Corporate Execution of Surety Indemnity Agreements1
November 2002
Marilyn Klinger discusses the requisites for
corporate execution of surety indemnity agreements which are now back in vogue
due to the hard market.
by Marilyn
Klinger
Sedgwick,
Detert, Moran & Arnold LLP
In light of the change from a soft market to a hard market, indemnity agreements
in the surety industry are back in vogue. The following is a refresher on the
requisites regarding corporate execution of indemnity agreements.
Indemnity Agreements Treated Like any Other Contract
Case law does not focus particular attention on “indemnity agreements,” as
opposed to other contracts, in connection with the issue of the authority of
corporate officers to bind a corporate entity on indemnity agreements. Thus,
the governing cases will involve issues common to general contract law. Recent
cases uphold the long-standing rule that triers of fact should construe contracts
of indemnity like any other contract. [See e.g., City
of Chino v Jackson, 97 Cal App 4th 377 (2002) (indemnity agreement construed
like any other contract); Andre Const. Assoc., Inc.
v Catel, Inc., 681 A2d 121 (NJ Super 1996) (indemnity agreement between
surety and principal must be interpreted in accordance with rules governing
construction of contracts generally).]2
In general, courts uphold the clear language of indemnity agreements. In City of Chino for example, the most recent word
from a California appellate court on the subject, the court held that it must
derive the parties’ intention first from the language of the contract. In City of Chino, the court disregarded an indemnitor’s
argument that the surety could not demonstrate a relation between the indemnity
agreement she signed and the bonds upon which it ultimately sustained a loss.
The court ruled in favor of the surety based upon language in the agreement
(1) defining “Bond” as “[a]ny contract for suretyship ... undertaken by Surety
for Principal, whether before or after the date of this Agreement;” and (2)
describing the indemnitors’ obligation as a “continuing obligation ... unless
terminated as to future Bonds by written notice to Surety....” Likewise, in Andre, the court held that where the indemnity
agreement is clear and unambiguous, the court must summarily enforce the agreement’s
provisions.
Authority of Corporate Officers To Bind Corporate Entity in Indemnity Agreement
Many sureties require that a company’s president or chief executive officer
sign the indemnity agreements. Indeed, some sureties require proof in the form
of the company’s by-laws or a resolution, demonstrating that the particular
officer has authority to bind the corporation, if another corporate officer
signs rather than the president or CEO. These practices are good practices for
surety underwriters to follow.
President’s Execution of Contract. Courts have
held that a president may be presumed, in the absence of proof to the contrary,
to have authority to enter into contracts pertaining to the corporate business
and coming within the general powers of the corporation. Courts in New York,
for example, expressly recognize the principle that a corporation’s president
is ordinarily presumed to have the power to make contracts pertaining to the
business of the corporation and that contracts so made are within the apparent
scope of a president’s authority. [See Odell v 704 Broadway
Condominium, 728 NYS2d 464 (2001) (citing several New York authorities
in support of principle).] Courts in Pennsylvania, Illinois, Missouri, Nebraska,
Georgia, and New Jersey have found a similar presumption.
By the same token, courts in Arkansas, Alabama, California, Connecticut,
Georgia, Iowa, Michigan, North Carolina, and Washington have all held that,
as a general rule, the president of a corporation has no power, merely by virtue of his office, to enter
into contracts on behalf of the corporation. Of course, as noted below, the
inquiry does not end there.
Execution by Corporate Officers in General. Any corporate officer, president or otherwise, may represent and bind a corporation
in transactions with third persons where the officer has express or implied
authority to act. [See e.g., Columbia Hops. for Women
Foundation, Inc. v Bank of Tokyo-Mitsubishi Ltd., 15 F Supp 2d1 (DC 1997)
(acts within actual or apparent authority of officer bind corporation); In re Frederick Savage, Inc., 179 BR 342 (Bkr SD
Fla 1995) (corporation bound by acts within actual or apparent authority of
agent); Pippenger v McQuik’s Oilube, Inc., 854
F Supp 1141 (SD Ind 1994) (theories leading to corporation’s liability for acts
of an agent include actual authority, apparent authority, and respondeat superior).]
