UAE Law on Contracts Signed by Non-Authorized Employees

September 26 2024

In the fast-paced business world of the UAE, Limited Liability Companies (L.L.Cs) operate under a robust legal framework that helps ensure accountability and proper management. But what happens when an employee who is not authorized to sign documents for the company enters into an agreement? Is the company still bound by it?

This is a critical question for businesses and one that is addressed under UAE law. To understand whether such documents are enforceable, we need to look at the relevant provisions in the Federal Law No. (2) of 2015 on Commercial Companies (Companies Law), Federal Law No. (5) of 1985 on Civil Transactions (Civil Transactions Law), and Federal Law No. (18) of 1993 on Commercial Transactions (Commercial Transactions Law).

Company Law: Who Holds the Signing Power?

Under UAE’s Companies Law, the authority to sign on behalf of an LLC is granted only to those specifically mentioned in the company’s Memorandum of Association (MOA) or as per a board resolution. “Only the managers or directors mentioned in the MOA or through board resolutions have the legal power to bind the company” (Article 55, Companies Law).

If an employee who is not officially authorized signs a document, the company has the right to argue that it is not legally bound by that agreement. However, this rule reinforces the importance of transparency – companies need to ensure that internal guidelines clearly identify who holds the power to act as a signatory.

Civil Law: Can Unauthorized Signatures Be Valid?

The UAE Civil Transactions Law steps in with the Doctrine of Ratification, which means that even if an employee lacked the authority to sign a document, the contract could still be enforced if the company later approves or "ratifies" it. “A contract signed by an unauthorized party may become enforceable if the company ratifies the contract either explicitly or implicitly” (Articles 179-182, Civil Transactions Law).

If the company benefits from the contract or acts in a way that shows acceptance of its terms, ratification may occur. Additionally, if a third party believed in good faith that the employee had the authority to sign, the contract could still stand.

Transaction Law: The Importance of Good Faith

UAE's Commercial Transactions Law underscores the principle of good faith in commercial dealings. Article (1) of the Commercial Transactions Law provides that “contracts concluded in good faith shall be binding and enforceable unless proven otherwise”. This means that courts often consider whether the third party entering into the contract reasonably believed the employee had the authority to sign.

Even if there are authorization issues, the courts look at the bigger picture, especially in cases where the company’s actions might have led the third party to trust the employee’s authority.

What Does This Mean for Your Company?

The enforceability of a document signed by a non-authorized employee is not black and white. It depends on:

• Whether the company ratifies the document after it has been signed.
• Whether the third party acted in good faith.
• How clearly the company defines its internal authorization policies.

In the UAE, clear internal processes and communication are essential to avoid disputes over who has the authority to commit the company.

Conclusion: Protect Your Business

For LLCs in the UAE, avoiding disputes over unauthorized signatures starts with clear internal policies and transparent communication of who holds signing authority. However, the law provides mechanisms, such as ratification and the good faith principle, that can make such documents enforceable in certain circumstances.

For expert guidance on navigating these legal complexities and ensuring your business agreements are secure, don't hesitate to consult legal advisors – having the right legal support can protect your company from potential disputes and liabilities. Our team is available to discuss with you the content of this article, please do not hesitate to address your interest or concern to [email protected]