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ACCA Applied Skills · Corporate and Business Law (Global) · Agency law

Petra, who has no authority from Clearwater Ltd, signs a supply contract with Dunmore Ltd stating she acts for Clearwater Ltd. Clearwater Ltd was not in existence at the time of the contract and is incorporated two weeks later. Clearwater Ltd then adopts the contract. Which statement is correct?

Clearwater Ltd cannot be bound by ratification because it did not exist when the contract was made. Ratification needs a principal in existence and with capacity at the time of the act, so a new contract would be needed.

  1. AClearwater Ltd is bound because it ratified the contract
  2. BClearwater Ltd cannot be bound by ratification, as it did not exist when the contract was madeCorrect
  3. CPetra is bound only if Dunmore Ltd consents
  4. DNeither Petra nor Clearwater Ltd can be liable

Explanation

Ratification requires that the principal was in existence and had capacity when the act was done. A company not yet incorporated cannot ratify a pre-incorporation contract, so adoption does not bind it as agent ratification. A new contract would be needed, and the promoter may be personally liable. Option A ignores the existence requirement.

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