The Issue Of Ratification

This problem is concerned principally with the issue of ratification. Other issues arise such as breach of warrant of authority, and the agent’s duties towards his principal. I will discuss the problem in relation to the English law and the American Restatement respectively.

PART ONE: Solution with Respect to English Law

1. Unauthorised Agency: General

The first issue that I will discuss in advising Hamish in his course of action with respect to English law is the fact that Gordon was not authorised by Scott to negotiate a contract with Hamish, in his capacity of managing director of Hebridean Airways (“Hebridean"). Gordon was therefore acting as an unauthorised agent, and as we will see this has important ramifications in respect of the enforceability of the agreement.

Where both the principal and the agent have given their consent to the agency agreement, the agent will be said to have actual authority. Although the general principle is that contracts entered into on behalf of a principal by an agent acting in excess of his authority are invalid, with the objective of facilitating the fluidity and efficacy of commerce, the common law recognises situations where an agreement concluded by the unauthorised agent may still be enforceable [1] . Accordingly, there are two exceptions to the rule that contracts entered into by an agent without authority are generally unenforceable: firstly, where apparent authority can be shown to exist; and secondly, where the principal later ratifies the unauthorised action of the agent [2] .

In relation to Hamish’s case I will now discuss each of these possible exceptions in turn, to ascertain if Scott will be able to enforce the contract against Hamish. If neither exception is possible, the presumption that contracts entered into by an unauthorised agent are unenforceable will not be rebutted, and Hamish will be able to avoid the contract.. It is clear from the facts presented that Gordon’s acts were not authorised, and therefore he was acting in the capacity of an unauthorised agent.

2. The Doctrine of Apparent Authority

The doctrine of apparent authority is not relevant to Hamish’s case. The doctrine provides that a principal may in fact be bound by acts of another in situations where he ‘held out’ that other as his agent. In English law, the doctrine has its basis in the doctrine of estoppel (consistent with the whole common law approach which focuses on the protection of the principal)- i.e. the principal is estopped from reneging on his representation that was relied upon by the third party [3] . This is important because, as a result the doctrine of apparent authority cannot be used as a cause of action, it is a “shield not a sword" [4] . Therefore Hamish will not be able to invoke the doctrine in an action against Scott. It will only come into play in a situation where Hamish sues Gordon. Gordon may be able to rely on the doctrine to pass on liability to Scott in this event. However, due to the constraints of this discussion, I will focus on actions available to Hamish.

Despite this relatively narrow construction of apparent authority, parties can rely often on the broader doctrine of ratification to enforce their contract.

3. The Doctrine of Ratification

a) General

The main issue that arises in the case before me is that of ratification. Taking into account the fact that the doctrine of apparent authority cannot be used as a cause of action in itself, the only option available to Lionel (acting on behalf of Scott) in establishing an enforceable contract against Hamish will be to rely on the doctrine of ratification. Failing this, the presumption that contracts entered into by an agent without authority are invalid will prevail and Hamish will be able to avoid the contract.

In situations where a person enters into a contract purportedly on behalf of the principal, without being authorised to do so, it is the sole prerogative of the principal [5] to endorse and adopt such an action, retrospectively [6] . Brown goes on to provide an instructive description of ratification as being a sort of ‘curative’ measure for the agent’s initial lack of authority [7] . The retrospective nature of the doctrine operates by effectively “clothe[ing]the agent with authority from the outset" [8] . In other words ratification has the effect of retrospectively granting the agent with authority to act on behalf of the principal. Prior to ratification a contract is unenforceable against a third party [9] . Ratification can be either express or implied [10] . Ratification can be implied by conduct (mere acquiescence or silence will not usually suffice), usually in the form of the principal’s performance of some of his obligations under the contract [11] .

In this case it is clear that Simon, acting as managing director of the company (his capacity in this regard will be discussed a in the next section), intended to ratify the contract by instructing his office manager to commence manufacture of the subject matter of the contract. The letter sent by Lionel on behalf of Scott could also be considered express ratification. Therefore the ratification took place on the 30th May.

b) Requirements

It is important to discuss the requirements that must be established in order for a valid ratification to occur.

Firstly, and arguably most importantly, ratification can only take place where the principal is both disclosed and named [12] . The seminal decision in which this was postulated is Keighley Maxsted v. Durant [13] . Here it was held that a transaction carried out by an agent acting in excess of his authority (buying a consignment of wheat for a higher price than he was authorised) could not be ratified as the agent had purported that he was acting on his own account and not on behalf of a principal. This requirement will be easily satisfied by Scott as Gordon signed the contract ‘on behalf of’ Scott. Therefore Scott, the principal, was both disclosed and named.

Secondly, the principal must be in existence at the time of the agent’s unauthorised act [14] . This requirement comes into play when dealing with agents acting on behalf of companies which have yet to be formed [15] . This situation is now governed by the Companies Act 1985, s 36 C (1). However, this requirement is clearly satisfied by Scott as the company is already incorporated.

The third requirement for ratification to take place is that the principal must have the capacity to ratify the transaction both at the time of the agent’s unauthorised action, and at the time of ratification [16] . If the managing director of a company is acting in excess of his powers but within the scope of the memorandum of association, then the ratification can occur by ordinary resolution of the shareholders [17] . However, it is likely that Simon as such authority as managing director.

The final requirement is that the principal must have knowledge of all material facts in which the unauthorised act was carried out, unless he undertakes the risk and acts regardless of what the circumstances have been [18] . In Hamish’s case, it appears that Gordon was upfront with Scott about the transaction. Furthermore it appears that Scott took the risk in ratifying without requesting further information, and therefore it can be imputed that he had no regard for the circumstances in which the deal was done.

