Authorizations in Germany
The “Prokura” is a very wide form of statutory commercial representation under German law. The “Prokurist”, the holder of the Prokura, is authorized to execute every kind of judicial or extrajudicial transaction and to perform every legal act associated with the operation of a commercial business (Section 49 (1) HGB).
Prokura holders are not, however, authorized to sell or encumber real property unless they are expressly authorized to do so. Certain fundamental transactions/acts (such as changing the objects of the company, decisions to wind up the company) are also outside the scope of their powers, as are transactions that must be performed by the shareholder personally.
The powers conferred by way of the Prokura cannot be restricted in relation to third parties. A Prokura confers on the holder of it general powers to execute every kind of transaction associated with “a commercial enterprise” (so the wording of the statute) and not just specific kinds. Therefore Prokura holders are also entitled to execute transactions outside the branch they are in.
Any restriction of the scope of the representational powers of a Prokura holder contrary to the statutory provisions is invalid, and any transactions concluded by the Prokura holder are binding on the company.
Example: Merchant M grants a Prokura to employee P. It has been agreed that P is only authorized to conclude contracts for purchasing goods. Contrary to this agreement, P sells goods in M’s name on the side. The sale of the goods by P is nevertheless binding on M, but P may be liable internally to M.
A Prokura can take the form of an individual Prokura or a jointly held Prokura. The holder of an individual Prokura has sole powers of representation. The holder of a jointly held Prokura only has powers of representation jointly with another Prokura holder, or in the case of an OHG or a KG, jointly with a managing director.
Example: Merchant M grants a Prokura to Z. But because Z is still inexperienced, Z is only authorized to conclude contracts together with the more experienced Prokurist P. P herself is also authorized to conclude contracts alone (without Z).
If a company has branch establishments, a Prokura – in the form of a so-called branch establishment Prokura – can be restricted to one of these establishments if the requirements of Section 50 (3) HGB are satisfied. A restriction to a certain area must be expressly declared.
a) Granting a Prokura
Only proprietors of commercial businesses or their legal representatives are entitled to grant a Prokura. In other words those persons registered in the Commercial Register or, in the case of commercial enterprises (GmbH, OHG, KG, AG), those organs vested with representational powers, i.e. managing directors and members of the management board. Therefore the holder of a Prokura can never grant a Prokura to someone else. The Prokura must be granted expressly (Section 48 (1) HGB) and must be registered in the Commercial Register (Section 53 HGB).
It is important to understand that the registration of the Prokura in the Commercial Register has a declaratory effect only. This means that it is not the registration of the Prokura that makes it valid; it is already valid the moment the proprietor or the legal representatives of the commercial business grant it. The registration in the Commercial Register is nevertheless important for reasons of legal certainty, because the public has the right to rely on the contents and the correctness of the Commercial Register. The registration of the Prokura must be made by application certified by a German notary. Additional documents may also have to be submitted with the application. Your notary public will tell you which documents these are.
The Prokura may only be granted to natural persons, and it is not transferable to another person (Section 52 (2) HGB).
b) Deleting the Prokura
The role registration plays is different when a Prokura has been terminated than it does when it has been granted. Until a Prokura has been deleted from the Commercial Register, the Prokura holder retains his or her powers of representation for the same reason given above: third parties have the right to rely on the contents of the Commercial Register (the so-called positive effect of publication pursuant to Section 15 (1) HGB).
Reasons for deleting the Prokura include the termination of the underlying employment relationship, the de facto legal incapacity or the death of the Prokura holder, and the revocation of the Prokura (Section 52 (1) HGB).
Example: Merchant M dismisses her Prokurist P. M forgets, however, to have the Prokura deleted from the Commercial Register. P continues to conclude contracts, one with the third party TP. TP knew nothing of the termination of P’s Prokura. In this case, TP is entitled to rely on the legal validity of P’s Prokura.
c) Rules regarding signatures
Prokura holders must make it very clear in all written correspondence that they have powers of representation. This is usually done by adding the supplement “ppa.” (per procura) to the signature.
