Ratification of agent’s contracts

Ratification of an agent’s contracts refers to the approval or confirmation by a principal of actions or agreements made by an agent on their behalf, often when the agent initially lacked authority to act.
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Updated: Jun 14, 2024

3 key takeaways

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  • Ratification occurs when a principal approves a contract or action performed by an agent who acted without proper authority.
  • This process binds the principal to the contract as if the agent had been authorized from the outset.
  • Ratification can be explicit or implicit and is crucial for validating agreements and actions taken by agents.

What is ratification of an agent’s contracts?

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Ratification of an agent’s contracts is a legal concept where a principal accepts and confirms the actions or agreements made by an agent on their behalf, despite the agent initially lacking the authority to do so.

This approval retroactively authorizes the agent’s actions, making the contract binding on the principal as if the agent had the authority from the beginning. Ratification can occur in various business and legal contexts, ensuring that agreements made by agents are validated and enforceable.

Importance of ratification

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Ratification is important for several reasons. It allows principals to validate actions taken by their agents, ensuring that business transactions and agreements are legally binding.

This process provides flexibility in business operations, allowing principals to approve beneficial deals even if the agent exceeded their authority initially. Ratification also helps maintain trust and clarity in principal-agent relationships, as it clarifies the principal’s stance on the agent’s actions.

Types of ratification

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Ratification can be explicit or implicit, depending on how the principal conveys their approval:

Explicit ratification

Explicit ratification occurs when the principal clearly and directly communicates their approval of the agent’s actions. This can be done through written or verbal confirmation, such as a letter, email, or spoken agreement.

Implicit ratification

Implicit ratification happens when the principal’s actions imply approval of the agent’s actions, even without direct communication. For example, if the principal accepts the benefits of a contract negotiated by the agent or behaves in a way that acknowledges the contract, this can be seen as implicit ratification.

Example of ratification in practice

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Consider a scenario where an agent, acting on behalf of a company, enters into a contract with a supplier without having the proper authority to do so. Upon learning about the contract, the company reviews the terms and decides the agreement is beneficial.

The company then sends a formal letter to the supplier confirming the contract, thereby explicitly ratifying the agent’s actions. As a result, the contract becomes binding on the company, just as if the agent had been authorized initially.

Process of ratification

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The process of ratification typically involves the following steps:

  1. Agent’s action: The agent enters into a contract or takes an action on behalf of the principal without proper authority.
  2. Principal’s knowledge: The principal becomes aware of the agent’s action and the details of the contract.
  3. Decision to ratify: The principal decides whether to approve or reject the agent’s actions based on their assessment of the contract’s benefits and implications.
  4. Communication of ratification: The principal communicates their approval either explicitly (through direct communication) or implicitly (through actions that imply approval).

Impact of ratification

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Ratification has several important effects:

  • Binding agreement: Once ratified, the contract is binding on the principal as if the agent had been authorized from the start.
  • Validation of agent’s actions: Ratification validates the agent’s actions, providing legal backing and certainty to the transaction.
  • Clarification of authority: It clarifies the extent of the agent’s authority and the principal’s stance on the agent’s actions, helping to avoid future misunderstandings.

Limitations and conditions

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Ratification is subject to certain limitations and conditions:

  • Full knowledge: The principal must have full knowledge of all material facts related to the agent’s actions before ratifying.
  • The entirety of action: The principal must ratify the entire action or contract, not just selective parts.
  • Within reasonable time: Ratification must occur within a reasonable time frame after the principal becomes aware of the agent’s actions.
  • Capacity: The principal must have the legal capacity to authorize the actions at the time they were taken and at the time of ratification.

Understanding ratification of an agent’s contracts is essential for managing principal-agent relationships and ensuring that business transactions are legally enforceable.

By approving and validating the actions of their agents, principals can maintain flexibility and trust in their operations while upholding the integrity of their contractual agreements.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.