Under the law of ‘agency’, an agent has the legal power to contract on behalf of another person (known as the ‘principal’) where the agent has authority to do so. That authority may be express or implied.
The agent facilitates the contractual relationship between the principal, and a third party who is the other contracting party. The agent is usually paid to act as the principal’s agent.
What happens if an agent enters into a contract without authorisation?
Where an agent enters into an unauthorised contract, the principal may still be willing to adopt it by way of a process called ‘ratification’. It would usually be in the principal’s interests to do so because financial gain would normally be the outcome under the contract terms.
Ratification of the contract effectively gives retrospective authority for the agent. However, for ratification to be available:
- the agent must purport to act on behalf of a principal
- the principal must exist at the time of the contract,
- and the principal must have capacity
The agent must purport to act on behalf of a principal
Because the agent must purport to be acting on behalf of another, ratification is not available where the principal was not disclosed. The third party must know that there is, or is supposed to be, a principal in the background – so if the third party believes the agent is acting on their own account, ratification will not be possible. If the principal is not disclosed, the third party can elect either the agent or the principal as bound under the contract terms.
The principal must be in existence at the time of the contract
The principal must have been in existence at the time that the agent entered into the contract. In the case of agents acting for future companies which are planned or being formed – but are not yet formed – this condition is not satisfied and ratification is not possible.
In cases where the agent acted without authority, and the purported principal company did not exist at the time of the contract, the agent will be personally liable under the contract under section 36C of the Companies Act 1985.
The principal must have capacity
For ratification to take place, the principal must have capacity in respect of two elements. Firstly, the principal must have capacity to enter into the transaction at the time of the contract. This means minors are excluded, as are individuals who lack mental capacity, and transactions entered into that are outside the company’s powers. Secondly, the principal must also have capacity at the time of ratification.
Is ratification retrospective?
Yes, the effect of ratification is that the original contract is treated as if it had been authorised at the time it was entered into, making the principal bound by the terms of the contract originally entered into. Ratification must also be communicated by all the parties involved in the transaction.
However, it’s important to note that if the principal shows an intention not to ratify the contract, it cannot later change its mind.