Ratifying an agent’s breach of authority
What does it mean to ‘ratify’ an agent’s breach of authority? And what might the consequences of ratification be for the principal, including in terms of the principal’s ability to later litigate a related claim? This case note explores those issues in light of the New South Wales Supreme Court decision in Shao v Crown Global Capital Pty Ltd.[1]
The issue
In February 2015, Ms Shao and her then-husband, Mr Peng, together agreed to lend $1m to Crown Global Capital Pty Limited (Crown). Repayment of the loan was guaranteed by a related company, Crown Group Holdings Pty Limited.
In February 2016, Crown repaid the money which Ms Shao and Mr Peng had lent but, unbeknownst to Ms Shao, it did so wholly to Mr Peng. Mr Peng then transferred the money into accounts which Ms Shao could not access.
In March 2016 and having become aware of the transactions, Ms Shao sued Mr Peng. She obtained judgment for amounts including the money which Crown had paid to him. Mr Peng subsequently was made bankrupt.
In February 2022, Ms Shao commenced the present proceeding against Crown. Among other things, Ms Shao alleged that Crown, in paying money into an account which Mr Peng alone had nominated, had breached the terms of its loan agreement with her and Mr Peng. She sued Crown for the full amount of the loan — less what she had recovered via a dividend from Mr Peng’s trustee in bankruptcy — by way of damages for breach of contract. She also brought an alternative claim in negligence.
In its defence, Crown alleged that its repayment to Mr Peng had followed instructions which he had given to Crown. Crown argued that Mr Peng was acting as Ms Shao’s agent with actual or ostensible authority to instruct Crown as to the manner of repayment. Crown also argued that Ms Shao, in pursuing a claim against Mr Peng in the first instance, had ratified Mr Peng’s offending conduct and that, as a result, Ms Shao was barred from later suing Crown in relation to the same transaction.
This latter issue — Ms Shao’s ratification of Mr Peng’s conduct in breach of his authority — become the focus of part of the Court’s judgment.
The Court’s analysis
The trial of the proceeding was heard by Ball J. On the issue of ratification, his Honour noted the following:
Ratification operates retrospectively.
Ratification may be express or implied. It can be implied ‘where the principal, knowing the facts, makes an unequivocal election to enforce rights that would only be available to the principal upon ratification’[2] and does so irrespective of the actual intention of the principal.
Once ratification has occurred, the principal cannot then exercise rights which are inconsistent with the ratification; the principal becomes bound by their (express or implied) election.
Ball J also noted that ratification can occur in instances beyond a pure agency relationship, including in the context of partnerships.[3] The breadth of the doctrine is evident from the following explanation offered by Scrutton LJ in Verchures Creameries Ltd v Hull and Netherlands Steamship Company Ltd:
‘A plaintiff is not permitted to “approbate and reprobate”. The phrase is apparently borrowed from the Scotch law, where it is used to express the principle embodied in our doctrine of election – namely, that no party can accept and reject the same instrument. ... The doctrine of election is not however confined to instruments. A person cannot say at one time that a transaction is valid and thereby obtain some advantage, to which he could only be entitled on the footing that it is valid, and then turn round and say it is void for the purpose of securing some other advantage. That is to approbate and reprobate the transaction.’[4]
Applying the principles to Ms Shao’s conduct, his Honour noted that Ms Shao’s claim against Mr Peng was based on rights she had in respect of the money which Crown had paid to Mr Peng and, in particular, the right to repayment of money characterised as a debt which Mr Peng owed to her. His Honour held that:
‘[B]y making the claim, obtaining judgment against Mr Peng and seeking to enforce that judgment, Ms Shao ratified those acts of Mr Peng that had that consequence’.[5]
Ms Shao sought to overcome the consequences of ratification by claiming that her actions in respect of Mr Peng were separate from any claim she might bring against Crown for breach of the loan agreement. She may well have succeeded in such an argument, but Ball J earlier in the Court’s judgment held that Crown had not breached the loan agreement simply because it paid the money into an account nominated by Mr Peng but, instead, had not obtained a good discharge of its debt. As his Honour noted, ‘[t]he question remain[ed] whether Ms Shao [was] entitled to sue Crown in respect of that debt’.[6]
His Honour went on to hold:
‘Ms Shao had a choice. She could have taken the view that the payment to Mr Peng was not a valid discharge of the debt owed by Crown and sued Crown for the debt, joining Mr Peng as a defendant if he was not willing to be joined as a plaintiff. Alternatively, she could have taken the view that Crown had discharged the debt and sued Mr Peng to recover it on the basis that, as between them, the money belonged to her. She chose the latter course and is now bound by that choice.’[7]
Comment
Ratification of an agent’s conduct in breach of the agent’s authority can have the effect of barring claims which might later be made in court. As the decision in Shao v Crown Global Capital Pty Ltd illustrates, much can depend on the way a claim is brought and the party against whom it is made. Ultimately, the case serves as a reminder of the importance of carefully considering one’s options in litigation before filing a claim.
[1]: [2023] NSWSC 820.
[2]: Ibid [73].
[3]: See, eg, Scarf v Jardine (1882) 7 AC 345.
[4]: [1921] 2 KB 608, 611–12 (emphasis added).
[5]: Shao v Crown Global Capital Pty Ltd [2023] NSWSC 820, [78].
[6]: Ibid [69].
[7]: Ibid [79].