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Agency Contracts Explained with Reference to Ratification and Doctrine of Relation Back

Section 182 of ICA defines Agency- A contractual relationship between an Agent and a Principal where the powers are vested with the agent to act in a manner to establish the contractual relations of the principal with the third party. If an agent has established a relationship between principal and the third party the duties of an agent are fulfilled and the relationship of Agent-Principal is also established.

Test for determining Agent-Principal relationship?

The portion is acting on behalf of the Principal.
Was there a deal with the third party or not? If this is proved, the principal will be held liable.

Loon Karan Soham v. John and Co.
The Assam government gave licences to people who were willing to buy / supply cotton yarns on behalf of the Government. In return for a licence fee, the permission to buy / supply the cotton yarn to any proprietor was given. The person (A) entered into several agreements to buy and further redistribute cotton Yarns. A asked (X) to supply yarns and X did as asked, later A failed to pay. X asked A to pay him and he kept denying due to lack of funds and later stated that he was just an agent of the Assamese Government and was not personally liable to pay. The agreement between the government and A was that of a procurement agency where he would grow or purchase yarns and sell it in the market. Court held that along with the nature of the relationship you also have to see that there was a trade between principal and the third party. A was selling and procuring yarns as a licensee and not an agent of the Government since the profits were not shared with the Government. The Assamese Government just played the part of a licensing Authority.

Creation of an Agency- An Agency can be created through the following three modes:
Express Authority ( S. 186 and 187)- Free Consent can establish oral / written agreements between the principal and the agent. Although advised to be mostly in writing, oral agreements of the Agency are equally valid. Situations of Co-Principals- Syed Abdul Khadir v. Rani Reddy (1979)- X, Y, Z jointly on a property and appointed A to maintain this particular land and this agent was responsible to all the the Agent was responsible to all those three co principals and since all those principals had the interest in the same property, there was also a common transaction of appointing the same agent. Actions by the Agent has to be binding on all three Co principals.

Harshad J. Shah v. LIC (1997):
Harshad had 4 insurance policies and had taken the help of the LIC agents. He was supposed to pay twice a year to renew his premiums and one day he realised that he had not paid for the premiums and that the date for paying the premium was about to come up. He went to the agent and said to take the cheque and renew the subsequent 4 premiums of all 4 insurance policies. The agent asked his son to encash the cheque but his son took his own sweet time. This caused a delay and the premium could not be paid and renewed on time. The person died and his wife went to ask for the payment. LIC however said that the premium was not renewed. Mrs. Shah stated that the premium was however paid on time through your agents and the delay on the part of your agent should not make her responsible. LIC contented that their agreement consisted of a clause in which they had excused themselves from the responsibility for the mistakes on part of their Agents. LIC also said that their agents were just responsible with the task of opening new accounts and taking money to renew premiums was beyond their scope of authority. The court held that LIC had made clear the scope of authority of their agents and Mrs. Shah had no right to claim money but to foster justice, equity and good conscience. However, more on humanitarian grounds, LIC was directed to return the premium with 15% interest.

Implied Authority ( Sec 187): The contract of Agency from conduct, situation, relationship, usages.

Two sub parts to Implied Authority:
  1. Estoppel:
    If principal has given an authority to an agent and if the third-party presumes that the authority has already been given to the Agent, then the agent cannot go back on his promise. Section 237 states that if Principal specifies that the agent has the authority to do only specific kinds of acts under the authority of the principal, and when the Agent acting on beyond the scope of his authority (representing the Principal) in an act, the principal cannot be held liable.

    However if principal has done something to make the third party believe (by his words or conduct) then the principal cannot go back through his implied promise and that the principal cannot say that the agent was not given authority.

