So, you’ve hired a new employee, and they’ve signed an agreement that explicitly says they have no authority to sign contracts on behalf of your Managed Service Provider (MSP). Seems airtight, right? But what happens if they go rogue and sign a contract anyway? Is your company legally on the hook for that debt? Let’s dive into it with some mildly amusing but seriously useful insights.
Disclaimer: I’m not a lawyer, and this blog isn’t legal advice. Laws can vary by jurisdiction, so always consult a qualified attorney to get the full scoop for your specific situation. Also, note this blog is specific to the USA.
Start with the Basics: Define “Agency” from Day One
Before diving into the legal twists and turns, it’s crucial to lay a strong foundation. Every new employee should sign an agreement stating they have no “Agency”—meaning they don’t have the authority to bind your MSP to contracts or agreements. This simple step can save you a world of trouble down the road.
But what if they get promoted? If an employee moves into a managerial role, have them sign an updated agreement that clearly defines the scope of their agency, usually with an assigned budget. This way, there’s no ambiguity about what they can and cannot do. Once this change is in place, make sure to update your vendors via email to document that they are aware of the new authority.
Pro Tip: Keep copies of these agreements and communications for your records. It’s like having a firewall—crucial for protection when things go haywire.
Apparent Authority: When It Looks Like They’re in Charge
Even if your employee has no actual authority to sign contracts, your MSP might still be liable if a third party reasonably believes the employee had that authority. This is where the concept of “apparent authority” comes into play.
Example: Imagine your new helpdesk manager, let’s call him Bob, regularly attends high-level meetings, emails clients from a company account, and maybe even has a snazzy title on his business card that sounds pretty official. A vendor approaches Bob to renew a software license, and Bob, feeling empowered, signs on the dotted line. If the vendor reasonably believed Bob had the authority to sign, your MSP could be on the hook for that contract.
Pro Tip: Keep titles and roles clear, and avoid giving non-signing employees any appearance of contract authority.
Notice to Third Parties: Making It Crystal Clear
If your company has clearly communicated to vendors, clients, and other third parties that certain employees do not have the authority to sign contracts, you might avoid liability. But this notice needs to be more obvious than a “DO NOT SIGN” Post-it on the employee’s monitor.
Example: Let’s say you’ve got a tech, Susan, who works magic with servers but doesn’t have signing authority. If you’ve explicitly informed your vendors in writing that Susan isn’t authorized to sign contracts, and she does it anyway, your MSP has a stronger defense against being held liable.
Pro Tip: Send formal notices to vendors about who can and cannot sign contracts, and update these notices regularly.
Employee Actions: When They Step Out of Bounds
If your employee steps way outside their job description and signs a contract, and there’s no reason for the third party to believe they had that authority, your MSP might argue that the contract isn’t binding.
Example: Picture a scenario where Jim, your network admin, decides to sign a lease for a new office space because it “felt right.” If Jim has no history of handling anything outside of cables and routers, it’s unlikely the landlord should’ve believed he had that authority. Your MSP might not be on the hook, but you’ll still want to fix the situation fast.
Pro Tip: Clearly define roles and responsibilities within your company, and communicate them internally and externally.
Ratification: Don’t Confirm What You Don’t Want
Even if an employee wasn’t authorized to sign a contract, your MSP might end up liable if you later act in a way that suggests you’re okay with the contract. This is known as “ratification.”
Example: Your sales rep, Kelly, signs a contract for a pricey new CRM tool without your approval. If your company starts using the tool, sends payments, or otherwise benefits from the contract, you’re essentially saying, “Yeah, we’re cool with this,” even if you weren’t cool with it initially. Now, that contract is likely binding.
Pro Tip: If an unauthorized contract is signed, address it immediately before taking any action that could be seen as ratification.
The Bottom Line: Protect Your MSP
Managing a Managed Service Provider (MSP) means juggling a lot of responsibilities, and keeping your contracts in check is crucial. While having employees sign agreements stating they don’t have contract-signing authority is a good start, you need to take extra steps to ensure you’re not inadvertently giving them apparent authority or ratifying unauthorized agreements.
Remember, laws can be as tricky as setting up a complex network. Always consult with a qualified attorney to ensure your business is protected. Better safe than sorry—and less expensive than finding out you’re liable after the fact!
