Concept

Estoppel and Ratification

Apparent authority and inherent agency power: binding the client to third parties

Estoppel and Ratification

A principal answers for a contract the agent makes when the agent acts with actual, apparent, or inherent authority, and even an agent who has none of the three can still bind the principal through estoppel or ratification.¹ The Restatement’s definitions show why those two doctrines are needed. Section 8A describes inherent agency power as power derived “not from authority, apparent authority or estoppel, but solely from the agency relation,” which marks estoppel as a separate ground of liability.² Section 8 grounds apparent authority in the principal’s manifestations to the third person, so an outsider who can point to nothing the principal said or did toward that person cannot rely on it.³ A gap remains for the client who gave the lawyer no authority, made no manifestation to the other side, and placed the lawyer in no role whose usual reach covers the act. Estoppel and ratification reach that client from different directions.

Estoppel examines the client’s conduct while the other side was dealing with the lawyer: what the client said, did, or failed to do, and what the other side lost by believing the lawyer. Ratification examines the client’s conduct afterward. A client who learns of an unauthorized settlement and affirms it is bound as though the lawyer had been authorized, whatever the other side believed on the day the lawyer signed.

Fact patterns tempt the wrong label, so keep the two doctrines apart. A client who watches the other side act on a mistaken belief about the lawyer and says nothing raises estoppel. A client who accepts settlement proceeds weeks later raises ratification. The first subsection sets estoppel beside apparent authority so that the facts, and not habit, choose the doctrine. The second takes up ratification and the conduct that counts as affirming a deal.

Estoppel

Restatement (Second) of Agency § 8B reaches a person who is not otherwise liable as a party to a transaction purported to be done on that person’s account. That person owes liability to anyone who changed position because of a belief that the transaction was entered into by or for the person, in either of two situations. The person intentionally or carelessly caused the belief; or the person, knowing of the belief and that others might change position because of it, took no reasonable steps to notify them of the facts.⁴ The first situation penalizes creating a false impression, and the second penalizes leaving one in place.

Ellis Canning Co. v. Bernstein quotes § 8B while explaining that most recent cases differentiate between apparent authority and estoppel, though the two are closely related.⁵ Three differences matter.

The doctrines first differ in the relationship they create. Apparent authority rests on the objective theory of contracts and makes the principal a party to the contract the third person makes with the apparently authorized agent.⁶ Estoppel is fundamentally a principle of torts, developed to prevent loss to an innocent person who relied on a representation or promise of the estopped person.⁷ It is dealt with as a form of deceit: the remedy holds the speaker to the truth of the speaker’s statements instead of creating a tort action for misrepresentation, and the one estopped gains no rights.⁸ Liability in estoppel therefore follows the client’s own fault, a theme familiar from tort law, where an employer shielded from vicarious liability for an independent contractor still answers for its own negligence in choosing an incompetent contractor or in failing to supervise.⁹ For an exam answer, apparent authority makes the client a party to the deal, and estoppel holds the client to what the client led the third party to believe.

The doctrines also demand different things of the third party. A claim on apparent authority requires reliance. A claim on estoppel requires reliance and, in addition, a change of position serious enough that it would be unjust for the speaker to deny the truth of the speaker’s words.¹⁰ Estoppel exists to prevent loss, so a third party who has spent nothing and given up nothing has no loss to prevent.

Finally, the doctrines demand different things of the client. Apparent authority requires a manifestation by the principal, while a person can be estopped by inaction.¹¹ Comment d to Restatement (Third) of Agency § 2.05 describes estoppel as protecting third parties who reasonably believe an actor to be authorized when the belief cannot be shown to follow directly or indirectly from the principal’s own manifestations.¹²

Hypothetical Illustration

Dana’s lawyer tells a parts supplier that Dana will buy a run of custom fittings. Dana never authorized the order and never spoke to the supplier. A week later, Dana learns that the supplier has begun fabricating the fittings in reliance on the lawyer’s word. One telephone call would end the supplier’s mistake, and Dana makes none. The supplier finishes the fittings at a cost of $40,000 that no other buyer will repay. Dana made no manifestation to the supplier, so apparent authority fails. But she knew of the belief, knew the supplier might change position because of it, and took no reasonable steps to notify the supplier. She is estopped to deny the lawyer’s authority. A second supplier holds the same belief about the same lawyer but has only waited for a purchase order. That supplier has lost nothing and has no claim in estoppel, however complete Dana’s silence.