    Kashinath Das v. Nisakar Dutt
    A owned the land and appointed a tahsildar B who was looking for managing the works of the agricultural land. Many people approached to purchase the land and the Principal asked these willing buyers to contact B to purchase the land. B sold the land and if A later says that he was not authorised to sell the land, he cannot go back from his promise and is bound by estoppel.
  2. Apparent and Real Authority:
    The Principal of Estoppel is also applicable in cases where the Principal might not have given a real authority but through the conduct or acts of the Principal, the third party was made to believe that the Agent has the apparent authority to act and represent the principal in his dealings with the third party.

Pickering v Husk (1812):
A was trying to sell hemps where B approaches and Buys hemps from A but asked to take delivery of the same after some days. However A and B contracted between each other where they agreed that A would remain B's broker to initiate further sale of hemps. C approached B where B asked C to approach A in case he wishes to buy those hemps. Here A despite not having a real authority to sell but through the words of B as A stands his broker, the sale which was made by A to C on behalf of B was held valid and legal and the principle of estoppel being applied on B was not allowed to reverse the transaction.

Instances where Agents are said to have an Apparent Authority:
  1. Principal has made a representation to the third-party to the effect that the agent has the capacity and the authority to act for him despite no real authority.
  2. Third party as a consequence of this representation by the principal has relied on such a representation to deal directly with the Agent of the Principal.

Sec 196 defines Ratification. Here in this case, there is no agent principal relationship and the agent acts on behalf of the principal misrepresenting the authority entrusted to him. If the agent misrepresents to a third party through which he is dealing with, on behalf of his principal and enters into the contract with the third party, the principal has the option to either choose if he wishes to go ahead with the transaction or hold the agent personally liable for the the deal that he has entered into, on behalf of the principal misrepresenting and acting outside the scope of the authority entrusted to him.

If the Principal ratifies the agreement between the Agent and the third party, then the Principal becomes liable for all the acts done by the Agent for the third party and also his scope of authority gets extended. If the Principal does not ratify, the Agent becomes personally liable for all the acts and the duty to execute the contract with the third party. Also after Ratification, the liability of the Principal dates back to the date when the contract was executed between the agent and the third party implying that the agent had an authority right from the start, this doctrine is called the doctrine of relation back. Hence Ratification is confirming / adopting / accepting a particular transaction.

Essentials of Ratification:
Either Express or Implied- Sec 197:
Ratification can be both Express and Implied. Hukumchand Insurance Case- The customer used to pay a premium amount of the insurance directly to the manager of the company. The manager used to accept and deposit the premium sum in the account of the customer. If Insurance Company knows this and still accepts the payment, it is a kind of an implied Ratification.

On behalf of the supposed Principal:
The Agent should mention as to on whose behalf the agent is working. If the third party is made to believe that the agent wasn't actually an agent and working on his own behalf, no Ratification could be made by the principal to protect the interests of Agent since the third party came into the agreement with a presumption that there is no agent or sub delegation involved.

Keighley Maxstead Co. V. Durant
KM company had asked the agent to buy Karachi wheat at a given price and from a given shop. The mentioned shop did not have Karachi wheat and the agent bought the wheat from some other shop at the same price. However money was not paid to the shop owner for that wheat. The other shop owner assumed that he was buying it for himself even due to this anomaly, even if KM Company refuses to pay at a later stage, he would be made personally to pay for the bought wheat.

R. Raghavachari v. Pakkiri Mahmed (1916):
If the agent is buying property on his own discretion despite being directed by the principal not to buy it, any purchases made on the behalf of the principal would make the agent personally liable since the Agent had a duty to have acted on the directions of his principal.

Competence of the Principal - It is to be insured that the principal was competent enough to come into a relationship of a contractual obligation between the agent and the third party, specifically after applying the principle of doctrine of relation back and the ratification coming in picture.

The Principal after having applied the doctrine of relation back should not be of an unsound mind as of that date in the past, should not be of an age of minority and should not have been barred by law to enter into contracts.

