Long & Levit LLP Construction Update

Issue No. 2

July 1998

Absent Other Indicia Of Authority, Corporate Contracts Lacking Two Categories Of Signatures May Be Invalidated

By Jennifer Wong Suzuki

The California Court of Appeal has shaken up the local business and legal community with its recent decision in Snukal v. Flightways Mfg., Inc. (1998) 64 Cal.App.4th 816, 74 Cal.Rptr.2d 571, which held that a single signature on a corporation's part, without more, could lead to invalidation of a contract at the will of the corporation.

In Snukal, plaintiff Robert Snukal leased his beach house to defendant Flightways Mfg., Inc. Its president, Kirt Lyle, signed the lease on the corporation's behalf. Although Lyle was also the chief financial officer and secretary of Flightways, the lease had only one signature line for the lessee, Flightways, and one for the lessor, Snukal.

Flightways paid a deposit and some of the rent for a few months, but then ceased payments. Following four months of non-payment, Lyle vacated the beach house. Snukal sued Flightways for breach of contract. Flightways cross-complained, arguing the lease was invalid, and seeking the return of all corporate funds paid.

The basis for Flightways' argument was that Corporations Code Section 313 requires one signature from each of two specified categories in order to constitute a binding contract. The lease in question, however, was signed only by Lyle as the President.

The Court of Appeal agreed, ruling that Section 313 does require one signature of the chairperson of the board, the president or any vice-president and one signature of the secretary, chief financial officer or any assistant secretary or treasurer. On that basis, the appellate court reversed a lower court judgment in Snukal's favor, and remanded the case back to the lower court to determine whether there were other grounds, such as ostensible authority, to validate the lease.

The controversy over Snukal stems from Flightway's use of Section 313 as a sword rather than as a shield. First operative in 1977, Section 313 was intended to aid third parties in their dealings with corporations by providing a presumption of validity if the requisite signatures were obtained. Absent actual knowledge of a lack of authority on the third party's part, the dual signature requirement of Section 313 was intended to assure the contract's validity. Now, under Snukal, a corporation can use Section 313 as an excuse to get out of a contract.

The lesson to be learned from Snukal is that, where possible, two signatures from the requisite categories should always be obtained from a corporation. This is especially important with settlement agreements or contracts for professional services. If it is not possible or practicable to obtain the two signatures, be sure to confirm the signatory has the requisite authority by other means, e.g., corporate resolutions signed by the corporate secretary and stamped with the corporate seal.

Snukal notwithstanding, it should be remembered that a lack of two signatures does not automatically mean the contract is invalid. It simply rules out one method of establishing validity, i.e., through Corporations Code section 313. If the two signatures are lacking, one can still avoid invalidation of the contract by presenting evidence of the sole signatory's actual or ostensible authority.

© Long & Levit LLP
This publication is intended for general information purposes only and does not constitute nor is intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances including whether the case may have been depublished after the date of this publication.