The models of decentralization and authorization are widely applied in corporate administration activities. These models not only help enterprises to promptly respond to market fluctuations but also affects the internal administration of the enterprise in the fields of HR management, strategic management, etc.
Decentralization and its trends
Unlike the act of authorization which has been legalized in the Civil Code 2015 and the Law on Enterprise 2020 (Enterprise Law), the decentralized activity is not currently defined in specific legal transactions.
Decentralization is understood as the delegation of power to subordinates, which means the distribution of responsibilities based on their functions and is an important decision of management activities.
The decentralization is established through legal documents as well as internal documents of the enterprise, most basically the provisions of the Enterprise Law; Company Charter and Corporate Governance Code. These documents play a decisive role in completing the decentralized model to define the functions, duties and authority of agencies, organizations and individuals participating in the enterprise administration, management activities.
Decentralization can be classified based on several principles: Decentralization according to desired results; determined by function; The ladder principle; Principle of powers based on positions; Principle of authority and responsibility, etc. Based on these principles, there are two major trends in decentralization:
First, the trend to focus the decision-making powers on a single manager. Accordingly, only the Owner is entitled to make decisions, while other managers or even the Board of Directors are just mere formality and without any real authority. This means that the Owner has to conclude a contract in a hurry without having time to consider such a contract in detail. Otherwise, the transaction would be delayed.
Second, decentralization for delegates. Many businesses carry out the decentralization process to lighten their workload and to maximize the autonomy of each department. The model of decentralization is shown through company structure with separated departments and their particular rights and duties. It is very common that the Branch of an enterprise may conclude transactions on its own. However, only when a dispute arises shall the branch’s authority to sign a contract be examined. Pursuant to Article 84 of the Civil Code 2015 and Article 44 of the Enterprise Law, a Branch is an affiliate other than a juridical person. The branch shall on behalf of the company perform all or part of the functions of the juridical person (including the representative function). Thus, the head of the Branch can sign the contract on behalf of the Company only when being authorized by the legal representative of the Company. To conclude, the broad decentralization for subordinates must be associated with a detailed and strict process that is in accordance with the applicable law and regulations to avoid any legal risks for the Company.
It is often wondered that whether the decentralization upon by a written assignment constitutes a legal power of attorney or not? Therefore, it is necessary to clarify the concept of authorization under Vietnamese law.
Authorization is one of the two representation forms stipulated in Article 135 of the Civil Code 2015.1 Authorization is known as an individual/legal entity that allows another to represent him to perform a civil transaction and the authorizer is still responsible for any acts performed by the authorized person within the authorized scope and duration.2 The Civil Code 2015 stipulates the rights and obligations of the authorizing and the authorized party from Article 565 to Article 568. According to Article 567.2 of the Civil Code 2015, the authorizing party is responsible for the performance of the authorized ones within the scope of authorization. On the other hand, if the performance of the authorized person is beyond the scope of authorization, or breaches other obligations in the authorization agreement, the authorizer can claim for damage resulted from such breaches.
There is a problem that if the commitment created by the authorized person acts beyond their authority to create a commitment, such commitment has legal validity or not? According to Article 567.2 of the Civil Code 2015, the authorizer shall not be responsible for any commitment beyond the authorized authority. However, it is unfair for third parties as they do not have enough time and resources to do investigate the scopes of authorization. Especially, in some cases, there is an assignment showing that the person performing the transaction has appropriate authorization, for example, the director of a representative office signs labor agreements, the director of the administrative department signs an agreement on the sales and purchase of office supplies, the sales manager makes a warranty commitment to the customer, etc. In such cases, the third-party implies that the person concluding the transaction with him has the appropriate authority. In the laws of other countries (e.g. UK and US law), there is an extension of the company’s liability in making a commitment to a third party in the event that a bona fide third party does not know the scopes of authorization. Thus, to avoid any risk related to the beyond of authorization’s scopes in the context of Vietnamese law, the best way to protect the interests of a third party is to ask the company to provide a written authorization that clearly shows scopes of authorization including the transaction execution on behalf of the company.
In terms of authorized authority in corporate administration. According to the provisions of Enterprise Law, only the legal representative of a company can establish the relationship of authorization related to the company administration matters. At the same time, the authorized person can sub-authorize a third person when (i) there is a consent of the authorizer; or (ii) in case of Force Majeure, if the sub-authorization does not apply, the purposes of a civil transaction for the interests of the principal is unachievable.3
In terms of authorization form. The authorized representation is very common, the parties can agree to conduct transactions in many forms, including verbally. However, the authorization of the company’s legal representative in respect of administrative activities shall be made in writing to be valid.
In practice, the internal authorization of a company can be made through (i) temporary authorization; and (ii) regular authorization. For the first form, the authorization for individuals, legal entities to perform the work on behalf of the company shall be conducted through a written authorization for each specific case. This is considered as the most common authorization method, among different entities of a company. The second method is regular authorization through internal governance decisions or the company’s operating regulations, for example, a Deputy Director performs his duties in a specific field within a specified period of time based on the authorization of the Director according to the regulations of the Board of Directors.
In summary, decentralization and authorization are completely different because authorization is a written agreement between the authorizing and authorized parties to perform acts on behalf of the authorizing person for a certain period of time. While decentralization means that people with higher positions divide power for their subordinates. Formally, the decentralization that is conducted through a document signed by the legal representative of the company and including the content of authorization can be deemed to be satisfied with the conditions of a power of attorney. However, based on the different nature of decentralization and authorization, those actions should be conducted through separate documents. The act of authorization in corporate administration shall be established in a written form which can be a power of attorney or an authorization contract signed by the legal representative of the company (or the authorized person who is allowed to sub-authorize). Meanwhile, decentralization is established through laws and regulations and internal documents of the company (e.g. the Company Charter, Assignment Decisions).
Please click the link below to read our legal analysis: English version | Vietnamese version