Meaning
Statutory provisions governing unauthorized agency in the People’s Republic of China establish the legal consequences when an actor performs a transaction without authorization. Under the framework of civil code article 171, the principal may choose to ratify such transactions or refuse them. This article balances the interests of the innocent principal and the third party.
Unauthorized Obligation
An agreement executed by an unauthorized representative remains in a state of suspended validity until the principal takes action. If the principal refuses ratification, the transaction has no legal effect on them. The actor who performed the transaction then becomes solely liable to the counterparty.
This statutory mechanism protects businesses from rogue employees who execute unauthorized contracts, shifts the financial risk away from the enterprise, and allocates the legal consequences directly to the perpetrator of the unauthorized act.
Ratification Option
The principal has the unilateral right to confirm the contract within thirty days after being notified by the counterparty. Silence or inaction after this period is treated as a refusal of ratification. Once ratified, the contract becomes retroactively effective against the principal.
Restitution Liability
If ratification is refused, the counterparty can demand that the unauthorized actor perform the contract or pay damages. The compensation is limited to the losses that the counterparty would not have incurred if they had known of the lack of authority. This ensures some remedy for the victim of the unauthorized transaction.