A third party may rely on a corporate officer’s implied or apparent authority
if such reliance is reasonable. [See Fonar Corp. v Tariq
Contracting, Inc., 885 F Supp 56 (ED NY 1995); Varney Bros. Sand & Gravel, Inc. v Champagne,
703 NE2d 721 (Mass App Ct 1998).] For example, a corporate officer, once having
enjoyed actual authority to deal with third parties on behalf of the corporation,
is likely to retain apparent authority to do so, so long as he or she remains
an officer. [See GAB Bus. Svcs., Inc. v Lindsey & Newsom
Claim Svcs., Inc., 99 Cal Rptr 2d 65 (Cal App 2000).]
Courts usually treat the question of apparent authority as a factual inquiry,
and will look into such factors as:
- The nature of contract involved;
- The officer negotiating the contract;
- The corporation’s usual manner of conducting business;
- The corporation’s size;
- The circumstances giving rise to the contract;
- The identity of the contracting third party; Lee v Jenkins Bros., 268 F2d 357 (CA2 Conn 1959).
In analyzing the question of apparent authority, courts will focus on any
corporate acts which create an appearance of an officer’s authority. [See, e.g., Moore v WOOW, Inc., 116 SE2d 186 (NC 1960) (corporation
held out or permitted an officer or agent to act in such a way that third parties
would reasonably assume the officer’s proper authority); Rivergate Corp. v Atlanta Indoor Advertising Concepts,
Inc., 436 SE2d 696 (Ga App 1993) (manager had previously entered into
two similar agreements which corporation ratified, and corporation had made
several payments under the questioned agreement); IFC
Credit Corp. v Nuovo Pasta Co., Inc., 815 F Supp 268 (ND Ill 1993) (corporation
bound where officer represented corporation in negotiating terms of agreement).]
Actual Knowledge
Courts will not hold a corporation bound where a third party dealing with
the corporation, through an officer or agent, had specific knowledge that the
officer lacked authority to bind the corporation. [See Gosule v Bestco Inc., 490 SE 2d 532 (Ga App 1997)
(independent contractor could not rely on apparent authority of company’s former
president where, before contracting, company employee told independent contractor
of former president’s removal); Novecon, Ltd., v Bulgarian-American
Enterprise Fund, 967 F Supp 1382 (DC 1997) (managing director of corporation’s
office had no apparent authority to bind corporation where she told developer’s
representatives on two occasions that she would have to obtain board of director
approval).]
By-Laws or Other Proof of Officer’s Authority
In addition to actual knowledge, when a third party dealing with a corporation
has knowledge of facts sufficient to arouse suspicion, or to raise a doubt,
as to the authority of the officer or agent with whom he or she is dealing,
the third party cannot rely on the officer’s or agent’s representations as to
authority. [See, e.g., In re Masterwear Corp.,
233 BR 266 (Bankr SD NY 1999) (one who deals with corporate agent cannot ignore
warnings that agent’s authority is limited, and must act diligently to determine
if agent is exceeding scope of his authority); Pippenger
v McQuik's Oilube, Inc., supra, 854 F Supp 1411 (SD Ind 1994) (corporation
is not liable for fraud of its officer when officer acted as individual for
his own account and defrauded party knew that officer was not acting for corporation).]
In such situations, the third party must inquire as to the extent of the officer’s
or agent’s authority. Absent grounds for such suspicion, however, a third party
has the right to assume that the agent or officer has the authority necessary
and incidental to the officer’s position.
A third party dealing with a corporation is not required to see a board of
directors’ resolution authorizing the officer to transact a particular piece
of business. [See, e.g., Lyons v Menominee Enterprises,
Inc., 227 NW2d 108 (Wis 1975) (purchasers of land from a corporation
need not insist on being shown the resolution of the board of directors authorizing
the particular officer or agent to transact the particular business which he
assumes to conduct).]
