In a prior post, we looked at the issue of authority and how it can be used as a basis for a customer to challenge their obligation to pay in a business dispute involving collection of payment for goods delivered. In this post we will take a look at a related legal theory that may be used to establish a corporate customer’s obligation to make payment in this situation even when an order is placed without authority. This theory is called ratification. The theory of ratification can be particularly useful when it is difficult or impossible to establish that the person who placed the disputed order had either actual or apparent authority to place the disputed order on behalf of the corporate entity.
“Ratification is defined as the affirmance by a person of a prior act which did not bind him but which was done, or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him.” Thermo Contracting Corp. v. Bank of New Jersey, 69 N.J. 352 (1976). In other words, if a person signs a contract on your behalf without your authorization, it may not be binding upon you. However, if you later approve the unauthorized signing of the contract, you will be bound by the contract as if you had in fact authorized the original signing.
This definition leaves open the question of what is required to establish that binding ratification of an unauthorized contract by a corporation has taken place. The answer is that binding ratification of an unauthorized contract by a corporation “will be implied from acquiescence or the acceptance of the benefits of such contract” when the corporation accepts the benefits with knowledge of all material facts. American Photocopy Equipment Co. v. Ampto, Inc., 82 N.J. Super. 531 (App. Div. 1964)(quoting Feist & Feist v. A. & A. Realty Co., 105 N.J.L. 461, 464 (E. & A.1929)). In order to establish a binding ratification, only acquiescence or acceptance of benefits needs to be shown, not both. Ibid.at 538-539.
The term “acquiescence” means a “silence on the part of the corporation” or the failure of a corporation to voice disapproval of the unauthorized act of its agent within a reasonable time when the corporation has full knowledge of the actions of the unauthorized act. The circumstances in which silence will amount to ratification are those where, “'according to the ordinary experience and habits of men, one would naturally be expected to speak if he did not consent.'” Id. “A ratification, once effected, cannot later be revoked, even where the ratification may have been induced by the anticipation of benefits which fail to accrue.” Thermo Contracting Corp. v. Bank of New Jersey, 69 N.J. 352, 361 (1976).
In short, what is helpful about ratification is that it potentially enables a creditor to establish the liability of a corporate account holder even in the absence of proof that the disputed order was initially authorized. Liability can be established on a theory of ratification so long as the corporation behaved as though the order was authorized after the fact. For example, in a recent trial of ours, the court determined that orders placed by a customer’s agent, whether or not they were authorized, were ratified by the customer when the customer made promises to pay for materials that were the subject of prior orders made by a third-party on the customer’s account. The customer was found to be responsible to our client for paying for the materials ordered.
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