Commercial Law - Agency - Ratification
The
law recognizes that it is quite impossible for an individual to act on his or
her own behalf hence the development in the law of agency. In law the word
‘agency” is used to connote the relationship which exists where one person has
an authority or capacity to create legal relations between a person occupying
the position of principal and third parties. This relationship arises when a
person referred to as an ‘agent’ has authority to act on behalf of another
person called the ‘principal’, and consents to act. The existence of this
relationship depends not on the precise terminology employed by the parties to
describe the relationship, but on the true nature of the agreement or
circumstances of the relationship between the alleged principal and agent. There
are three (3) notable instances when agency relationship is deemed to have come
into existence by operation of the law, one of which is agency by ratification.
Ratification
is a means by which the agency relationship is created retrospectively. Agency
of ratification may arise followed by one of the two situations; it can be
either an agent who was properly appointed has exceeded his authority or a
person who has no authority to act for the principal has acted as if he had the
authority. This means the agent has no actual authority; the principal can then
not rely on the acts of the agent since the agent was not authorized to perform
those acts. If the principal wishes to enforce the contract that the agent has
entered into, the principal must adopt what the agent has done.[1]Tindal,
C.J. in Wilson v Tumman[2]
stated, “An act done, for another, by a person, not assuming to act on himself,
but for such other person, though without any precedent authority whatever,
becomes the act of the principal, if subsequently ratified by him or her. In
that case the principal is bound by the act, whether it be for his detriment or
advantage, or whether it be founded on a tort or a contract…..” The case explains how ratification occurs,
the legal weight it carries in terms of how effectively it becomes binding on
the principal, and third party once the principal ratifies or adopts the acts
of an agent.
Firstly,
for ratification to occur there must be existence of a principal. This
requirement has been subject to debate. A contract formed without the existence
of a principal company is called a
pre-incorporated contract. The law recognizes that in order to get the
benefits of corporate personality it is of necessity that a company becomes
incorporated under the companies act and only then will it be in existence. The
reasoning behind this is that before incorporation companies do not have any
legal existence and if it enters into a contract in the name of the company
before it is incorporated such an agreement would be considered void ab initio.
For example, in kelner v Baxter[3]
where the promoter on behalf of an unformed company accepted an offer from Mr.
Kelner to sell wine, subsequently the company failed to pay the claimant and he
brought an action against the promoters. In this case, an action could not be
brought against the company. Erle CJ stated that “the principal agent
relationship cannot be in existence before incorporation, and if company was
not in existence, the principal of an agent cannot be in existence”. He further
explained that the company could not take liability of pre-incorporation
contract through adoption or ratification; because a stranger cannot ratify or
adopt a contract and in this case the company was a stranger, as it was not
incorporated before the contract was formed between the promoters and the claimant.
It was held that the promoters were personally liable as they were the
consenting party to the contract.
Conversely,
in Newborne
v Sensolid (Great Britain) limited,[4]
court of appeal interpreted the finding in kelner v Baxter in a different way
and developed the principle further. However, this development created some
amount of confusion. The facts of the case are; contract for purchase of tinned
ham by the defendant was entered into between ‘Leopold Newborne (London)
limited, per Leopold Newborne, director’ and the defendant. The defendant
refused to take delivery of the goods and Leopold Newborne then commenced an
action. The evidence adduced showed that the company was not incorporated at
the time the contract was concluded. Leopold Newborne then sought to personally
enforce the contract. Lord Goddard observed that before the incorporation the
company could not be in existence, then the contract, which the unformed
company signed, would also not be in existence. In this case, the promoter
cannot sue because they were not the party to the contract.
The
Newborne
v Sensolid case created some amount of confusion. Despite the case
having the same principle with regard to the existence of a principal with Kelner
v Baxter, it differed on the effect as it delved more into looking at
intention. In this case, Newborne could not sue in his personal capacity
because if an agent or promoter signed the contract, then he will be held
personally liable and has the right to sue or be sued. However, if a person representing
him as director of unformed company enters into a contract then the contract
would be unenforceable. This position was found objectionable in Phonogram
limited v Lane,[5] Lord Denning settled the
position, he stated that if an unformed company enters into the contract , then
it cannot bind the company, but the legal effect of the contract does not
entirely lack. Moreover, even in that situation the promoter or representor are
personally liable for the pre-incorporated contract.
The
current position is that in Kelner v Baxter as can objectionably
be seen by subsequent case holding by Windel J in Black v Smallwood.[6]
Zambia has however, created an exception to the rule set out in the kelner case
where ratification does not occur if the principal was not in existence at the
time of concluding the contract. This can be seen in section 20 (3) of the
Companies act[7]
which states;
20. (3) A company
may, not later than fifteen months after its incorporation, adopt the contract
specified in subsection (1) and (2) by an ordinary resolution, and on the
adoption, subject to subsection (4) the—
(a) company shall
be bound by the contract and entitled to the benefits thereof, as if the
company had been incorporated at the date of the contract and had been a party
thereto; and
(b) Person who
purported to act in the name or on behalf of the company shall cease to be
bound by the contract or entitled to the benefits thereof.
The
stated position in section 20(3) of the Companies Act shows that it is possible
to ratify a contract once the principal comes into existence, regardless of the
principal not being legally recognized at the time the contract was concluded
by an agent. However, this ratification should occur within fifteen (15) months
of the company’s incorporation. Once the ratification occurs, the company shall
be bound by the contract as if it had been incorporated at the date of the
contract. This means the position in Kelner v Baxter where the promoters
were held liable seizes to exist and in this case the company itself will be
held liable after it ratifies and the person who purported to act on behalf of
the company ceases to be bound by the contract and is no longer entitled to the
contractual benefits. It is imperative to note that if the company does not
ratify within fifteen months of its incorporation the decision in Kelner
v Baxter still stands.