The Ratification should have a legal objective:
The principal by law is not bound to ratify illegal acts or tenders undertaken by the Agent on his behalf.
Sunil v/s Maharashtra State Mining Corporation (2001):
Managing Director of a company terminated the employee without giving any valid reason for his termination. When the employee questioned the authority of the Managing Director, the Managing Director stated that he has an important authority by being the Agent of the company, the company however ratified the said act of the Managing Director.

The matter when taken up by the court held the termination to be illegal and held that a corporation cannot ratify an act with an illegal objective and which goes against the company laws and rights of an employee.

When can Ratification be made:
Ratification can only be made within a reasonable time period, within the time duration for which the subject matter existed. Grover and Grover Ltd. V. Mathew's (1910)- X kept his goods in possession of Y and Y feared the destruction of the bailed goods from water, fire. Y went to an insurance company stating that he is an agent of X and wishes to enter into a contract of insurance. However X did not ratify this agreement and X kept delaying the ratification. One day, goods were caught fire and then, X ratified the agreement and went to the Insurance Company to claim compensation. Insurance Company stated that you have delayed to ratify within a reasonable time period and a reasonable time period can construed to be anytime before the goods caught fire. Court held the same and X was denied compensation.

Effect of Ratification - Following are the effects of Ratification:
  • It is establishes a relationship between the principal and the agent.
  • It also establishes a relationship between the principal and the third party.
With the help of Doctrine of Relation Back it can be said that ratification has a retrospective effect. Same was held true in Surendra Nath Roy v. Kedar Nath Bose (1936).
Section 199 of ICA also holds that part Ratification is not allowed as per law. The Principal is bound to either accept all the consequences of acts of the Agent under his behalf or accept nothing at all. For an Example, if the agent B brings a contract for Ratification from C for buying 100 kgs of rice, A as a principal cannot ratify the contract for just 50 kgs of rice.

Doctrine of Relation Back:
The doctrine states that the Principal becomes liable for all the acts undertaken by the Agent right from the day when the Agent and The third party contracted, as a part of Ratification.

Bolton Partners v. Lambert(1889):
Controversial Judgment- X was the Managing Director (MD) of a company. MD was not authorised to engage the company in Contracts yet he contracted with A on behalf of the company (On 3rd March). A got to know about his unauthority the very next day and he revoked the offer after 2 days of getting into the contract (let's call it as 5th March) but the company got to know about this contract between the MD and A and ratified it on the very next day after A had revoked the offer (Let's call it as 6th March)

The question was if the third party that is, A had the authority to revoke the contract especially when having applied the doctrine of relation back, the contractual obligations became enforceable and binding on both the parties right from the very first day that is 3rd March. Amidst all the hue, the court held that the ratification despite dating the contract back to 3rd March, would not be binding upon the third party in this case cause the MD of the company had no authority to represent the company in contractual obligations and that he had acted beyond his scope of authority due to which the third party's revocation stands valid.

Watson v. Davies:
Davies (D) best to sell a property to a charitable Institute or an NGO of eight members. The NGO had a policy which stated that all its eight members would have to unanimously agree and ratify an offer without which a ratification cannot be considered valid and binding upon the NGO. Four out of the eight agreed and ratified and before the consent of the other could have been taken, D withdrew the offer. Here in this case, the court stated that the offer was subject to the condition that all the eight members agree and ratify to an offer to make it a binding obligation hence, D was allowed to revoke the contract before the ratification from all 8 members.

Principal - Agent Relationship in cases of Ratification:
When a Principal is known to exist and the name has been disclosed to the third party and if the agent is acting beyond the scope of his authority, the liability of the Principal can be determined through S 227 which states that Principal would be liable only for those acts which are within the scope of authority of the Agent.

Sec 228 states that in cases it is not possible to ascertain as to what comes under the scope of authority of the Agent or if the two are inseparable, principal is not liable for any such an act of the Agent.

Sec 226 states that acts done by the Agent are much like the acts done by the Principal himself and would personally bind him for all the acts done by the Agent within the scope of his authority.

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