Property law: Representation problem

The company's management board consists of three members who are required by the company's articles of association to act jointly when concluding any legal act in the name of the company, or the prior consent of the management or supervisory board is necessary for the company to purchase real estate. At some point in time, it suddenly becomes apparent that during a two-month period, the management board consisted of only two members, because one of the members' mandate had expired. Imagine that this went unnoticed, and the company proceeded in its normal way. The result is that a large number of purchase agreements would be invalidated.

The only way to remedy the situation would be to conclude a new agreement in the form of a new notarial deed. In theory this solution sounds simple enough. However, such a remedy may be very hard to apply in some situations (i.e. where plots which have been invalidly purchased are subsequently merged, creating a new plot altogether). Legally, the solution proposed above is impossible because the original plot of land ceased to exist and the merged plot may not be disposed of again solely by a person who only owns a portion of it.

Potential solutions

Pursuant to the provisions of the Polish Civil Code, if a board of a company concludes that a legal transaction exceeds its authority, or that the board was not represented in accordance with the company's articles of association, the persons who concluded this legal transaction are obliged to account for any consideration obtained (i.e. the purchased property) and to compensate the other party for any damages suffered. It is obvious that this is not a good solution, especially if the developer validly concluded preliminary agreements for the purchase of the property with its clients.

Another remedy is potentially available. Pursuant to the Polish Civil Code, the validity of legal acts conducted by a person acting in excess of the scope determined by a power of granted, or in the event where such person acts with no power of attorney (such a person is known as falsus procurator), is dependent on the subsequent approval of the principal. If such approval is expressed, it has retroactive effect and the legal act is valid ab initio. However, the above provision may not be applicable as it relates only to proxies and not to the boards of legal persons.

Applications allowed

Nonetheless, the Supreme Court of Poland in its judgments seems to allow analogical application of the above provision with respect to the issue we have described. One of its judgments indirectly allows such interpretation, while another judgment clearly allows a duly represented partnership to approve its previous invalid acts by means of analogy with the situation of a falsus procurator. Due to the fact that the judgments of the courts are not a source of law in Poland, it may only create a basis for a wider interpretation and practical application of such an approach to this problem, especially if it is accepted by influential representatives of the civil-law doctrine. However, it must be borne in mind that, depending on the details of the case and their sense of practical application of the law, the courts may or may not approve such reasoning.

The best solution to the problem would be to simply amend the Civil Code by providing for express provision, which empowers legal persons to approve the invalid acts made by their wrongly represented boards, just as it is possible with falsus procurator cases in relation to proxies. This will probably not happen in the foreseeable future.

Therefore, the best way to avoid the problem is to always check whether the rules of board representation are being complied with and to ensure that the members of management boards have the requisite powers to act on the company's behalf. 

Paweł Lis is a junior associate at Linklaters law firm. E-mail: pawel.lis@linklaters.com