Owner Responsibility for Actions of His Employees

Introduction: An issue that occurs with businesses is whether the corporation is responsible for the business decisions its employees. Although this area of the law is very complicated what frequently occurs is that a high-level employee signs a contract or makes a decision for the corporation that was not authorized by the corporation. Shortly after, the corporation is sued on the contract or action but denies that the employee was authorized to enter into the agreement. Let’s see what issues we have to deal with in terms of this area of law.

Question: Dear Attorney Cheng, Jack was an employee in our company. He entered into an agreement with another company. We did not authorize him to do so. When we were alerted to the contract our employee admitted it was his mistake and he would take care of it. We never expressly told anyone that we would accept the contract. Now, we are being sued for breach of contract. Did we do anything wrong? Sam, San Marino

Answer: Dear Sam, I understand your frustration. The issue that I would be looking for in your case is ratification. Ratification means you 1) Know of a situation (in this case the contract) and 2) That you have received the benefit of the situation. Questions I would ask you in this case is 1) When did you find out about the contract? 2) Could you have done more instead of having your employee take care of it? 3) What is Jack’s position? 4) What were the terms of the contract? 5) Were they beneficial to you? 6) Would a reasonable person under the circumstances acted the way you did? 7) Did you terminate the employee for this action?

For instance, in one California case, the court said that “If the employer, after knowledge of or opportunity to learn of the agent’s misconduct, continues the wrongdoer in service, the employer may become an abettor and may make himself liable…”

In another case, the court stated that ratification did not have to occur expressly but impliedly. What that means is that one can ratify the actions of another not necessarily by expressly objecting, but refusing to do nothing.

In this case, if I was representing the Plaintiff I would argue that you pushed off responsibility onto another knowing full well that you may be found liable on a breach of contract. In addition, I would look at the terms of the contract to see if they benefited you. If so, I would say that you must make an express act to deny the contract.

If I represented the Defendant I would argue several points. One is I would look at the position of the employee. If the person is a low level employee, would that person even be considered a person that can sign contracts? For instance, a teller at Bank of America would not be able to sign a multi-million dollar contract for the corporation. Another factor is notice. Who actually received notice of the contract? If that person was also a low level employee I would argue that no proper notice even occurred. There was no way for defendant to reject something they had no notice about. Lastly, I would argue that the terms of the contract did not benefit the defendant. As such, there was no reason to reject the contract.

As stated, this area of the law is very difficult. Millions of dollars are used annually to fight these types of disputes. I hope this does not happen to you and the information provided helped. Good luck!

Categories: Employment Law