Meaning
Statutory provisions define the validity of contracts signed by a legal representative exceeding their delegated authority. When a person acts beyond their power as defined by the articles of association, civil code article 504 dictates that the act remains effective unless the counterparty knew or should have known of the overreach. This protection preserves the stability of commercial transactions by placing the burden of internal oversight on the entity itself.
The provision ensures that third parties acting in good faith are not penalized for internal governance failures or secret limitations on a representative’s power. It establishes a default of validity that encourages swift execution in industrial markets.
Agency Limitation
Internal restrictions on power often conflict with the outward appearance of authority held by a corporate officer. While a company may limit a director’s signing limit through private bylaws, civil code article 504 prevents these hidden caps from voiding external obligations. The law assumes that a general manager or chairman possesses the inherent capacity to bind the firm.
Creditors rely on this legal presumption to execute deals with speed because they are not required to audit every internal resolution of the board.
Good Faith
Evidence of a counterparty’s awareness regarding a breach of authority shifts the legal standing of the agreement. If the signing party can prove the other side acted with malice or possessed clear knowledge of the restriction, civil code article 504 no longer shields the transaction. This creates a boundary where the protection of trade ends and the prevention of fraud begins.
Courts examine whether the external party exercised reasonable diligence expected in the specific industry.
Entity Liability
Corporate liability persists even when the individual signatory violates their internal mandate. Because civil code article 504 prioritizes the objective appearance of authority, the firm must fulfill the contract and seek damages from the representative afterward.
