Meaning
Legislative rule governs the validity of contracts executed by legal representatives who act beyond the scope of their designated powers or exceed the internal limits of the entity. This civil code article 504 establishes that such contracts remain binding on the company unless the counterparty was aware of the restriction at the time of signing. It addresses the common conflict between a representative’s statutory power to act for the firm and the private restrictions placed upon them by the board of directors.
The rule applies to the most senior officers of a corporation, typically the individual named as the legal representative on the business license. It marks the limit of corporate protection against the unauthorized actions of its own leaders. The law assumes that a legal representative has plenary power unless evidence of the counterparty’s bad faith is provided.
Representative Power
Statutory authority granted to a legal representative is broad and carries significant weight in Chinese commercial law. According to civil code article 504, the actions of this individual are viewed as the actions of the legal entity itself. This means that a signature or a seal applied by the legal representative creates an immediate legal obligation.
The law does not require the counterparty to check the company’s internal articles of association or board minutes for every transaction. This power is intended to facilitate trade by providing a clear and reliable point of contact for the corporation. A legal representative can sell assets, enter into loans, and hire or fire employees with a single act.
The entity is bound by these decisions even if they contradict the private wishes of the shareholders.
Transaction Security
Protection of the external market depends on the predictability of contracts signed by recognized corporate officials. Civil code article 504 prevents companies from using internal procedural errors as a way to cancel unfavorable deals. If a legal representative signs a lease that was supposed to be approved by a committee, the lease remains valid for the landlord.
The security of the transaction is maintained because the landlord can rely on the official status of the signer. This principle discourages entities from hiding behind complex internal rules to avoid their obligations. It forces the corporation to internalize the cost of its choice of leadership.
The law prioritizes the rights of the honest trader who relies on the public record of the company’s registration.
Legal Limitation
Evidence of knowledge on the part of the counterparty is the only way to invalidate a contract under this provision. If the principal can prove the third party knew the legal representative was acting without authority, civil code article 504 will not apply. This might happen if the counterparty was provided with a copy of a board resolution that specifically forbade the transaction.
Another scenario involves a transaction that is so far outside the company’s business scope that no reasonable person would believe it was authorized. The court examines the communications and the environment of the deal to find signs of collusion or awareness. This limitation ensures that the rule is not used to facilitate fraud against the company.
The burden of proving this knowledge is high and usually requires documented proof of the counterparty’s state of mind. It keeps the default position in favor of contract validity and market stability. Corporations must therefore be cautious about whom they appoint to the role of legal representative.
