Understanding Implied Ratification: When a Corporation is Bound by Unauthorized Acts

G.R. No. 121313, April 10, 1997

Imagine a scenario: a company uses equipment under a lease agreement signed by someone without proper authorization. Can the company later deny the contract’s validity? This case explores the principle of implied ratification, demonstrating that a corporation can be bound by contracts entered into by unauthorized individuals if it knowingly accepts the benefits of the agreement.

Introduction

In the Philippines, contracts form the bedrock of business transactions. However, disputes often arise regarding the authority of individuals signing on behalf of corporations. This case, Ravago Equipment Rentals, Inc. vs. Court of Appeals and Alcolex Corporation, delves into the legal concept of implied ratification, a crucial principle in contract law. It illustrates how a corporation’s actions can validate an agreement even if the person who signed it lacked the initial authority. This case provides valuable insights for businesses and individuals entering into contracts with corporations, emphasizing the importance of understanding the implications of their actions.

The Legal Framework: Agency and Ratification

The legal principle at play here revolves around agency and ratification. Agency, in legal terms, is a relationship where one person (the agent) acts on behalf of another (the principal). A key aspect of agency is the agent’s authority to bind the principal to contracts. Without proper authorization, an agent’s actions are generally not binding on the principal.

However, the law provides a remedy: ratification. Ratification occurs when the principal approves or confirms an act performed by an agent who lacked the initial authority. Article 1317 of the Civil Code of the Philippines addresses this directly:

“ART. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority of legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contradicting party.”

Ratification can be express, meaning the principal explicitly approves the unauthorized act, or implied, meaning the principal’s actions demonstrate an intent to adopt the agreement. For example, if a company uses goods delivered under an unauthorized contract and pays for them, it might be considered an implied ratification. This principle protects parties who deal in good faith, preventing corporations from disavowing contracts after benefiting from them.

Consider this hypothetical: A small business owner, Maria, enters into a supply agreement with a representative of a large corporation. The representative, unbeknownst to Maria, lacks the authority to sign such agreements. However, the corporation accepts deliveries under the agreement and makes partial payments. Later, the corporation attempts to void the contract, claiming the representative’s lack of authority. Under the principle of implied ratification, the corporation’s actions of accepting deliveries and making payments could be interpreted as ratifying the unauthorized agreement, making it binding.

Case Summary: Ravago Equipment Rentals, Inc. vs. Alcolex Corporation

The case of Ravago Equipment Rentals, Inc. vs. Alcolex Corporation revolves around a lease contract for a Caterpillar diesel generator. Here’s a step-by-step breakdown of the events:

• Ravago (the lessor) and Alcolex (the lessee) purportedly entered into a lease contract.
• The contract was signed on behalf of Alcolex by Mr. Edgardo Chua.
• Ravago claimed Alcolex owed unpaid rentals and overtime charges.
• Alcolex denied the validity of the contract, arguing that Chua lacked the authority to represent the corporation.
• Alcolex admitted partial payment but claimed it represented full settlement.

The trial court initially ruled in favor of Ravago, ordering Alcolex to pay the unpaid rentals, overtime charges, and damages. However, the Court of Appeals reversed this decision, leading Ravago to elevate the case to the Supreme Court.

The Supreme Court focused on two key issues: whether the Court of Appeals erred in considering issues not raised in the trial court, and whether Ravago sufficiently proved its claim against Alcolex. The Court ultimately affirmed the Court of Appeals’ decision, finding that while the contract was indeed binding due to implied ratification, Ravago failed to adequately prove the overtime charges.

The Supreme Court emphasized that Alcolex’s statement indicating that the monthly payment covers full operation is an effective denial of liability for any overtime charges. The Court also highlighted the lack of concrete evidence presented by Ravago to substantiate the overtime claims. As the Supreme Court noted, “The record is bereft of any proof whatsoever about the alleged overtime, whether actually incurred their respective duration on specific dates and other relevant data.”

Regarding the enforceability of the contract, the Supreme Court cited Article 1317 of the Civil Code and stated, “The Court of Appeals correctly held that the contract, assuming that Edgardo Chua had no authority to sign for Alcolex, was impliedly ratified when the generator subject of the contract was used by Alcolex for its operations… the contract is enforceable against respondent Alcolex.”

Practical Implications and Key Lessons

This case offers significant practical lessons for businesses. While a corporation can be bound by a contract even if signed by an unauthorized person through implied ratification, proving the specific terms and extent of the obligation remains crucial.

Key Lessons:

• Verify Authority: Always verify the authority of individuals signing contracts on behalf of corporations. Request board resolutions or other documentation confirming their power to bind the company.
• Document Everything: Maintain meticulous records of all transactions, including usage hours, agreed-upon rates, and any deviations from the original contract.
• Address Discrepancies Promptly: If you receive a demand letter or invoice that you dispute, respond promptly and clearly stating your objections. Silence can be misconstrued as acquiescence.
• Burden of Proof: Remember that the party making a claim (such as Ravago claiming overtime charges) bears the burden of proving that claim with sufficient evidence.

Going forward, businesses should implement robust contract review processes to ensure that all agreements are properly authorized and documented. This includes conducting due diligence on the individuals representing counter-parties and maintaining detailed records to support any claims arising from the contract.

Frequently Asked Questions

Q: What is implied ratification?

A: Implied ratification occurs when a principal (like a corporation) takes actions that demonstrate an intent to approve or adopt an unauthorized act performed by someone on their behalf. This can include accepting benefits under the contract or making payments.

Q: How can a corporation avoid implied ratification?

A: A corporation can avoid implied ratification by promptly disavowing any unauthorized acts and clearly communicating its objections to the other party. It should also refrain from accepting any benefits under the unauthorized agreement.

Q: What evidence is needed to prove overtime charges in a lease agreement?

A: To prove overtime charges, you need detailed records of the equipment’s usage, including dates, times, and the agreed-upon overtime rate. Testimony from individuals who monitored the equipment’s operation is also helpful.

Q: What happens if a corporation fails to respond to a demand letter?

A: While failing to respond to a demand letter does not automatically create liability, it can weaken your position in a legal dispute. A prompt response clearly stating your objections is always advisable.

Q: Is a contract always unenforceable if signed by an unauthorized person?

A: Not necessarily. The contract is initially unenforceable, but it can become binding if the principal ratifies it, either expressly or impliedly.

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