California Corporations Code Section 313 provides, in pertinent part, “any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof, executed or entered into between any corporation and any other person, when signed by the chairman of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same.”
From this rather obtuse language, the California Supreme Court decided, in Snukal v. Flightways Manufacturing, Inc. , 23 Cal. 4 th 754 (2000), that the contract signature by a single corporate officer was not necessarily sufficient to bind the California corporation under Section 313. Kirt Lyle was a corporate president, secretary and chief financial officer of Flightways, a California corporation. Lyle signed a lease on “as president” behalf of Flightways. After Flightways defaulted on the lease and Snukal sued, the California Court of Appeal held that Flightways was not necessarily bound by its president’s signature on the lease.
Since a lease is a “contract” as listed in Section 313, that statute was applicable. The Court observed that the purpose of Section 313 “is to allow third parties to rely upon the assertive authority of various senior executive officers of the corporation concerning the execution of any instrument on behalf of the corporation.” But for a third party to be able to rely on the asserted authority of the corporate officers, there must be compliance with the terms of Section 313, and the third party must not have actual knowledge that the signer lacks authority to bind the corporation. Because Section 313 sets up two classes of signatures by corporate officers (the “operational” group and the “financial” group), combined with the word “and,” the Court held that one member of each class of officer must sign the contract in order to bind the corporation under Section 313. The effect is that the signing corporate officers must be (like the classic Chinese food menu) “one from column A and one from column B”: (A) Operational group: Chairman of the board, president or vice president, and (B) Financial group: Secretary, assistant secretary, chief financial officer or assistant treasurer.
Before you panic about all those contracts already in your files, we have to emphasize (as did the Supreme Court) the limitations of this case. The lack of two corporate officers’ signatures does not automatically mean the corporation is not bound by the contract. All it means is that the corporation is not conclusively presumed to be bound under Section 313. There are other ways that the corporation may be found to have accepted the contract — such as implied authority, partial performance of the contractual obligations, or acceptance of the benefits of the contract, or subsequent ratification of the contract. But these alternative methods of establishing that the corporation is bound to the contract are much more fact-dependent, and can lead to more (and more prolonged) disputes. Those are the kind of disputes that were intended to be avoided by the enactment of Section 313.
At least when dealing with a California corporation, therefore, it’s generally advantageous to comply with the terms of Section 313 — get the signature of two officers, even if they’re both by the same person. Unlike the Court of Appeal below, the Supreme Court concluded that a single officer who holds corporate positions in both the Operational and Financial groups can bind the corporation for purposes of Section 313 even if that officer signs only once, with a single title. Therefore, since Mr. Lyle was in fact both a CFO and secretary of Flightways, the fact that he had signed only once “as president” did not prevent the application of Section 313, and the contract was presumptively binding on the corporation. The Supreme Court also emphasized, however, that even if the contract is binding on the corporation, that is not necessarily the end of the question of the enforceability of the contract. Other defenses to the contract may apply, such as fraud, mistake, failure of conditions precedent, impossibility of performance or other defenses.
