Story Case

George Thompson, the purchasing agent of the Gammon Hardware Company, went beyond the scope of his authority in purchasing a lot of automobiles. He explained to his principal the nature of the purchase, and stated, among other things, that the automobiles carried a certain make of carburetor. This information was given in good faith, but the agent was mistaken as to this point. In reliance on what the agent had said, the Gammon Company wrote the automobile manufacturer, stating when and where the cars should be shipped. A few days later, the truth was learned as to the carburetors, and the hardware company wrote another letter, stating that the automobiles would not be accepted. The automobile manufacturers thereupon brought suit for damages against the hardware company. What are the rights of the parties?

Ruling Court Case. Bank Of Owensboro Vs. Western Bank, Volume 26 Lawyers' Reports Annotated At Page 211

The Bank of Owensboro authorized the Western Bank to make an investment of $5,000 for them in good notes. In accordance therewith, the Western Bank made a loan to one Atwood, secured by stock of the Bank of Louisville. The Western Bank, however, exceeded its authority in making the loan in this manner because the Bank of Louisville had a lien on this stock for unpaid subscription. The Western Bank explained this to the Bank of Owensboro, but advised the Bank of Owensboro to ratify the act because the Bank of Louisville had promised to release this lien.

When the notes were due, the Bank of Owensboro could not collect from Atwood because he had become insolvent. Also, the Bank of Louisville refused to relinquish its lien. Therefore, the Bank of Owensboro brought this action against the Western Bank for negligence in making the loan contrary to instructions. The Western Bank defended on the ground that its act in making the loan had been ratified by the Bank of Owensboro.

Justice Woodbury rendered the opinion: "If the principal acquiesces in the agent's act with a full knowledge of all the facts, then this amounts to a ratification and the agent is released from liability to the principal for doing the unauthorized act. There was no ratification in this case because the Bank of Owensboro did not know all the facts; it did not know that the Bank of Louisville would assert its lien. Therefore, the Western Bank is liable for its unauthorized act."

Judgment is given for the Bank of Owensboro for its losses.

Ruling Law. Story Case Answer

Before an alleged ratification is binding upon the principal he must have been actually acquainted with all the material facts concerning the transaction which he is ratifying. This means that he must know the actual facts, and not merely the facts as the agent thought them to be. If the agent himself is mistaken about the material facts, ratification based upon these facts by the principal is not binding upon him.

In the Story Case, the hardware company would not be liable for damages because it did not ratify with knowledge of all the material facts; hence the ratification was not binding upon it.