Analysis

Supreme Court: Acts performed by 'irregular' joint proxies remain valid

Amendments to legal documents regarding commercial representation may be required

Legal alert (8/2015)

After two months of deliberations, the Supreme Court published justification of its resolution passed on 31 January 2015 with regard to so-called 'irregular' joint commercial representation.

The resolution of the Supreme Court included a negative decision regarding the legal validity of so-called ‘irregular’ joint commercial representation involving a proxy representing a company jointly with a management board member, which had raised controversies in judicature (sometimes even differences of views within the same court). Please note that many companies used this concept when granting the power of proxy to their representatives in order to ensure management board’s control over their acts.

As discussed in Legal Alert No. 4 entitled Supreme Court: Joint commercial representation only with other proxy, the decision to defer the publication of the justification has raised anxiety among business people since they were not sure whether and how the Supreme Court would address the issues of key importance from the viewpoint of legal transactions, such as whether legal acts performed in accordance with the questioned representation principles remain valid and how to ensure appropriate control of proxy’s acts that can be applied in compliance with the decision.

Effectiveness of legal acts performed by “irregular” joint business representatives

According to the Supreme Court, the decision that appointing a proxy acting jointly with a management board member is illegal applies only to legal acts performed as of the date of the resolution. Therefore, no grounds occur to undermine the legal validity and effectiveness of legal acts performed by such commercial representatives prior to the resolution date, i.e. before 31 January 2015.

Regardless of theoretical doubts related to the legal basis for pro futuro interpretations of the Supreme Court, the solution seems right from the perspective of legal transactions. Even if certain arguments support the statement that legal acts performed by such commercial representatives remain valid due to the presumption of truth regarding entries in the National Court Register or to implied confirmation of the acts performed by a proxy acting without relevant authorization, both the legal status and the necessity to analyze each individual case would remain uncertain. The justification of the resolution including a clear statement that the presented position does not impact the validity of legal acts performed prior to its date allows business entities that had acted in compliance with the position previously presented by a significant part of the doctrine and trusted the commonly adopted practice avoiding negative effects.

Commercial representation following the Supreme Court's decision

In the justification, the Supreme Court included certain guidance on future determination of principles regarding declarations of will made by proxies.

In principle, they are based on a sole commercial representation (i.e. single-person representation). In such a case, the scope of authorization of such a proxy cannot be effectively limited. The document granting the power of proxy or a separate agreement may oblige a sole proxy to refrain from certain acts (e.g. in specific cases or in transactions whose value exceeds a certain limit) and determine his/her liability. The limitations, though, cannot be disclosed in the register of entrepreneurs, and their breach in principle shall not affect the validity of acts performed by such a proxy.

Therefore, in order to ensure effective control of sole proxies, businesses should use joint commercial representation, where for a declaration of will to be valid, it must be made by all authorized commercial representatives. In practice, this necessitates authorizing at least two commercial representatives to act jointly when making declarations of will on behalf of a company.

When discussing the joint commercial authorization, the Supreme Court clearly distinguished the representation by proxies from so-called mixed representation performed by a management board consisting of several members, where cooperation of a proxy, acting as a replacement of a management board member, with another management board member must be clearly provided for in the articles of association or by-laws as an alternative representation manner. Thus, the “mixed” representation in the form of a declaration of will made by the management board with regard to commercial representation is not allowed.

In the justification of its decision, the Supreme Court referred to the doubt raised by practitioners, whether the joint commercial representation does not necessitate joint signatures of a management board member and all joint proxies. In the justification, the Supreme Court directly approved the representation involving making of declarations of will by one management board member and one joint proxy, provided, though, that this manner of commercial representation is clearly provided for in company’s articles of association (by-laws).

In summary: the current legal status allows joint commercial representation by a proxy and management board member, but only as a manner of collective representation by management board and if company’s articles of association (by-laws) include relevant provisions. On the other hand, limiting the possibility of making declarations of will by a proxy without participation of a management board member seems possible if joint commercial representation (e.g. for two persons) has been established in a company and at the same time, the other proxy has not been appointed.

Measures recommended in relation to the Supreme Court’s resolution Companies previously using the “irregular” commercial representation must therefore analyze the above solutions, select one being most suitable for them and adjust the contents of relevant documents regarding the authorization of proxies (and, if necessary, company’s articles of association) as appropriate.

Entrepreneurs exposed to the risk of legal disputes with counterparties regarding validity of contracts concluded after 30 January 2015 in accordance with the representation principles undermined by the discussed representation should therefore adjust the representation principles disclosed in the register of entrepreneurs as soon as possible.

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