Can Corporations Enter Into Binding Legal Contracts?

Corporations are formed under state law, which also specifies the powers that a corporation can exercise. Among the powers granted to corporations is the power to enter into binding legal contracts. Like all corporate action, a corporation's ability to enter contracts is accomplished by the action of its officers, directors and authorized employees.

In all states, corporation laws include a general grant of corporate power; one example is Arizona's Revised Statute 10-302, which states a corporation has "the same powers as an individual to do all things necessary or convenient to carry out its business and affairs." Along with the general grant of power, specific corporate powers are listed, such as the power to make contracts, incur liabilities and borrow money. State corporation law generally prohibits anyone except for the corporation's shareholders, officers, directors and employees from challenging corporate action based on a lack of power. The state's attorney general also has the right to make this challenge during a proceeding initiated for the purpose of dissolving a corporation.

Corporate powers are exercised through its board of directors and officers. The directors are responsible for setting the policy and direction of the corporation’s business and have final responsibility for the corporation’s overall success or failure. Among the duties of the board of directors is to approve the corporation’s contracts. The directors are also responsible for appointing the corporation’s officers, which include the president or chief executive officer, secretary, treasurer and other officers as necessary who are responsible for overseeing the day-to-day business operations of the corporation. The president or CEO is empowered to sign legally binding agreements, including contracts, for the corporation.

Dealing with a representative of a corporation who is neither an officer nor a director can raise the issue of whether the representative has the authority to bind the corporation to a contract. The best way to resolve the issue is to request that the corporation's president or CEO sign off on the contract, which assures that the corporation is bound to the contract. During the course of negotiations, it may also be prudent to request that the representative provide a written statement that the representative is authorized to negotiate on the corporation's behalf. The statement should be signed by a corporate officer and bear the corporate seal or letterhead.

State law generally prohibits a corporation's directors and officers from taking unauthorized action -- referred to as an "ultra vires act." A director or officer engaging in an ultra vires act is liable to the corporation and its shareholders for the damages caused by the action. However, the ultra vires act is not necessarily an invalid corporate act with regard to the person or company that dealt with the director or officer. Anyone who enters into a contract with a corporation in good faith that is signed by the corporation's director or officer can enforce the contract.