In addition, as a general rule, limitations on an officer’s or agent’s authority,
contained in by-laws of which an innocent third party dealing with the corporation
has no knowledge, cannot affect the third party’s transaction. [See, e.g., Avery v Kane Gas Light & Heating Co., 403 F Supp
14 (DC Pa 1975) (under Pennsylvania law, the corporation is bound by instruments
signed by its president and treasurer despite internal by-laws or regulations
of corporation denying such officer’s authority, unless party dealing with corporation
has actual notice of such bylaws); Ryan v Charles E.
Reed & Co., 165 NE 396 (Mass 1929) (corporation’s by-laws that limit
officers’ authority are binding on third persons having knowledge thereof, but
are not as to those without knowledge); Chem-Tronix
Laboratories, Inc. v Solocast Co., 258 A2d 110 (Conn Cir AD 1968) (where
corporate defendant did not disclose internal operations or limitations imposed
on its operations by bylaws or otherwise, plaintiff had right to assume corporation's
agents and officers were acting with authority from and for benefit of corporation).]
Thus, requesting a copy of the corporate resolution or company by-law which
permits an officer other than the president to execute an indemnity agreement
is very safe practice. As discussed above, third parties are not required to
obtain such proof unless the third party suspects that the officer or agent
with whom it is dealing lacks adequate authority. Thus, such a practice of requesting
such confirmation, even where the surety is not specifically suspicious regarding
lack of authority, provides an additional element of safety with respect to
the execution of the indemnity agreement.
Additional Safeguards
Our review of relevant legal authorities suggests some additional safeguards
in addition to the practice of requesting a copy of the authorizing board resolution
or corporate by-law.
For example, California’s Corporation Code contains a provision which expressly
overrules arguments regarding an officer’s authority to enter contracts where
the contract is executed by a company’s chairman of the board, president, or
any vice president and the secretary, any assistant secretary, the chief financial
officer, or any assistant treasurer of the company (California Corp. Code, section
313).
One case interpreting this statute focused on the capacity of the officers,
noting that the statute applies when officers from each of the two “categories”
of officers execute a contract; one officer from the “operational” category
(i.e., chairman of the board, president, or vice president) and one officer
from the “financial” category (secretary, assistant secretary, chief financial
officer, or assistant treasurer). [See Snukal v Flightways
Mfg., 23 C 4th 754 (Cal 2000).] Sureties may likewise consider obtaining
signatures from both categories of officers.
In addition, case law holds that use of a corporate seal serves as prima
facie evidence or authentication that the officers who have executed an instrument
have been duly authorized to do so. [See Rouse-Teachers
Properties, Inc. v Maryland Cas. Co., 750 A2d 1281 (Md 2000) (corporation
may bind itself by a writing not under seal to the same extent as an individual,
but corporate seal is prima facie authentication that the document is the act
of the corporation and that the officers who have executed it have been thereunto
duly authorized); Atlantic Banana Co. v Standard Fruit
& S.S. Co., 493 F2d 555 (5th Cir (La) 1974) (affixing corporate seal
to contract constitutes prima facie evidence that it was affixed by proper authority).]
Requiring notarization of signatures, discussed more fully below, may provide
an additional safeguard.
Notarial Acknowledgment of Indemnity Agreement Execution
Recent case law upholds the role of notarial acknowledgments as another means
of authenticating signatures to an executed instrument. [See, e.g., In re Crim, 2002 WL 1585624, (Tenn 2002) (notarial
acknowledgment says to the world that the execution of an instrument was carried
out according to law); In re Messinger, 281 BR
568 (Bankr MD Pa 2002) (under Pennsylvania law, acknowledgment is formal declaration
or admission before authorized public officer, by person who has executed instrument,
that such instrument is his or her act and deed); Eliason
v Englehart, 733 A2d 944 (Del 1999) (acknowledgment is a means by which
the signature on an instrument may be authenticated).]
