Meaning
Approval measured against the original scope of delegated authority for an act performed by an agent. In a corporate setting, ratification allows the board of directors to validate a contract signed by an officer who exceeded their powers. This process gives the act retroactive validity from the moment it was performed.
It cures the defect of authority and makes the obligation legally binding on the organization.
Retroactive Approval
Legal certainty returns to a transaction once the governing body formally recognizes the unauthorized action. The effect of ratification is to treat the deal as if it had been properly authorized from the start. This prevents counterparties from voiding the agreement based on a technical lack of capacity.
Agency Validation
Communication of the intent to be bound is the essential step for the principal. Even if no formal vote occurs, the company might be held to have performed a ratification by accepting the benefits of the contract. This implied version of the process is often a point of contention in litigation over failed partnerships.
Board Oversight
Corporate governance policies often include a list of items that require this specific curative action if mistakes are found during an audit. Using ratification sparingly maintains the integrity of the delegation of authority. Frequent use of the power indicates a breakdown in the internal controls of the company.
Formal documentation of these approvals ensures that the history of the contract is transparent to future auditors, secured creditors, employees, tax authorities and trade vendors.
