Keeping Contract Benefits Without Ratification? American Burglary & Fire, Inc. v. Aspect Software, Inc.

Here we have an interesting argument:

Does ratification arise from acceptance of benefits under a contract, and performing duties under a contract, where the putatively ratifying party is not aware of all the terms?

American Burglary & Fire, Inc. v. Aspect Software, Inc. (E.D. Mo. No. 99472), involves a contract to monitor fire and burglar alarm system.  Pertinent facts referenced in the respondent’s (Aspect’s) brief may be summarized:

Evidently ABF had installed a system on buildings owned by Quilogy. Aspect acquired the buildings “as part of a merger transaction” in January 2010.  Contracts dated May 2010 concerning ongoing monitoring at the building were signed by ABF and, purportedly on behalf of Aspect by one Buxton, who had been an employee of Quilogy but had no authority to act on behalf of Aspect.

Buxton was described in appellant’s brief as one who had been the “building supervisor at Quilogy”.  Appellant’s brief goes on to note:

According to the testimony of Bob Nagy, corporate controller for ABF, ABF sent over salesman Greg King to execute a new sales contract with Aspect.  Larry Buxton, the building supervisor at Quilogy, signed the original contract with ABF.  When Mr. King went to Aspect to execute a new sales contract, Larry Buxton was on site and signed the contracts dated May 27, 2010, for the monitoring and servicing of Aspect’s businesses….  Gene Butcher, [Aspect’s] witness, admitted to being present for the signing of the ABF contracts and asking that the billing be changed to Aspect Software and not Quilogy.

It appears Aspect used the services from ABF until some time during or after August 2010.  Respondent’s brief notes that in 2010, “Aspect had a Hirsch Electronics’ alarm system installed … and, at that time, stopped using the ABF alarm system and started paying Hirsch Electronics for its alarm monitoring services.”  The brief indicates payments to ABF continued until May 2011, but then discontinued payments.

One could examine the issue of apparent authority.  One of this author’s favorite illustrations of apparent authority is referenced in Kanelles v. Locke, 1919 WL 922 (Ohio App) (quoting Curtis v. Murphy, 22 N.W. 825 (Wisc. 1885):

A traveler who goes to a hotel at night and finds a clerk in charge of the office, assigning rooms, etc., has the right to assume that such clerk represents the proprietor and has authority to take charge of money which may be handed him for safe-keeping.

It would seem clearly not thoughtful to maintain on-premises one who had formerly made arrangements for the owner and not clarify to those with whom the former agent had contracted the termination of authority.  The analogy is not putting some new, unauthorized person behind the counter at the hotel.  It’s change of ownership of the hotel, allowing the clerk to stay behind the counter but claiming the clerk’s authority has terminated.

Ratification

But we will turn to the examination of ratification, discussed in only cursory terms by respondent.  Here is the part of respondent Aspect’s brief concerning whether it ratified the contract:

More after the break …

 

THE TRIAL COURT’S JUDGMENT SHOULD BE AFFIRMED BECAUSE APPELLANT FAILED TO PROVE THAT RESPONDENT RATIFIED THE TERMS OF THE CONTRACTS.

In the trial court below, ABF did not plead any theory of ratification, nor did ABF prove any ratification at trial.

Under Missouri law: “The first essential in ratification is that the principal have full knowledge of all the material facts at the time he is charged with having accepted the transaction as his own.” Hutcheson & Co. v. Providence-Washington Ins. Co. of Providence, R. I., 341 S.W.2d 142, 145 (Mo. App. 1960).

ABF failed to show that Aspect had “full knowledge” of the terms of the Contracts. In particular, ABF came forward with no proof whatsoever to show that anyone from Aspect was ever made aware of, much less accepted, the acceleration clauses that ABF sought to enforce. ABF, therefore, failed to prove any ratification on the part of Aspect.

Respondent’s Brief at 5-6.

Let us put aside the assertion as to the pleading.  The brief addresses the substance of the argument.  So shall we.

Mere Reiteration of a Bromide

It is preferable for one making an argument to think about the content of an argument, as opposed to simply repeating some bromide.  Respondent illustrates the less desirable approach, simply referencing “the principal have full knowledge of all the material facts at the time he is charged with having accepted the transaction as his own.” (quoting Hutcheson).

Well that’s interesting.  But what does it mean for “the principal to have full knowledge of all the material facts”?  Aspect’s counsel does not explain.  Surely it cannot mean what it literally provides.  So, if a party finds out about an unauthorized. lengthy written contract, has the opportunity to get a copy of the contract–has someone present when it’s signed–and consciously, willingly receives the benefits, but avoids reading the contract, surely it cannot be the case that the party is permitted to treat the contract as not having been ratified.

Typically a party is not able to avoid a contractual obligation it consciously failed to read simply because it chose not to inform itself.  For those who like bromides, a “duty to read” is the typical refrain.  Why, then, should a principal not have a duty to read a contract following conscious acceptance of the benefits of a putatively unauthorized contract?

For a bromide-free analysis:  Allowing the putatively ratifying party to retain the benefits while preserving the right to claim not-atypical contract terms do not bind it creates an option in the putatively ratifying party.  The creation of such an option is disfavored in the law.  Why?  Well typically it is not what is in the aggregate interest of the parties.

One might object if the pertinent contract provision were surprising, unrelated or abnormal.  But that’s evidently not the kind of provision at issue–it appears to be a common remedial provision–an acceleration clause.  Acceleration provisions are common, because the common law default, requiring lawsuits for periodic payments be brought sequentially, is clearly inefficient.  The common problem, and opting-out by contract, is something that is addressed in a first-year class in Contracts.  So surely the presence of an acceleration clause cannot have been a surprise.

Authority Addressing the Issue

Abramson v. America Online, Inc., 393 F.Supp.2d 438 (N.D. Tex. 2005), addressing a forum selection clause of which the principal professed no actual knowledge, provides a thoughtful discussion:

In the alternative, the Court finds Abramson ratified the contract. Abramson admits that immediately after her son initiated her AOL account, he informed her that he had done so. Abramson subsequently accepted the benefits of that transaction, and took affirmative actions to reinstate her service on several occasions, after it was suspended for non-payment. Although there is no evidence indicating whether she actually became aware of the terms of the Member Agreement, it is beyond doubt Abramson knew her service with AOL was subject to a contract. Her failure to review the terms of that contract, while accepting its benefits, demonstrates affirmative acquiescence to the Member Agreement. See Motel Enterprises, Inc. v. Nobani, 784 S.W.2d 545, 547 (Tex.App.—Hous. [1 Dist.] 1990, no writ) (ratification may be “inferred from the existing facts and circumstances, as where a party retains the benefits of an invalid contract with full knowledge of the facts that make the contract voidable”).

Can we find other authority that gets to the same point by a different path?  Sure.  Would not that conscious act–receiving the benefits for some period of time and simply declining to ascertain the contract provisions–give rise to an estoppel?  Restatement (Second) of Agency § 103 notes, “A person may be estopped to deny that he has ratified an act or transaction.”  As comment c notes, “The manifestation … may consist of a failure to act.”