Having examined the principal requirements for a valid ratification, it seems that Scott will be easily able to convince an English court that they have satisfied them all.

c) Is Hamish’s withdrawal valid?

The next issue that arises in Hamish’s case is whether or not his withdrawal is valid.

The rule in Bolton Partners v. Lambert

In the controversial decision of Bolton Partners v. Lambert [19] , it was held that a third party has no right to withdraw from the contract before ratification, based on the retroactive effect of the doctrine. The case involved a third party who made an offer to the managing director of the principal. The managing director accepted the offer despite the fact that he lacked the authority to do so. The third party then attempted to withdraw his offer, but ten days subsequently the principal ratified the managing director’s acceptance. The court held that the principal’s ratification had retrospective effect, rendering the attempted withdrawal ineffective [20] .

Brown argues that contracts such as these, lack mutuality. He views it as being unjust that the principal can opt not to not to ratify the contract without consequence, whereas the third party enjoys no such right [21] . The application of the rule can potentially be gravely prejudicial to the third party. In situations where the agent is not authorised, the third party is at the mercy of the principal who retains the right to ratify as an ‘option’ [22] . The third party is left to bear the brunt of any market changes. The third party is left in an uncertain precarious position [23] . The rule has also attracted judicial criticism [24] . However, the rule in Bolton Partners although at first glance appears to be harsh, is justifiable when we remind ourselves that the third party was contractually bound at the point in time that the agent accepted his offer due to the retrospective effect of ratification [25] . Despite the aforementioned academic opposition Bolton Partners is binding on any English court other than the House of Lords [26] . It remains to be seen how if the House of Lords will endorse it, but it has stood firmly as good law for over 100 years [27] .

According to the rule in Bolton Partners, it is clear that Hamish’s attempt to withdraw from the contract would be held to be invalid in an English court.

d) Exceptions to the principle of retroactivity

Although the rule in Bolton Partners is accepted to be the general rule on withdrawal, there are some exceptions, to counteract the aforementioned potential for retroactivity to be overly prejudicial to the third party. The exception that I feel is relevant to Hamish’s case, is that ratification must take place within a reasonable time [28] .

Although in certain contracts, parties will often elucidate time limits whereby ratification is to occur in the terms of their agreement, what is the situation when such time limits are not prescribed, as in Hamish’s case? In these situations the courts will look to what is a reasonable time in light of the circumstances. Fry L.J. stated that, “if the ratification is to bind it must be made within a reasonable time after acceptance by an authorised person" [29] . It is left to the discretion of the courts to decide what time is reasonable in the circumstances, taking into account whatever factors they feel are relevant, with the ultimate goal of protecting the third party against potential prejudice [30] .

In Hamish’s case, I am of the opinion that he may be able to argue that in the circumstances, due to the highly volatile nature of the airline market, and the fact that Hebridean is on the brink of insolvency, that twenty five days was an unreasonable amount of time to delay ratification in the circumstances. I feel that this is the only weakness in Scott Ltd’s case in showing that their ratification is valid.

Having examined all of the relevant elements of the doctrine of ratification, I feel that Scott Ltd. will undoubtedly be able to prove that they ratified Gordon’s contract with Hamish, and furthermore that this ratification is valid. It is clear from the case of Bolton Lambert that Hamish’s attempted withdrawal is invalid. However, I would encourage Hamish to argue that the ratification did not occur within a reasonable time. If successful he may be able to avoid the contract on this basis.

4. The Agent’s Fiduciary Duty

Another issue which I feel is worth mentioning briefly in this case is the fact that Gordon may have been in breach of his fiduciary duty towards Dawson from the offset of his negotiations in respect of the contract between Scott Ltd and Hebridean. If this is the case the latter contract could be avoided by Hamish.

Due to the unique relationship between the agent and the principal, there is an extremely high fiduciary duty owed by the agent to the principal. “A fiduciary must act in good faith; he must not act for his own benefit or the benefit of the third person without the informed consent of his principal" [31] . As Brown postulates, this fiduciary duty is extended insofar as an agent cannot represent two principals whose interests may conflict [32] . Although as Conaglen points out much of the case law and academic commentary has overlooked the way the fiduciary duty effects transactions where an agent is representing two fiduciaries with conflicting interests [33] . Although it is well established that an agent will be in breach of his fiduciary duties where an agent’s interests conflict with those of his principal [34] , there is little mention of the situation that applies in a case like the one at hand.

The relevance that this has in the context of Hamish’s predicament is that Dawson could take an action against Gordon for breach of his fiduciary duty towards them, in acting on behalf of Scott Ltd whilst he was in the meeting with Hebridean in the capacity of their agent. In relying on the general conflict of interest principles, it is foreseeable that it could be proven that Scott was in fact in breach. He did not after all request the express consent of Dawson, although it was contained in his agency agreement that he would be permitted to act for several principals at any given time. In this event the resulting transaction could be found to be invalid [35] , and hence, Hamish would be able to avoid the contract.

5.Conclusion

In conclusion, I would advise Hamish that there is a valid contract between Hebridean and Scott. The ratification is valid, and his withdrawal is invalid based on English law. However if Hamish can show that Scott did not ratify within a reasonable period he may be able to avoid the contract. I would advise him to focus his case on this. His only other option would be if Dawson took an action against Gordon which is possible, for breach of fiduciary duty, which would render the contract void. However, this is an uncertain area, and would rely on Dawson taking the action.

Hebridean is bound by the contract with Scott

Hebridean can only withdraw from the contract if it can be shown that Scott did not ratify within a reasonable time

The onus of proof is on the person alleging the agency, therefore the onus of proof will be on Scott.