Ratification: entering into an unauthorised contract

The principles of ratification

Where an agent enters into an unauthorised contract, the principle may be happy to adopt it. This can be done by the process of ratification. For ratification to be available, however, the agent must purport to act on behalf of a principle, the principle must be in existence at the time of the contract, and the principle must have capacity.

The agent must purport to act on behalf of a principle

Because the agent must purport to be acting on behalf of another, ratification is not available where the principle is undisclosed. The third party must know that there is, or is supposed to be, a principle in the background. If the third party thinks that the agent is acting on his or her own account, no later ratification will be possible.

The principle must be in existence at the time of the contract

The second requirement for ratification, that is, that the principle is in existence at the time of ratification, arises mainly in relation to contracts made on behalf of new companies which are being formed. In Kelner v Baxter, it was held that if the company was not existence (in that it had not been incorporated) at the time of the contract, it could not later ratify the agreement. The purported ‘agents’, the promoters of the company, were therefore personally liable. Such personal liability is now imposed by statute, by virtue of s 36C of the Companies Act 1985.

The principle must have capacity

The final requirement is that the principle must have capacity. There are in theory two aspects to this rule. The first rule is that the principle must have capacity to make the transaction at the time of the contract. This has most obvious relevance to minors, who want to ratify after reaching majority. It could also apply to contracts made outside the powers of a company. The second aspect is that the principle must have capacity at the time of ratification. This was applied in Grover and Grover Ltd v Matthews. A contract of fire insurance was purported to be ratified after a fire had destroyed the property which was the subject of the insurance. It was held that this was ineffective because at the time of the purported ratification the principle could not have made the contract himself (because the property no longer existed). ‘Capacity’ is thus being given a rather broader meaning than usual, to cover the issue as to whether the principle would have in practice been able to make the contract in question.

Ratification is retrospective in its effect, and the original contract must be treated as if it had been authorised from the start. This was confirmed by the Court of Appeal in Presentaciones Musicales SA v Secunda. The implications of this rule are clear from the decision in Bolton Partners v Lambert. Bolton Partners owned a factory, which Lambert offered to buy. This offer was accepted by the managing director, though in fact he had no authority to do this. On 13 January, there was a disagreement, and Lambert withdrew his offer. On 17 January, Bolton Partners started proceedings for breach of contract. On 28 January, the Board of Directors of Bolton Partners ratified the actions of the managing director. Lambert argued that this ratification came too late, but the Court of Appeal held that it had retrospectively validated the original contract, and that Lambert’s attempt to withdraw was therefore ineffective.