A contract, as well as any other legal transaction, can also be concluded through a representative. The representative fully substitutes the represented party in legal transactions.¹⁵⁵ The contracting party is not the representative but the represented party.

The legal basis for representation is found in law (e.g., a manager of a limited liability company, parents of a minor child), another legal act (the statute of a business entity), an act of an authority (a court decision appointing a bankruptcy trustee in insolvency proceedings), or the will of the represented party (a power of attorney).¹⁵⁶ The most common form of representation in business practice is representation based on a power of attorney.

We distinguish between direct (immediate) and indirect (mediated) representation.¹⁵⁷

In direct representation, the representative acts in the name and on behalf of the represented party. The person with whom the representative enters into a contract is aware that they are not dealing with the actual contracting party but with their representative. The obligations and rights apply only to the represented party, as if they had carried out the transaction themselves.

Example: A (representative of B) enters into a contract with C because B is abroad. The contract binds B and C, but not A.

In indirect representation, the representative acts in their own name but on behalf of the represented party. The person with whom the representative enters into a contract is unaware that they are not dealing with the actual contracting party but with their representative. The obligations and rights apply only to the representative, who must then transfer the effects of the legal transaction to the represented party.

Example: A (representative of B) enters into a contract with C because B is a public figure. The contract binds A and C, but not B, at least until A transfers the effects of the contract to them.

A representative is not an organ of a legal entity, as an organ is only a part of a legal entity. A representative is also not a messenger, as a messenger merely conveys the will of the business principal, nor a broker, as a broker does not conclude legal transactions in their own name or on behalf of another but only carries out preparatory actions leading to the conclusion of a specific legal transaction and provides explanations.

A representative must act within the limits of their authorisation. If they exceed their authorisation, the represented party is bound only if they approve the excess.¹⁵⁸ If the representative exceeds their authorisation and the represented party approves the excess, the principle of validation applies, as defined by the OZ. This can only be enforced if the represented party approves the excess within the usual time required to review and assess such a contract; otherwise, it is considered rejected. If the other party was unaware and was not required to be aware of the excess authorisation, they may immediately declare that they do not consider themselves bound by the contract without waiting for the represented party’s decision. Approval has a retroactive effect unless the parties agree otherwise. If the represented party refuses to approve the contract, the representative and the represented party are jointly and severally liable for any damage suffered by the other party if they were unaware and were not required to be aware of the excess authorisation.¹⁵⁹

Different rules apply when a contract is concluded by an unauthorised person, meaning a person who does not exceed their authorisation but lacks it altogether. A contract entered into by someone acting as an agent in the name of another without their authorisation binds the unauthorised representative only if the represented party later approves it.¹⁶⁰

Exercise:

1. Which persons are not authorised representatives:

• guardian of a person deprived of legal capacity,
• procurator,
• lawyer representing a client,
• parents of a minor,
• members of the management board of a joint-stock company,
• estate guardian,
• managing director of a limited liability company,
• Maddie, who was given written authorisation by Tina to withdraw cash from her personal bank account.

2. A transaction concluded by a representative without authorisation binds the represented party:

• only if the transaction is approved,
• always,
• never,
• if the represented party benefits from it, otherwise not,
• if the third party was unaware that the representative had no authorisation.¹⁶¹