The two suppliers show how the doctrines divide the work. The first supplier has a loss, so estoppel gives a claim. The second supplier holds the same belief but has no loss, so estoppel gives nothing. Had Dana written to the first supplier introducing the lawyer as her purchasing agent, the belief would trace to her own manifestation, and apparent authority would reach her without any showing of a changed position.

The impostor cases mark the point where apparent authority runs out. The classic statement is that the law cannot permit apparent authority to be established by the mere proof that a mountebank in fact exercised it.¹³ A third party who dealt with a pretender must trace the belief to the principal’s manifestations to win on apparent authority. Failing that, the claim moves to estoppel, with its added burdens of fault and changed position.¹⁴ The lawyer cases divide the same way. A client’s letter introducing the lawyer as the person who will negotiate is a manifestation, so it raises apparent authority. A client’s silence toward a counterparty who is spending money on the lawyer’s claimed authority raises estoppel.

Exam Analysis Steps

Estoppel asks about the client’s fault and the third party’s loss rather than about a bargain, so test a problem one element at a time:

Identify the third party’s belief that the transaction was entered into by or for the client.
Ask how the belief arose. Did the client intentionally or carelessly cause it, or, knowing of it and of the risk that others might change position because of it, fail to take reasonable steps to notify them?
Ask whether the third party changed position because of the belief, to a degree that would make it unjust for the client to deny the appearance.
Remember the limits of the remedy: the client is held to what the client led the third party to believe and gains no rights against the third party.
Before settling on estoppel, check whether the client’s own manifestation to the third party supports a reasonable belief, because apparent authority then applies and needs no changed position.

Steps two and three decide most problems, because an answer that treats estoppel as apparent authority skips both. The client’s silence and the third party’s belief supply half the claim. The facts must also show that the third party gave up something in reliance.

Ratification

Ratification looks at what the client does after the deal exists. Comment b to Restatement (Third) of Agency § 4.01 states that “the act of ratification consists of an externally observable manifestation of assent to be bound by the prior act of another person.”¹⁶ The doctrine applies when the actor, who may or may not be an agent, had no power to bind the principal. It is therefore a source of liability independent of actual authority, apparent authority, and estoppel, and litigants sometimes plead it as an alternative ground when the facts support it.¹⁷

The standard illustration shows the mechanism. Ann, acting wholly without authority, contracts on Tuesday to sell Pam’s oriental rug to Tom. Pam hears of the sale on Friday and tells Ann, “I’m not happy that you did this without even talking to me but I like the price, so I’ll go along with it.” Her statement makes the sale binding on her immediately, and the effective date of the contract is Tuesday.¹⁸ That retroactive effect defines ratification: the affirmance gives the act the effect it would have had if an agent with actual authority had done it.¹⁹

Because the manifestation must be externally observable, private satisfaction binds no one. Express words suffice, as Pam’s did. So does conduct that justifies a reasonable assumption of consent, the standard example being acceptance of the benefits of a contract with full knowledge of its material terms.²⁰ A principal also cannot ratify in part, because the affirmance must take the whole transaction.²¹

Ratification is also ineffective unless the principal, when affirming, knew all the material facts of the original transaction.²² Assent to a deal the principal does not understand is not assent to that deal. In the standard example, an agent without authority rents machinery from T for P, delivers it to P, and tells P that T lent the machinery without charge. P uses it. P has not ratified, because P was unaware of the material facts about the rental.²³ Accepting a benefit counts only when the principal knows what it accepted. A store owner who keeps the proceeds of a sale her manager arranged, without learning that the manager also promised the buyer a ninety-day return right, has not ratified the sale.²⁴