A recent case from North Carolina underscores the utility of obtaining notarial
acknowledgment of signatures to an indemnity agreement. In Amwest Surety Ins. Co. v Vaughn, 100 F Supp 335
(2000) individual indemnitors on an Amwest indemnity agreement argued that they
never intended to personally indemnify Amwest and sought to enter extrinsic
evidence to support their contention. The indemnitors claimed a right to bring
extrinsic evidence to the court’s attention due to alleged ambiguities in the
agreement. Among the ambiguities cited, the indemnitors noted that they signed
the indemnity agreement with their names and offices, suggesting that they signed
only on behalf of the corporate indemnitor, while much of the indemnity agreement
treated them as individual indemnitors. The indemnitors further claimed that
the absence of the typed word “Individual” next to their names on the agreement,
contrary to Amwest’s normal practice, supported their arguments regarding ambiguity
and lack of individual liability. Finally, the indemnitors argued that the signature
and notary pages, as “stand alone forms,” gave little or no indication as to
the nature of the agreement executed.
The court held that extrinsic evidence of the indemnitors’ intent was inadmissible
because the indemnity agreement was not ambiguous. In support of its ruling,
the court cited the separate “Individuals” and “Corporations” sections of the
signature page and the explicit distinctions made on the notary page between
corporate and individual signatures. On the notary page, the notary attested
that “Bobby L. Vaughn—Pres. Designer Carpets” signed on behalf of the company,
while “Bobby L. Vaughn—Individual” signed on his own behalf. [See, id. at 339-340.]
Another unpublished case from North Carolina contains a similar ruling on
the same grounds. In American Ins. Co. v Allison Const.
Co., Inc., 1990 WL 223107 (Tenn App 1990), the court held that the notarial
acknowledgment for defendants Jim, Patricia, Tom, and Ruth Allison was made
under the “Individual Acknowledgment” form, whereas the acknowledgment for the
signature of Jim Allison, as President of Allison Construction, was found under
the "Corporate Acknowledgment" form. The court found these facts to be particularly
compelling given that the acknowledgments were taken before a notary public
who was employed by and under the control of Allison Construction, not the surety.
Thus, sureties should take pains to ensure that proper, specific, and detailed
notarial acknowledgments accompany the execution of an indemnity agreement.
Specifically, the surety or its bond producer should instruct the notary public
to acknowledge each signature made to the agreement and to include a specific
reference to the capacity in which a signature was made.
This author’s chapter entitled “A Toast—To The Underwriters: The Underwriting
Process and Salvage by the Surety” published in the American Bar Association
publication, Salvage by the Surety, noted as follows:
The vast majority, if not all, indemnity agreements in the surety industry
include notarial acknowledgments of the signatories. If possible, the bond
producer’s office notary should notarize the indemnity agreement, not personnel
from the principal’s office. All too often, the spouse’s or a business partner’s
signature is forged. While this is a rather bold statement, based upon the
commentary around the industry there is a great tendency for the officers
of the principal to simply sign their spouse’s or partner’s name and advise
their secretaries who are notarizing the indemnity agreement that the spouse
or partner had, indeed, signed the document ... Five years later ... the
surety learns that it has an unenforceable indemnity agreement as to that
non-active spouse or partner.3
One benefit of notarial acknowledgments, as opposed to obtaining simply the
attestation of a witness, is the notary’s role as a neutral public official.
This neutrality is better secured in those instances where the notary public
is an employee of the bond producer, rather than an employee of the signatories.
Should particular indemnitors attempt to challenge indemnity on the basis of
alleged improprieties in signing, the testimony of a notary public, including
the notary’s journal regarding the event, may prove far more trustworthy than
the testimony of a “witness,” particularly where the witness is an officer or
employee of the same company as the challenging indemnitor. Naturally, the use
of both witnesses and notarial acknowledgments in the same agreement further
protects against potential challenges to indemnity.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.