What is a Ratified Contract?
Simply put, a contract ratified is a contract that is legally binding. Although this could be a sort of tautology, there is something to this definition. Simply "binding" can mean forceful, as in forceful agreement or a deeply ingrained habit. However, legally binding is about the obligation a person has under a situation to follow it. In the case of a contract, the ratification of a contract creates a situation what a person is obligated to follow to the letter .
To ratify something is to approve of it, so that it becomes valid. In the same way, a ratified contract is a contract that is approved and is now in existence. It is not just a good idea, it is a legal obligation.
In this way, proper ratification creates an agreement with mutual understanding and acceptance. There are a variety of ways to ratify contracts, but that action places each party under the penalties of the contract.
How is a Contract Ratified?
The groundwork for a contract ratification is laid in the discussions held as an agreement is being negotiated. In many cases, one party to a developing commercial relationship will have to make the decision on whether to accept a pending transaction in which the other party is the principal. This means that the ultimate terms of the deal will need to be ratified before it is finalized.
A classic situation in which contract ratification will be needed involves one people acting in a corporate capacity, such as a business owner. If an owner is the principal in a deal, but he has no authorization from the company he manages to close on a deal before he does so will be acting without authority. This could mean that the transaction will ultimately not be valid on its face, and would therefore need to be ratified in order to take effect.
There are common participants throughout this process. An agent, for example, may be a real estate broker. In legal terms, the principal could be a person or a corporation. A real-world example of a principle is a small business. The company owner would have to review the contract and approve it before a sale was completed.
Making any necessary adjustments or clarifications, obtaining approvals and requesting any additional information about the contract are all steps involved in ratifying a business transaction.
Legal Criteria for Ratification
A legally effective ratification requires the following: (1) capacity; (2) intent to ratify; (3) sufficient knowledge of material facts and circumstances; and, (4) benefit to the ratifier which is or ought in good conscience to be compensated. (1) Capacity to ratify entails the parties’ competency to enter into a new contract. A minor may be ratified into a contract, but will receive the benefit of any possible disaffirmance. (2) Ratification must be authorized by the principal. Agency principals cannot ratify an agent’s actions beyond the scope of the agent’s original authority if ratification would be against public policy (e.g. a principal may not retroactively ratify an agent’s procurement of gambling winnings). (3) The principal must have sufficient knowledge of material facts and circumstances. Ratification may be express or implied. Implied ratification removes a pre-existing legal right. (4) Parties may agree to conclude a pending contract as valid. If the principal’s benefit was unintended, neutral decisions (rather than overtly affirmative decisions) will not constitute a ratification.
Ratified vs. Unratified Contracts
The distinction between a ratified and an unratified contract is rooted in the principles of agency law. In the context of agency law, ratification is consent by an action, rather than a verbal confirmation. Sometimes, the facts underlying a case will show that an agent, who lacks authority to contract, engages in contracts on behalf of the principle. The principle may choose to ratify the contract or not. If the principal chooses to ratify the contract, then the contract is deemed ratified.
However, if the principal chooses not to ratify the contract , then liability may still exist. That liability may be based more on general breach of contract as opposed to agency liability. For instance, if both the principle and the agent are ultimately found liable to a plaintiff in a lawsuit, the plaintiff may fully enforce a judgment against either party. Essentially, if the principal and the agent are found to be jointly and/or severally liable, the contract as to that third party (presumably a plaintiff) is ratified. Therefore, it is important for all parties involved with a contract to understand whether or not the contract is ratified.
Ratified Contract Case Studies
The obligation to ratify is a frequently recurring contractual requirement in credit and bank agreements that typically are not the subject of extensive legal advice. Although not a defined term under English law, English law requires the parties to ratify their agreement and its variations to ensure that those variations to the original unsigned drafts will be binding on them. Ratification transforms an unsigned agreement into a binding contract. The act of ratifying creates a new and binding contract notwithstanding that it was ineffective at the time it was entered into.
A practice note on the BAILii web site outlines relevant case law involving ratification. The leading case on the effect of ratification of unsigned documents occurred in 1996 and involved the purchase of a diamond. In that case, the parties concluded a written agreement (the pro forma "purchase agreement") whereby the claimant (Mr Naklar) agreed to purchase an old diamond from the defendant (Bwogi) in exchange for a 50% "agent’s commission" plus VAT. However, the terms were recorded on a later unsigned pro forma document (the "additional written agreement"). Shortly afterwards, Mr Naklar left the diamond with Bwogi for refurbishment before the transaction was completed. While it was being repaired, the diamond was found to be "a brooch with a large round Burmese ruby and diamond jacket."
On the above facts, Mr Naklar sought damages against Bwogi for breach of contract. Bwogi sought to rely on the unsigned agreement which did not constitute a binding contract as it had not been signed by both parties. The Court of Appeal held the unsigned agreement constituted a valid contract, even though it was incomplete with respect to VAT. The Court highlighted that once a written agreement is signed, it is fully enforceable. Moreover, although the unsigned agreement was not effective as a contract, it could become binding when both parties sign it or the terms of the unsigned document are adopted by both parties orally or in writing. In the instant case, the unsigned "additional written agreement" was ratified by Bwogi when it was sent to Mr Naklar, and both parties conducted themselves towards it as if it were binding. As a result, the unsigned agreement was binding. The Court stated that, "[i]f [Bwogi] had sent [the unsigned purchase agreement] to [Mr Naklar], obtained his signature and then said nothing more, [Mr Naklar] would have been bound by it as a contract. The fact that he was not bound at once was immaterial."
This example demonstrates that, for a document to be ratified, it was sufficient that it was not objected to. Hence, "[t]he test for ratification was not whether the [unsigned purchase agreement] has been expressly or impliedly adopted by [Bwogi] but whether in all the circumstances they were binding upon it." Similarly, in terms of the legal effect of the ratification, the Court stated that, "[t]o ratify is to adopt what has been done." For instance, one can ratify a contract, appointment, sale, signature or invalid voluntary covenant. In accordance with this test, an unsigned agreement will be enforceable whether it was ratified by an oral or written statement after the agreement date, or even by conduct.
Common Ratification Issues
One of the most common pitfalls in dealing with contract ratification involves ensuring that the ratification makes reference to the original contract. This simple reference is essential to the validity of a ratification. If you are asked to ratify a contract, it is always recommended that you include a one or two sentence reference to the original agreement. Otherwise, you run the risk of the ratification being considered a new contract.
Another potential pitfall involves terminology. Although the legal principle of ratification applies to any subsequent action that shows a clear intent to ratify a contract, an individual may inadvertently commit to a ratification of a contract by using terms that imply the individual agrees to all terms under a contract rather than specifically outlining which terms are approved or disapproved.
For example , if you are asked to ratify a lease, and the property has been leased for several years, you may be tempted to review the lease and use language in the context of a renewal. "Ratification" should be clearly spelled out and not be imbued with the language of renewal. The language used in a renewal often infers approval of all the terms outlined in a contract, and may be construed as renewal of a contract, rather than a ratification.
Contracts are increasingly lengthy documents. Because of their length and/or complexity, mistakes in ratification can result. When asked to ratify a contract, take time to read through the contract, highlighting those terms to which you do not agree, then review the wording of your ratification carefully before communicating your approval.
