This clause establishes the procedural steps required for a contract to become binding, including who must approve it, in what sequence, and by what deadline. It typically specifies approval authorities at each organization (e.g., "contracts under $100,000 require department manager approval; contracts over $1 million require board approval"), required sign-off from specific departments (legal, compliance, finance), and timelines for each approval stage. The clause may also address what happens if approvals are not obtained within specified timeframes—for example, whether the contract is deemed approved by silence, whether it lapses, or whether parties must take affirmative action to extend the approval period.
While categorized as "dispute-resolution," this clause actually functions as a gatekeeping mechanism that prevents disputes by ensuring contracts receive appropriate internal review before binding the organization. It protects companies from rogue employees committing the organization to unfavorable terms and ensures compliance with internal governance requirements. However, this clause can also create operational friction: if approval workflows are unclear or lengthy, contract execution delays, business opportunities are lost, and parties may become frustrated. The clause must balance protective oversight with practical efficiency.
When drafting or negotiating this clause, establish realistic timelines (e.g., 5-10 business days per approval stage) and identify a single point of contact responsible for shepherding approvals. Specify that approvals may be given electronically (email, DocuSign) unless the contract value or risk profile requires wet signatures. Include a "deemed approved" provision if an approver fails to respond within the deadline—this prevents one slow reviewer from blocking the entire process. If you're the receiving party, request a copy of the other party's approval workflow early in negotiations so you understand realistic timelines and can plan accordingly. Avoid clauses that make approval contingent on subjective factors ("approval not to be unreasonably withheld") without defining what "reasonable" means in your context.
Frequently Asked Questions
What does this clause mean in simple terms?
This clause establishes the procedural steps required for a contract to become binding, including who must approve it, in what sequence, and by what deadline.
Why should I care about this clause?
It typically specifies approval authorities at each organization (e.g., "contracts under $100,000 require department manager approval; contracts over $1 million require board approval"), required sign-off from specific departments (legal, compliance, finance), and timelines for each approval stage.
What are my options?
The clause may also address what happens if approvals are not obtained within specified timeframes—for example, whether the contract is deemed approved by silence, whether it lapses, or whether parties must take affirmative action to extend the approval period.
How does this affect small businesses?
While categorized as "dispute-resolution," this clause actually functions as a gatekeeping mechanism that prevents disputes by ensuring contracts receive appropriate internal review before binding the organization.