Plowman v. Indian Refining Co. supplies facts for the same point. A witness there testified that the company’s vice president and general manager, Anglin, told him in the vice president’s private office that the oil industry was in a deplorable condition, that management had to cut expenses and lay off employees, and that the witness would be relieved of his duties but kept on the payroll at half salary because of his many years of service.²⁵ The witness would be excused from all labor, would report to the main office only to collect his checks, and would keep his insurance and hospitalization privileges.²⁶ A claim that the board ratified such a promise by continuing the checks meets the knowledge requirement head-on. A board that saw payroll entries would learn that checks went out, not that the recipient had been excused from all work on a promise of half salary.²⁷ Pam knew everything about the sale when she spoke. The board knew only what a payroll record shows.

Timing limits ratification too. The principal must ratify before the third party withdraws from the transaction.²⁸ The rule reduces the risk that the principal will use ratification to speculate at the third party’s expense. Without it, the principal could wait to see whether the deal works out, ratify if it does, and repudiate if it does not.²⁹ If the buyer in an unauthorized land contract withdraws on Tuesday, a principal who affirms on Wednesday, fully informed, affirms too late.

Ratification also changes the actor’s position. It releases the person who purported to bind the principal from warranty-of-authority liability to the other person, because that liability exists only if the actor lacked power to bind the principal.³⁰ Because the affirmance operates retroactively, it can give the actor the same rights against the principal as if the act had been authorized, including compensation and indemnity, subject to any conditions the principal imposes at ratification and the actor accepts. An actor who was not an agent when acting becomes a fiduciary of the principal with respect to the transaction.³¹ And because the affirmed act carries the effect of an act done with actual authority, a client who ratifies a lawyer’s deal is poorly placed to complain that the lawyer lacked authority to make it.³² The sections that follow on allocating the loss take up the client’s claim against the lawyer and the lawyer’s warranty of authority.

Settlements bring the doctrine into sharpest focus. Even if a lawyer lacks actual or apparent authority to settle, the client is bound by the settlement if the client subsequently ratifies it.³³ The practical danger lies in ratification by conduct, since a client who accepts the benefits of a settlement with full knowledge of its material terms invites the reasonable assumption that the client consents.³⁴

Hypothetical Illustration

Assume a lawyer had neither actual nor apparent authority to settle. A client tells her lawyer to settle only for $90,000 or more. The lawyer signs a release for $60,000, which the client never approved, and mails the client a letter stating the amount and the release terms. The client reads the letter, deposits the settlement check, and spends it. She has accepted the benefit of the whole deal with knowledge of its material terms, so the settlement binds her from the day the lawyer signed. A second client receives the same check from the same lawyer, who describes it only as a payment on account and never mentions the release. She deposits it. When she later reads the signed release, she objects. At the time of the deposit she knew neither the amount nor the release, so the deposit affirmed nothing.

Exam Analysis Steps

Ratification is a fallback that turns on the client’s conduct after the deal, so test a claim that a client ratified a lawyer’s unauthorized settlement in this order:

Confirm that the lawyer lacked actual and apparent authority. Ratification matters most when those routes fail, though litigants can also plead it as an alternative ground.
Identify what the client did after the deal: an express statement of approval, or conduct such as keeping the proceeds.
Ask whether the client knew all the material facts of the settlement, including its amount and release terms, when the client acted.
Ask whether the affirmance covers the whole deal and whether the other side had already withdrawn.
If ratification is established, treat the client as bound from the date of the lawyer’s act and the lawyer as released from the other side’s warranty claim.

The third step sorts most problems, because conduct that resembles affirmance, such as cashing a check or using delivered property, carries no weight until the client’s knowledge of the material terms is established. The fourth step catches the client who speaks with full knowledge only after the other side has walked away.