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Agency Law: Ratification by the Principal can lead to Agency (Part 1 of 2)

Thursday, 24 May 2012

Part I

Ratification is a process whereby a principal approves the actions of an agent who has acted to bind that principal without preceding legal authority. The concept applies to a variety of circumstances such as international treaties and constitutional changes but its most pertinent day-to-day application relates to contract law.

In this two-part article we will consider the basic principles underlying ratification, the requirements that must be met for it to take place, acts that might fall within its remit, how it is applied in practice and its effects thereafter.

Defining Ratification

Ratifying a contract means approving it after it has been entered into by an agent (such as an employee) who lacked the expressed or implied authority to enter it, and the principal (such as an employer) has no obligation under that contract or has disclaimed an obligation under it.

Generally, the possibility of ratification arises when an agent acts without the authority or knowledge of the principal in entering into the contract. In certain circumstances a principal may then subsequently agree to be bound by that contract as if he had agreed it or authorised it in the first instance.

Where a principal agrees to be bound by its subsequent conduct its relationship with the party that held themselves out as its agent becomes an actual relationship of principal and agent. Evidently this also means that the principal is bound by the contract as originally agreed by the agent and the third party contractor.

Conditions for Ratification

There are a number of conditions that must be met for an action to be capable of being ratified by a principal. The three main pre-conditions are:

  1. The agent must purport to act on behalf of the principal;
  2. The principal must be in existence at the time of the contract; and
  3. The principal must have capacity to enter into the contract.

The first condition requires that the third party is aware of the existence of the principal and believed that the agent was acting on its behalf. If the third party believed that the agent was acting on its own behalf then the contract will not be subsequently ratifiable.

It follows that the principal must therefore be in existence at the time the agent purports to enter into a contract. In relation to a company, this will not be the case if the contract was entered into by the agent for a company that had been planned but not actually formed.

Finally, the requirement that the principal must have the capacity to enter into the contract relates to both the time the contract was made and the time the principal attempts to ratify it. This is particularly relevant where an agent attempts to enter a contract on behalf of a company that has not been formed. In those circumstances the contract may become binding on the agent personally.

If you need advice in respect of agency law or other contractual issues, Rollingsons has experienced lawyers who can assist you; for more information please contact James Crighton via e-mail or by telephone on 0207 611 4848.