Marilyn Klinger discusses the requisites for corporate execution of surety indemnity agreements which are now back in vogue due to the hard market.
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).] 1
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).]
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 explained, 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.
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 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. 2
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. 3