Question

Write INTRODUCTION and explain the term Law of Agency & Agency by ratification. Elaborate the terms and provide articles that talked about it.

Answer 1

The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships that involve a person, called the agent, that is authorized to act on behalf of another (called the principal) to create legal relations with a third party. Succinctly, it may be referred to as the equal relationship between a principal and an agent whereby the principal, expressly or implicitly, authorizes the agent to work under his or her control and on his or her behalf. The agent is, thus, required to negotiate on behalf of the principal or bring him or her and third parties into contractual relationship. This branch of law separates and regulates the relationships between-

- agents and principals (internal relationship), known as the principal-agent relationship;

- agents and the third parties with whom they deal on their principals' behalf (external relationship); and

- principals and the third parties when the agents deal.

In India, section 182 of the Contract Act 1872 defines Agent as “a person employed to do any act for another or to represent another in dealings with third persons”.

The reciprocal rights and liabilities between a principal and an agent reflect commercial and legal realities. A business owner often relies on an employee or another person to conduct a business. In the case of a corporation, since a corporation is a fictitious legal person, it can only act through human agents. The principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency.

A third party may rely in good faith on the representation by a person who identifies himself as an agent for another. It is not always cost effective to check whether someone who is represented as having the authority to act for another actually has such authority. If it is subsequently found that the alleged agent was acting without necessary authority, the agent will generally be held liable.

Agency by Ratification

Subsequent adoption of an activity is called ratification. Soon after ratification, the person who has done the activity becomes agent and that person who has given ratification becomes principal. Ratification is of two types. Namely-

- Express Ratification and

- Implied Ratification.

The ratification where there is wording and expression is called express ratification. For example: Without A`s direction, B has purchased goods for the sake of A from C. There after, A has given his Support to B's activity, it is called ratification and now A is principal and b is agent.

The ratification where there is no expression is called implied ratification. Here the mode of behavior of the party indicates that support is given to activity concern. For example: Mr. Q has P's money with him. Without P's direction Q has lent that amount to R. Thereafter, R pays interest directly to P and P has taken the amount of interest. It indicates that P has given his support to Q's activity.

Essentials of Valid Ratification

1) The person, who is going to give ratification, must be in existence at the time of activity. Let us consider pre-incorporation contracts made by promoters. Company comes into existence on the date of incorporation. Therefore company is not in existence at the time of pre-incorporation contracts. If company gives ratification to pre incorporation contracts, it is not valid ratification. Hence to pre-incorporation contracts, promoters are personally liable.

2) The person who is going to give ratification should have capacity to contract, at the time of activity as well as at the time of ratification. In Armugan Vs Dorai Singh the minor obtains loan from money lender and executes a deed. Before repayment of debt, he becomes a major and executes another bond. Court decides that the second bond also is not valid because the person who has given ratification has no capacity to contract at the time of activity i.e. at the time of getting loan.

3) Ratification should be given within reasonable period after the activity the concept of reasonable period depends upon nature of the situation.

4) Ratification must be absolute. To entire activity ratification is to be given. Partial ratification carries no validity.

5) The fact of ratification must be communicated to all parties in connection with the activity.

6) Ratification attains validity only when it is given with full knowledge of facts relating to the activity.

7) The activity which is going to be ratified must be a lawful activity. For example: for the sake of A, B has murdered C. If A gives his support to B's activity, it is not valid ratification.

8) The person who is going to give ratification should have right to do such activities. For example: If company gives ratification to an Ultravires activity it is not valid.

9) Ratification relates back to date of activity. Though ratification takes place after the date of activity, it will be assumed that ratification is given on the date of activity.

10) Ratification should not lead to breach of contract. In other words ratification should not be harmful to third party. For example: There is a rental agreement between A and B according to which three months notice is needed at the time of vacation of house. On one day C, A's son, has asked B to vacate the house on that day itself. A has given his support to C's activity. It is not valid ratification because it leads to breach of rental agreement and at the same time it is harmful to B.