Business Negotiations & the Indoor Management Rule


In Donald Trump's "the Art of the Deal", his wise number 1 rule is to "deal with the top".  This piece of advice undoubtedly has its merits.  Not only are founders and owners more likely to care and pay attention to an offer being presented but it is much less likely that the proposal being presented will run into the complex and bureaucratic processes involved in corporate decision making.  However great of a piece of advice this may be, dealing with top decision makers within an organization is often easier said than done: everyone wants to deal directly with the top decision makers. 

The result is top decision makers delegate certain tasks in the corporate decision making process to managers and employees that may not necessarily qualify as  being at the top of the corporate decision making process. Outside business development managers and negotiators then run into the risk of entering into a contractual agreement that is not "binding" on the corporation. Under Canadian corporate laws, only a limited number of individuals (normally directors and officers) have signing authority to bind the corporation. Corporate resolutions and bi-laws may be used to delegate or appoint other individuals within an organization as having decision making powers, sometimes over a limited number of subject matters affecting the corporation.  

For outside business development managers negotiating energy contracts, dealing with those who are at the top is important to avoid running into the risk of closing a non-binding contract.  However, asking for outside business negotiators to obtain all the information necessary to ensure the person with whom they are negotiating a deal with has binding authority over the corporation can be near impossible, especially considering the high reluctance of corporations to share any type of inside information with outside representatives. Thankfully for outside business development managers, however, the common law lends some assistance with the "Indoor Management Rule" such that corporations get out of any contractual agreement under the pretence that the person who signed the contract did not have authority to bind the corporation. In fact, the "Indoor Management Rule" goes well beyond this issue. 

Under the well-established "Indoor Management Rule" individuals dealing in good faith with a corporation and without knowledge of any irregularity under that corporation's decision-making process are entitled to assume that a corporation's internal policies and proceedings have been followed and complied with. Among many other things, this would apply to a situation where an outside representative enters into a contractual agreement with a person whom holds her/himself as having authority to bind the corporation. Under such circumstances, the 'Indoor Management Rule' says that the outside representative is not obliged to research all of the corporation's articles of incorporation, by-laws, resolutions, and minutes to verify that the person with whom he/she is negotiating effectively has authority to bind the corporation. 

The "Indoor Management Rule" is perhaps best illustrated in the decision Accra Wood Products Ltd., Re, 2014 BCSC 1259.  In this decision, an office manager completed and signed a credit application on behalf of her company, Accra.  In determining whether or not Accra should be allowed out of the agreement at issue under the pretence that the office manager did not have authority to bind the corporation, the Appeal court examined whether any internal documents clearly and inconspicuously placed limits on the office manager's powers within the corporation. The Court also determined that credit applications of the nature entered into by the office manager were a regular occurrence in the business and affairs of the corporation. Also of critical importance to the decision was that the office manager had been in her position for 23 years, and was intimately familiar with the types of credit agreements being contested. Perhaps even more importantly, while the office manager struck out certain provisions in the said agreement, she did not strike out the sentence under the signature line that stated "the undersigned individual is authority to execute this application on behalf of the Customer". The Court also examined the applicable law, and made the following findings: 
  • There was no evidence in law to the effected that an employee office manager is presumed not to have authority to execute an agreement on behalf of his/her employer; 
  • There was no evidence in law that supported the need to obtain a certified director's resolution for the type of transaction in dispute;

In short, following Donald Trump's #1 rule to always deal with the top unarguably avoids issues of whether or not the person signing the agreement has binding authority. However, in many cases, at least part of the decision making process is delegated to managers, and sometimes employees. While obtaining a certified director's resolution attesting that the corporation is bound by an agreement could certainly avoid a future scenario whereby the company would try to get let out of the agreement under the pretence that the person who signed the agreement did not have signing authority, a certified director's resolution may not always be available. Under this circumstances, the well-established "Indoor Management Rule" under Canadian Corporate Law can offer solstice to outside negotiators.  

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