CAN ONE RENEGADE BOARD MEMBER BIND THE ENTIRE BOARD?

Many of you have seen outgoing board members sign long term contracts with a vendor just before getting off the Board.  Often times, these contracts were executed by a single board member without any vote of the board whatsoever.  The question is……is the contract still an obligation of the association even though it was signed and approved by only a single member of the board.  Can the association now get out of this contract without penalty?  The answer is MAYBE.

Under Florida law, if an officer of a corporation has the apparent authority to enter into a contract or an agreement, such contract may be binding on the corporation even though the contract was not made by authority of any resolution of the board of directors.

So what is apparent authority?  Basically, it’s a good faith belief by the other party that the person signing the contract on behalf of the corporation had the authority to do so, and as a result, the other party reasonably relied upon that signature and changed their position.

 

For example, in the arbitration case of Miami Beach Club Motel Condominium Association, Inc. v. Escar Case No. 93-0162, a unit owner made  request to the Secretary of the association for permission to install an air conditioning unit after she “notified all Board members.”  The secretary never received the vote of the other board members but gave permission to install the air conditioner anyway.  Of course, a majority of the board then wanted the air conditioner unit removed.  The arbitrator held that:

In order to determine whether the approval form signed by the Secretary could be imputed to the Board, it must be determined whether, as to the Respondents, the Secretary had the apparent authority to sign the approval form. In other words, was it reasonable for the Respondents to believe that the Secretary had obtained the approval of the board prior to her signing the approval form and was it reasonable for them to have relied on it. The letter, which was sent to the Board of Directors, notified the Board that the Respondents wished to install an air conditioner and directed the Secretary to either grant or deny approval after notifying all board members. The language of the letter indicates that the Respondents were aware that the Secretary, acting alone, could not grant permission for the air conditioner, but that the decision would have to be made by a majority of the board of directors. Respondent Domingo Escar was a member of the board at the time. However, he testified that he did not attend the board meeting at which the issue of the air conditioner would have been brought up. [FN5] Therefore, when he received the approval form, he assumed that the Secretary had obtained the approval of the Board prior to signing the approval form.  Respondents’ reliance on the Secretary’s apparent authority was reasonable in light of the Association’s method of approving alterations at the time. For instance, Mr. San Jose testified that he had changed the number of windows in his unit from three to two and had moved the air conditioner from below the windows to higher up and next to the windows. That alteration was accomplished around the same time as the time that Mr. Escar installed his air conditioner. Mr. San Jose further testified that he did not obtain prior approval from the Board because at the time, the unit owners believed that if they were making a “small” alteration, they did not have to obtain approval or they would ask a board member whether it would be acceptable. Therefore, even if Respondents were aware that no board meeting was held in order to discuss the approval of the air conditioner, it was still reasonable for them to rely on the representation of the Secretary that the air conditioner had been approved because of the Board’s method of approval of alterations.

However, in Lensa Corp. v. Poinciana Gardens Association, Inc., 765 So.2d 296 (4th DCA, 2000) the court held that a President of the association did not have the apparent authority to execute a contract that would have sold association land to a developer.  The court specifically said:

 Three elements are needed to establish an apparent agency: (1) a representation by the purported principal; (2) reliance on that representation by a third party; and (3) a change in position by the third party in reliance upon such representation.   The reliance of a third party on the apparent authority of a principal’s agent must be reasonable and rest in the actions of or appearances created by the principal, and “not by agents who often ingeniously create an appearance of authority by their own acts.”. As to acts in the ordinary course of business, courts have consistently recognized that a presumption of authority exists in the case of acts made or done by presidents.

This sale was not made in the course of the corporation’s ordinary business and there is no basis for concluding that the sale of all or substantially all of Association’s assets could be presumed to be within the President’s authority. For an agent to act with apparent authority requires, as previously noted, that the principal create the appearance of the agent’s apparent authority. Here, reliance on the signature of the president and on the minutes were insufficient to create apparent authority. The statute mandates that only the board has the power to authorize a sale. Here, the board did not make any representations or take any actions signifying either its consent or the president’s authority to act.

Perhaps a sophisticated developer is also held to a higher standard than a typical unit owner.  In any event, if you want to avoid litigating disputes like these……no contract should ever be signed without a vote of a majority of a quorum of the Board.

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