Agency by Ratification Explained
In this circumstance, we start out with an Agent (A) who has no authority to act on behalf of the Principal (P).
A enters into a contract with a Third party (T) on 1 July.
The agent takes the contract to the prospective principal. P likes the deal and ratifies the contract on 15 July.
Through the ratification process, P and T have an agreement dated 1 July. That’s the significant part. The deal is operative, and enforceable as of 1 July. The actual date of ratification, two weeks later is not important.
There is one little qualifier. P in this case, had to be in existence on 1 July. If not, then there would have to be a special rule to enable P to ratify.
In most of these types of circumstances, A enters into the contract with T, on behalf of an unknown, unidentified, non-existent principal. The contract will specify the following:
“this agreement is on behalf of a corporation to be incorporated…”
Naturally, there will be two other clauses, being the assignment and the release:
- once incorporated, A may assign to P,
- once assigned, A is released from all liability.
So, let’s assume that the deal is struck. A makes arrangements to incorporate P. In Ontario, under the Business Corporations Act, a newly incorporated corporation has the power and authority in law, to adopt “pre-incorporation" contracts. Kindly note: that is not necessarily the case in other jurisdictions.
Once incorporated, P passes a by-law to enable it to act, and passes a resolution to adopt the contract A negotiated with T. Now, the deal is done once the actual assignment has been completed.
It’s interesting that P was not incorporated until 15 July, but it is responsible for a contract that was effective 1 July.
In such instances, resort must be had to the appropriate incorporation legislation, to see that such a power exists.
Ratification to be effective must:
- Take place within a reasonable time
- Adopt the contract in full (not in part)
- May be express or could be implied from P’s conduct
Ratification takes place without consent. This is an pre-negotiated automatic right. This is quite unlike other assignments, like for example, pre-construction condominiums where the developer/builder remains in control of the assignment process.
The conduct of the third party during the two week period, between acceptance and assignment is interesting. What if the third party repudiates the contract during that time? Unfortunately the law is not all that clear. There are several conflicting cases, resulting in uncertainty. Sometimes, this repudiation can constitute an impediment to the ratification.
In the field of residential real estate transactions, agents without principals, occur rarely.
Sophisticated Commercial Transactions
You might wonder whether this business is worth worrying about?
Well, if you do complicated, sophisticated, real estate development transactions, then, you are going to have to know this area “inside out”.
All purchasers of property ready for development will purchase in their own names, then flip it over, to another party. Naturally, that flip takes place at a higher price.
Even if they wanted to keep the property for themselves, they will incorporate a numbered company for the purpose. That will provide them with a gain, possibly qualifying as a capital gain.
Now, if you’re acting for the seller, you are going to have to know the seller’s rights and remedies as against the agent and/or the principal. Your job is to protect your seller, so you had better know and understand “ratification”.
In cases of uncertainty, seek the assistance of a solicitor engaged in real estate practice or a barrister (litigation lawyer) specializing in commercial transactions.
Brian Madigan LL.B. Broker