A California appellate court recently caused a furor in the legal community when it ruled in favor of a corporate tenant in a simple breach of lease lawsuit. In the case ofSmukal v. Flightways Manufacturing, Inc., the Court of Appeals decided the trial court incorrectly interpreted Section 313 of the California Corporations Code and the signature of the corporate president of the lease was insufficient to bind the corporation. As a result of this decision, many lawyers are now insisting on having multiple signatures by certain combinations of corporate officers on all agreements entered into by a corporation.
Corporations Code Section 313 is a “safe harbor” that enables a party dealing with a corporation to rely on the signatures of certain officers of the corporation, making it unnecessary for that party to conduct further inquiry on whether the officers signing an agreement are in fact authorized to bind the corporation. Specifically, the statute provides that if a contract is signed by the chairman of the board, the president or any vice president (i.e., the “group A” officers) and treasurer (i.e. the “group B” officers), then the agreement will not be invalidated by any lack of authority of the signing officers unless the other party to the agreement has actual knowledge that those officers do not have authority.
In the Smukal case, the tenant’s president signed an agreement on behalf of the corporation to lease a beachfront property. The corporation later defaulted on its lease payments, and when the landlord sued the corporation, the corporation sought to avoid liability by claiming that the president did not have the authority necessary to bind the corporation to the lease.
The trial court agreed with the landlord, but the appellate court reversed the trial court’s decision and held that the signature of an officer from both officer groupings is required to fall within the “safe harbor” of Corporations Code Section 313. The appellate court was unpersuaded that the requirements of Section 313 had been met even though the president happened to concurrently hold the position of secretary within the corporation, since he had signed the lease only in his capacity as president. In other words, the court concluded that the landlord could not rely on Corporations Code Section 313 as the agreement had been singed by a “group A” officer but not a “group B” officer.