Another
important requirement for ratification to occur is that the principal must be
ascertainable. This means the agent must profess himself as agent to principal to
third party during the time of the contract. It is imperative that the agent
was not acting for himself or herself but in the name of the supposed principal
and this must expressly be communicated to the third party. In the absence of
such an expression then the act cannot be ratified. This can be observed in the
case of Keighley Maxted and Company v Durant.[8]
In this case a principal authorized an agent to buy wheat at a given price
in the joint names of the principal and the agent. Having failed to purchase
wheat at that price, the agent bought wheat in his own name at a higher price.
The principal, being satisfied with this act, purportedly ratified the wheat
purchase agreement at a higher price, but failed to take delivery of the wheat.
The seller then then sued the principal arguing that the sale contract had been
ratified. It was held in this case that obligations are not to be founded on
undisclosed intentions. It was further stated that to establish that a man’s
thoughts unexpressed and unrecorded can form the basis of the contract so as to
bind other persons and make them liable on a contract they never made with
persons they never heard of, seem to be a difficult task.
Additionally,
the principal must have had capacity at the time of the act. A minor for
example generally has no contractual capacity. An act done on behalf of a minor
cannot be ratified. It is imperative to understand that capacity in this sense
does not just encompass age only but covers the scope in which the person was
acting. In Gerardus Adrianus Van Boxtel v Rosalyn Mary Kearney,[9]
Ngulube, D.C.J. discussed that the issue was whether the defendant as a
sole shareholder and managing director, could bind the company to transactions
when decisions were made without reference to the other directors, a
non-shareholder. There can be no doubt that shareholders enjoy, as a matter of
right, overriding authority over the company’s affairs. In this regard, the
articles of association of Falcon Air Limited are instructive. . .. Again, if
the defendant entered into the contract allegedly in his capacity as director
and if such contract would have been invalid for lack of a quorum for
director’s meeting, then nonetheless such contract would be capable of
ratification by the members and would become a valid contract of the company.[10]Furthermore,
for an act to be ratifiable it must be legal. Every other act may be ratified
other than one which is void. A transaction, which is void ab initio, cannot be
ratified.[11]
The act to be ratified must not be illegal or contrary to public policy.
There
are several limitations to ratification as can be seen under section 20(3).[12]
Ratification takes place within a reasonable time after the agents act. If the
ratification does not take place within a reasonable period of time, the
principal loses the right to ratify.[13]
What is reasonable time is subjective to circumstances and the nature of the contract. For example,
in Zambia the standard is fifteen months after incorporation of a company,
however, this may not be the case when perishable goods are involved.
Additionally,
time plays an important factor on ratification. In Presentaciones musicals S.A. v
Secunda.[14]
It was held that if time is fixed for doing an act whether by statute or an
agreement, the doctrine of ratification cannot be allowed to apply if it would
have the effect of extending that time. This means if a contract states that
the property has to be sold within thirty days of the date of option, and the
agent without authority exercise that option, the principal cannot ratify the
act after thirty days.
Lastly,
ratification is limited if the principal lacks legal capacity. In Bird
v Brown[15]
it was held that the act of ratification must take place at the time, and under
circumstances, when the ratifying party might himself have lawfully done the
act which he ratifies. This means a principal may not be entitled to ratify
certain acts that were lawful at the time they were entered into, but were no
longer so at the time of ratification. For example, if the transaction made was
legal before an amendment or change of the law which now creates the very
transaction illegal an attempt to authorize it would be void.
In
conclusion, agency by ratification is a legal doctrine that allows a person or
organization to retrospectively authorize an action or contract made on their
behalf by another person without prior authorization. This doctrine is based on
the idea that if a person or organization accepts the benefits of an action or
contract, they should also accept the responsibilities and liabilities that
come with it. Ratification can be express or implied through a principal’s
conduct. However, it is important to note that ratification can only occur if
the principal has legal capacity, the act being within the scope of the
authorization, the act being done within a reasonable period and the principal
being in existence at the time the contract is concluded. Conversely, in Zambia
it is possible to ratify a contract within fifteen months of incorporating a
contract by virtue of the Companies Act. Overall agency by ratification
provides a mechanism for individuals or organization to validate actions or
contracts made on their behalf without prior authorization. This serves as a
means of enforcing accountability and ensuring that the principal assumes the
rights and obligations associated with the acts of their agents.
[1] RoshniDuhan,’a study of the importance of knowledge of
facts to the principal for the ratification in the law of agency’ (2013) https://d1wqtxts1xzle7.cloudfront.net32078831/IJMRA-PSS2543-libre.pdf13924965 s
[3] (1866) LR 2CP 174; 36 LJ CP94
[4] (1953) 1 QB 45; (1953) 2 WLR 596
[5] (1982) qb 938
[6] (1966) UWALawRw 21
[7] No. 10 of 2017
[8] (1901) AC 240
[9] [1987] ZR 63
[10] Grant v. United Kingdom Switch Back
Railway Co. (1889) 40 Ch D 135 . .
[11] Kishor Das v. Raman
Lal. A.I.R 1943 Bom.362 at p.364
[12] Companies Act NO.10 of 2017
[13] Meropolitan Asylums Board v Kingham and songs (1890) 6
T.L.R 217
[14] (1994) Ch 271
[15] (1850) 4 Exch. 786
This Article is Brought to you by:
LEGAL AID INITIATIVE
(Access to Knowledge)
About the Author:
Natasha Ng'andu is a third year law student at the University of Zambia and serving as the Research Coordinator at Legal Aid Initiative.