Limited commercial authority
Limited commercial authority (German: “Handlungsvollmacht”) authorizes the holder of it to undertake all transactions and legal acts commonly associated with operating a commercial enterprise. The powers of representation pursuant to this authority are limited to the execution of business transactions of the commercial enterprise. The taking out of loans and the conducting of litigation proceedings are per Section 54 (2) HGB not covered by it. The scope of a limited commercial authority must be defined. A restricting of the authority vis-à-vis a third party is invalid if the third party did not know of or did not have to know of the restriction.
a) Granting and terminating the limited commercial authority
The granting of a limited commercial authority may be declared to the authorized person (internal authority) as well as to third parties (external authority) or may be publicized via a public announcement. It does not have to be registered in the Commercial Register, and there are no requirements as to the form in which it must be granted or terminated, i.e. it can be done orally. But for evidentiary reasons, it is advisable to grant it in writing. If the authority is terminated by way of revocation, then it is important to notify those individuals of the revocation who had been notified of the granting of it. For example, if the authority was granted by way of notification to a third party, then such authority remains in effect towards the third party until he or she has been notified of its revocation, i.e. until the third party obtains or had to have obtained knowledge of the termination. The termination of the underlying legal relationship, i.e. the employment relationship, ordinarily operates to terminate the authority.
b) Rules regarding signatures
The holder of the limited commercial authority generally signs with the German supplement “i. V.”, which is the abbreviation of “in Vollmacht” and means “authorized to act for”.
Authority to conclude contracts
The authority to conclude contracts (German: “Abschlussvollmacht”) is a subcategory of the limited commercial authority. It is primarily an instrument of commercial agents (German: “Handelsvertreter”) and employees working in external sales (German: “Handlungsgehilfe”). These persons are authorized to conclude contracts within the scope of their job duties. What this authority does not include, however, is the authority to modify contracts that have already been concluded, particularly those terms stipulating payment deadlines.
Special authority (to conclude specific legal transactions)
The special authority (German: “Spezialvollmacht”) authorizes the holder of it to execute specific transactions or specific kinds of transactions. The wording of the special authority must be unambiguous and precise. Particularly the purpose of the authority must be stated in the most exact terms. The special authority should also be granted in writing. If the authority was granted for carrying out one specific transaction only, then it lapses automatically upon completion of such transaction.
Shop employee’s authority
Whoever is employed in a shop or a storehouse is deemed to have the authority to transact those sales and take those deliveries common to such a shop or storehouse (German: “Ladenvollmacht”). Excluded from such common transactions, however, are purchases of goods and promises to exchange goods. Such transactions must be carried out by a merchant or by another authorized person. The granting of the authorization takes place automatically with the hiring of the person and ends automatically with the termination of the employment relationship. The idea behind the shop employee’s authority is to provide customers with legal certainty so that they do not have to worry about whether the salesperson is in fact authorized to make the sale or not.
Authority by virtue of an ostensible legal situation
In exceptional cases, authorized representation may be found to exist even though authority was not expressly granted:
a) Apparent authority
The acts of employees who actually have no powers of representation but who present themselves to third parties as if they do can bind the company for whom they are employed even when the company does not know of such acts if the company could have known of them and could have prevented them had it exercised the requisite duty of care (German: “Anscheinsvollmacht”).
b) Authority by acquiescence
Authority by acquiescence (German: “Duldungsvollmacht”) is found to exist when a company allows employees who actually have no limited commercial authority to present themselves to third parties as if they do (the company acquiesces in this) and the third party is justified in thinking that such authority had been granted. In such a case, the company must accept full responsibility for the acts of the employees, because there is no way for the third party to know that authority actually did not exist. It is the good faith of the business partner that is being protected.
Example: Merchant M hired the office manager OM. OM was never granted any kind of authority or Prokura. Because OM sometimes finds his work boring, he negotiates contracts directly with partners of M and concludes these on behalf of M. M allows this to go on, because OM is surprisingly good at making deals.
Representation without powers of representation
Representation without powers of representation is found when authorized persons exceed the powers of representation granted to them or when there has been no authorization at all and the contracting partner had no knowledge of such lack of representational powers. The transaction is provisionally invalid. If the principal ratifies it, then it becomes valid. If the principal refuses to ratify it, then the agent who acts without authority is him- or herself bound by it and is personally liable for any loss incurred.
This online information can only provide you with a very summarized overview of these topics and does not claim to be complete. If you need more information, you can visit our Commerzbibliothek (Library of Commerce) where you will find all the usual legal literature such as legislation, legal commentaries, collections of judicial decisions, periodicals, and monographs. The Commerzbibliothek is located on the ground floor of the Hamburg Chamber of Commerce at Adolphsplatz 1 in 20457 Hamburg. It is open Monday to Thursday from 10 am to 8 pm and on Friday and Saturday from 10 am to 3 pm.