULTING HELP YOU?
To ensure a smooth investment and business operation from the legal perspective, but also still focus on maintaining your business in Indonesia and reach your revenue target, it is advised for you to find capable and trusted lawyers or legal consultants for advice and assistance in ensuring your legal compliance with prevailing trading laws and regulations.
SMART Consulting is an Indonesian Corporate Legal Services firm. We have assisted local and multinational companies in handling their corporate legal matters, including acting as a legal retainer in a legal advisory capacity for companies.
Contact Us Now to get your legal solution for your business goals, and still comply with the prevailing laws and regulations.