Creation of Agency by Ratification

Chapter X of the Indian Contract Act, 1872 deals with the laws relating to a special contract named ‘Agency’. When one party delegates some authority to another party whereby the latter performs his actions in a more or less independent fashion, on behalf of the first party, the relationship between them is called an agency. There are different methods of creation of agency. That is, by express agreement, by implied agreement, by ratification and by operation of law.

Section 196-200 of the Indian Contract Act deals with agency by ratification. Agency by ratification is created when, a person accept or approve an act done by a person who acted on his behalf without his permission or knowledge. This is also called ex-post facto agency, since agency is arising after the occurrence of an act.

Section 196 of Indian Contract Act states the effect of ratification. If the act is ratified, a relationship of the agency will come into existence and it will be as if he had previously authorized the person to act his agent. The effect or ratification is to make the agent’s unauthorized acts as authorized acts, as if they had been performed with the principal’s authority.

Section 198-200 of the Indian Contract Act deals with the essentials of a valid ratification. The essential conditions are

1.Full Knowledge

Section 198 states that no valid ratification can be made by a person whose Knowledge of the facts of the case is materially defective.

Example:A authorized B, his agent to purchase grains for him. B supplied his own grains to A At a higher price. A ratified the purchase without knowing the fact that the grains Belonged to B himself and he charged price higher than that in the market. Held, The ratification made by A was not valid because it was made without the full Knowledge of the facts of the case.

A case law regarding this is Damodharan Das v. Sherom Das. In this case, Principal instructed agent to arrange a house on a reasonable rent in Bombay. Agents lets out his own house at a rent which is much higher than the prevailing rentals in that area. Principal started living in the house. Later on he came to know that the house belonged to agent. Here principal’s ratification is not binding upon himself.

2.Whole Transaction

Section 199 of Indian Contract Act states that, a person ratifying any unauthorised act done on his behalf ratifies the whole of the transaction of which such act formed a part. The principal can’t adopt only that part of transaction which is favour to him and reject the part which is prejudicial to him. He must ratify in toto or reject in toto.

3.Ratification of unauthorised act cannot injure third person

Section 200 states that an act done by one person on behalf of another, without such other person’s authority, which if done with authority, would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have such effect.

4.Within reasonable time

The ratification is binding only if it is made within a reasonable time after the act to be ratified is done.

5.Lawful Acts

Only those acts which are lawful can be ratified. If the unauthorised transaction or contract is unlawful, the principal may not ratify a contract. Void contracts can’t be ratified. For example, criminal acts can not be ratified.

6.Acts within Principal’s power

Only those acts which are within the principal’s power can be ratified. An act which is beyond the competence of a principal cannot be ratified.

Example: A director of a non-trading and non-banking company borrowed Rs. 1 lakh On behalf of the company. The company can’t ratify such act of director became it Is beyond the power(ultravirus) of the company.

8.Contractual Capacity The principal must have contractual capacity both at the time of contract and at the time of ratification. If the principal do not have the capacity, the contract itself is void and hence the contract cannot be ratified if it was done by an agent.

Example: A minor on attaining majority cannot ratify the contracts made on his behalf during his minority.

Agency by ratification is created when the principal accepts the act of an Agent whom he has not given authority to do so. There is two situations For that. One is, when an agent who was appointed has exceeded his given Authority; and another is when a person, who has no authority to act for The principal, has acted as if he has authority to act so. The Principal has a Choice either to reject or to accept the act that was done on behalf of him. If he accept it then agency is created by ratification and it relates back to The date of the agent’s act. However, If the Principal does not agree, no Agency relationship exists and the Principal would not be liable upon such Contracts. There are certain conditions or essentials for valid ratification. If The Principal has ratified the contract, but any one of those conditions had Not been fulfilled, the contract is not binding on the principal and the Person who done the unauthorised acts will be personally liable.

Reference :

Law of Contracts I&II, Prof. G. C. V. Subba Rao(11th edition)

Aishwarya Says:

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