Signature by Authorized Representative: No Name Required?

For those of you who are trying to create a ‘UCC brain’, this would be a good time to go back to the first blog and read all of them.  Probably not all in one sitting, but in several.  With a foundation in place, the material will be understood at a much higher level than the first time through.  That will continue to happen due to the nature of the UCC and the sequence in which material has been presented.

            The material has been set forth in a very structured and connected manner, and the sections as presented link up, not only within each post, but post to post.  Repetition of material which is presented in the optimum sequence creates a powerful foundation for going forward.  Referring back to the 100,000,000,000 billion neurons we all have in our brains, there is plenty of room to lay new tracks.  It is purely a matter of sufficient and properly applied focus.

            With that brief comment in place, let us return to the Uniform Commercial Code, and continue with liability of parties.  With the discussion of secondary obligors complete, and the liabilities of the maker, drawer, indorser, acceptor and accommodation parties behind us, we will turn attention back to the basic rule of liability stated in Section 3-401(a)

(a) A person is not liable on an instrument unless (i) the person signed the instrument, or (ii) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person under Section 3-402.      Section 3-401(a)

Section 3-401(a) was discussed in an earlier post as was an extended discussion of the definition of ‘signed’ under the Uniform Commercial Code. Particular emphasis was given to the meaning and possible interpretations of the ‘present intent’ to authenticate a writing.  As we near the conclusion of the initial coverage of Article 3, I wanted to focus on some of the ‘specialty sections’ that deal with signatures on instruments, and which are exceptions to the general rule of Section 3-401(1).

The first exception is stated in Section 3-401(a)—for signatures made in a representative capacity.  Signatures in a representative capacity are governed by the rules stated in Section 3-402

(a) If a person acting, or purporting to act, as a representative signs an instrument by signing either the name of the represented person or the name of the signer, the represented person is bound by the signature to the same extent the represented person would be bound if the signature were on a simple contract. If the represented person is bound, the signature of the representative is the "authorized signature of the represented person" and the represented person is liable on the instrument, whether or not identified in the instrument. Section 3-402(a). [Emphasis added]

The answer to the question of who is liable when a signature is made in a representative capacity under Section 3-402(a) turns on whether the person ‘would be bound if the signature were on a simple contract.’  This would be determined by the law of agency. The general law of agency would be applicable under Section 1-103. 

Note, it is not necessary that the signature of the representative indicate that it is made in a representative capacity in order for the principal to be liable. Nor, as the second sentence states, must the represented person be named. The latter rule is a departure from prior law [Section 3-301(1)] which was interpreted to require the principal to be named.  Once again, I call your attention to New York law which has not enacted the amended version of Article 3. Big differences here as with the liability of secondary obligors.

          

           While an unnamed principal may be liable even when not mentioned, the representative has an incentive to mention the principal in the signature, for if he or she does so, and also indicates the representative capacity, the representative will not face the liability he would face if the signature was simply in his name.  For example, if X is signing a note on behalf of Y, X can avoid any personal liability on the note by ‘unambiguously’ showing that the signature was made in a representative capacity and identifying the person represented in the instrument:

If the form of the signature shows unambiguously that the signature is made on behalf of the represented person who is identified in the instrument, the representative is not liable on the instrument.  Section 3-402(b)(1)

In the above example, if X signed the note ‘X, on behalf of Y’, X would face no liability, for X clearly showed that he was signing in a representative capacity and identified Y as the person represented.

If on the other hand, the signature does not conform to the standard stated in Section 3-402(b)(1), the representative faces potential personal liability on the instrument to a subsequent holder in due course and others who might take the instrument, ‘unless the representative proves that the original parties did not intend the representative to be liable on the instrument’.

(2) Subject to subsection (c), if (i) the form of the signature does not show unambiguously that the signature is made in a representative capacity or (ii) the represented person is not identified in the instrument, the representative is liable on the instrument to a holder in due course that took the instrument without notice that the representative was not intended to be liable on the instrument. With respect to any other person, the representative is liable on the instrument unless the representative proves that the original parties did not intend the representative to be liable on the instrument. Section 3-402(b)(2)

Obviously it is in the best interests of the representative to sign properly and avoid the possibility of an HDC holding him or her liable. Similarly, it is in the best interests of the representative to avoid having to prove that the original parties did not intend the representative to be liable on the instrument.

            An examination of the language of Section 3-402(b)(2) provides an opportunity to see some of the interrelationships we have discussed in some of the posts.  First, of course, is the holder in due course doctrine.  This brings to life the importance of taking the instrument in good faith—honest and within standards of commercial standards of fair dealing.  Of equal importance is that the holder in due course not otherwise have ‘notice that the representative is not intended to be liable in the instrument’.  This activates Section 1-202 on notice and with that, the question of what is ‘reason to know’ which might give rise to notice.  This in turn raises the question discussed in an earlier post—is this an objective or subjective standard?

            The simple analysis above is what you will see in almost all Code cases--   Sections which logically cluster together as well as an enormous number of possibilities for the trained eye.