What Happens When Your Business Partner Signs A Contract Without Your Consent

What Happens When Your Business Partner Signs A Contract Without Your Consent

Understanding Authority, Liability, and Legal Remedies Under New Jersey Law

In closely held businesses, particularly partnerships and small LLCs, it is not uncommon for one partner to take the lead in handling vendor contracts, leases, client agreements, or even loan documents. But what happens when that partner signs a binding contract without discussing it with the other owners, or worse, without their knowledge? In many cases, the answer surprises business owners: the contract may still bind the business.

Under New Jersey law, a partner or member of an LLC can legally obligate the business through contracts and other agreements, even without the express approval of the other partners, unless clear internal restrictions are in place and communicated to third parties. The enforceability of such contracts depends on legal principles known as actual authority and apparent authority. These doctrines determine whether the partner had the legal right, or appeared to have the legal right, to act on behalf of the business.

Actual Authority: The Power Expressly Granted by the Business

Actual authority refers to the authority that is intentionally granted to a partner by the partnership or LLC. This can be expressed in the operating agreement, bylaws, board resolutions, or even through verbal authorization in smaller, less formal entities. If the partner was authorized to enter into the contract, even if others disagreed later, the business will generally be bound by that agreement.

For example, if a partnership agreement states that each partner may enter into contracts under $10,000 without prior approval, and one partner signs a vendor agreement for $7,500, that contract is enforceable, regardless of whether the other partner was consulted. Similarly, if a managing member of an LLC is granted broad authority to bind the company in service agreements, those contracts will be honored as long as they fall within the scope defined by the LLC.

In disputes over actual authority, courts will look to the entity’s governing documents, past practices, and the nature of the transaction. If the partner acted within their authorized role, the business cannot claim the contract was unauthorized after the fact.

Apparent Authority: The Power the Partner Appears to Have

Even when a partner lacks actual authority, a contract may still bind the business if the other party reasonably believed that the partner had authority. This is known as apparent authority, and it is based on the actions or representations of the business, not the subjective beliefs of the partner.

Under New Jersey law, a third party may rely on apparent authority if the business has represented the partner as someone authorized to act on its behalf. This could be through titles, patterns of past conduct, public-facing materials, or a lack of internal controls. The key question is whether the third party’s belief was reasonable under the circumstances.

For instance, if one partner regularly negotiates vendor contracts and signs them on behalf of the business, and the business has never objected, a new vendor would be justified in assuming that the partner has the necessary authority. If the contract turns out to be unfavorable, the other partners may be frustrated, but the agreement may still be enforceable because of the outward appearance of authority.

When a Partner Exceeds Their Authority

Problems arise when a partner enters into a contract that is clearly outside the scope of their authority or beyond the ordinary course of business. For example, if a partner in a retail business signs a five-year commercial lease for a second location without any discussion or vote, the other partners may argue that the agreement was unauthorized and voidable.

To challenge the enforceability of such a contract, the business must demonstrate either that the partner lacked actual authority and that the third party did not have a reasonable basis to assume authority existed. Courts will closely examine whether the third party made any effort to confirm the partner’s authority, whether the transaction was typical for the business, and whether any warnings or restrictions were in place.

In some cases, internal restrictions, such as requiring majority approval for contracts above a certain threshold, may protect the business. However, these restrictions must be documented in writing and communicated both internally and externally. If those restrictions are unknown to third parties, they may not prevent enforcement of the agreement.

What New Jersey Courts Look For

When deciding whether a contract signed by one partner without consent is enforceable, New Jersey courts typically evaluate:

• The language of the partnership agreement, operating agreement, or bylaws

• The usual course of business and prior conduct of the parties

• The representations made by the business to the third party

• Whether the contract was in the ordinary scope of the partner’s role

• Whether the third party reasonably believed that the partner had authority

New Jersey courts are generally inclined to protect third parties who have acted in good faith, particularly where the business’s conduct supported the appearance of authority. That means the burden often falls on the business to prevent unauthorized contracts through clear delegation of authority, documented internal policies, and consistent enforcement.

How to Protect Your Business from Unauthorized Agreements

The most effective way to prevent unauthorized agreements is to define authority clearly in your partnership agreement or operating agreement. This includes specifying what types of contracts require unanimous or majority consent, identifying who has signature authority, and placing limits on financial commitments.

In addition, businesses should adopt formal approval procedures for significant transactions and notify vendors, lenders, or clients of who is authorized to sign contracts. This may include requiring written resolutions, using board ratification, or designating specific officers as signatories.

If a contract has already been signed without consent, immediate legal action may be necessary. The business may need to challenge the enforceability of the contract, notify the other party of the lack of authority, and, in some cases, seek declaratory relief from the court. Waiting too long or continuing to act as if the contract is valid may result in ratification—essentially confirming the unauthorized act after the fact.

Conclusion: Do Not Assume Silence Means Consent

In New Jersey, business partners and LLC members must be vigilant in controlling who has the power to bind the business. A partner who signs a contract without consent may still expose the business to liability if the other party had reason to believe the authority existed. Preventing this risk requires clear agreements, documented restrictions, and a firm understanding of how courts analyze actual and apparent authority.

When disputes arise over unauthorized contracts, the worst approach is to act informally or react emotionally. These situations require strategic legal guidance, early intervention, and a thorough analysis of the underlying facts and documents.

For more information about how to handle disputes over unauthorized contracts or to schedule a consultation, please contact the Law Offices of Peter J. Lamont at www.pjlesq.com, call 201-904-2211, or email info@pjlesq.com.

Contact us today to discuss your business or legal matter. Put our 20+ years of legal experience to work for you.

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For detailed insights and legal assistance on topics discussed in this post, including litigation, contact the Law Offices of Peter J. Lamont at our Bergen County Office. We're here to answer your questions and provide legal advice. Contact us at (201) 904-2211 or email us at  info@pjlesq.com.

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About Peter J. Lamont, Esq.

Peter J. Lamont is a nationally recognized attorney with significant experience in business, contract, litigation, and real estate law. With over two decades of legal practice, he has represented a wide array of businesses, including large international corporations. Peter is known for his practical legal and business advice, prioritizing efficient and cost-effective solutions for his clients.

Peter has an Avvo 10.0 Rating and has been acknowledged as one of America's Most Honored Lawyers since 2011. 201 Magazine and Lawyers of Distinction have also recognized him for being one of the top business and litigation attorneys in New Jersey. His commitment to his clients and the legal community is further evidenced by his active role as a speaker, lecturer, and published author in various legal and business publications.

As the founder of the Law Offices of Peter J. Lamont, Peter brings his Wall Street experience and client-focused approach to New Jersey, offering personalized legal services that align with each client's unique needs and goals​.

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