Characteristics Of Commerce And Trade

Commerce and trade has been a characteristic of all human societies from time immemorial. With the expansion of trade it was necessary to branch out and set up mercantile establishments in places far from the successful parent store. Furthermore, with the invention of the wheel and other improvements in the transportation system it became mutually profitable for different colonies and countries to exchange goods. With expansion and exports becoming so important for merchants there was an urgent need for a system that made it possible for businessmen to work without having to be in two or three places at once. The popularity of the company form of business organization where the trading entity was an artificial one also emphasised the need for a representational system of commerce.

Thus in response to precisely this need, the system of agency was established. Under it the principal consigned goods to an agent, his servant who would receive possession and dispose them off according to the instructions given by the principal and remit the earnings back to him. In return the principal would repay the agent for any expenditure incurred by him in the course of selling his products and protect him against all losses besides the commission as a reward for all sales. [1] At all times the principal was the owner of the items consigned and the agent was duty bound to follow his or her instructions.

It was an effective and successful system. The agent was motivated into recovering the maximum return for the principal because he was remunerated on a commission basis. The principal on his part enjoyed the convenience of not having to be continuously travelling. His agent at all times was to meticulously follow his instructions and he still enjoyed title of the goods till it was transferred by sale to a customer by his agent.

The essential feature of an agent is in his power of making the principal answerable to third persons enabling him to sue the third party and also to be sued by the third party. The relationship between an agent and a principle may arise under different circumstances viz. by an actual authority given to the agent by the principal or by the principal’s ratification of a contract entered into by the agent on the principals behalf but without its authority or by ostensible authority even though there is no actual authority or by an implication of law in cases of necessity. [2]

The authority can be given to the agent either expressly or impliedly. An express agency usually involves documents like power of attorney or a specific letter of appointment or even by an oral order given to the agent explicitly mentioning the acts to be carried out by him. Implied authority, on the other hand, has to be determined from the acts or situation of the parties or out of necessity. However implied agency does not extend to acts outside the ordinary course of business and which are neither necessary nor incidental to his authority [3] .

Implied authority is stated to be divided into four types:-

Incidental authority i.e. the authority which is incidental to do that which is ordinarily or necessarily incidental to the due performance of the express authority.

Usual authority i.e. the authority to do whatever is usually done by persons occupying positions in particular trade or business.

Customary authority i.e. an authority to act in accordance with the customs and usage of the places where the agent acts.

Authority derived from the circumstances of the case.

Under the Indian Contract Act express and implied authority have been defined under §187.However the section has been criticized to be incomplete not mentioning the circumstances under which the authority may be implied. [4]

However sometimes the agent might not have the authority at all or might exceed the authority given to him. In this case the principal can either disown the act making the agent personally liable to the third party or adopt the benefit and liabilities of the contract made on his behalf by ratification of the act. Under the Contract Act ratification has been dealt with from §196 to §200.

By virtue of ratification all the parties are placed at the position similar to the one which they would have occupied if agent had an authority to perform the acts. Hence the concept of ratification is said to relate back to the time of contracting and is said to have a retrospective effect expressed by the maxim omnis ratibahito retrotrahitur et mandato priori aequiparatur . [5]

Care must be taken to not confuse ratification and consent. Consent is an express or implied agreement to waive the right of avoiding the act done by the agent and precedes the transaction between the agent and the principal. Ratification on the other hand takes place after the ratification.

Ratification can be both express and implied as stated under §197 of the Contract Act. Express ratification cannot be said to be complete until it is communicated to the agent till then it is capable of being revoked. Implied ratification on the other hand can be inferred from silence or mere acquiescence. In both the case the ratification need not be communicated to the third party. [6]

RATIFICATION:WHAT IS IT AND WHO CAN RATIFY

When the agent acts outside the scope of his authority on the behalf of the other (the supposed principal) then the principal may either ratify the act or disown it. If the act is disowned then the agent is personally liable to the third party and no liability rests on the principal. However, if the act is ratified, then the liability shifts from the agent to the principal and then the principal is liable to be sued and also attains the capacity to sue the third party.

When one acts on behalf of the other person without the authority of the person assuming to act his agent then the person on whose behalf the act has been done by ratifying the act, make it as valid and effectual, as if it had been originally done with the authority.

The concept of ratification is said to relate back to the time of contracting and is said to have a retrospective effect expressed by the maxim omnis ratibahito retrotrahitur et mandato priori aequiparatur. [7] By virtue of ratification all the parties are placed at the position similar to the one which they would have occupied if agent had an authority to perform the acts. Ratification is not deemed as a new contract in terms of the old one. It is the adoption of the old contract itself, in its previous form as if it were made with previous authority. It amounts only to endorsing the unauthorized the authorised acts of the agent. [8]

There are two views with respect to the ratification. Professor Hanbury and Bowstead have promulgated the orthodox view that the ratification is exactly as the same as the prior authorization and hence is the retrospective creation of the principal agent relationship. However on the other hand Professor Seavey does not believe in the same and argues that ratification is quite distinct from the creation of agency who proposed that the “So far from being the creation of power in an agent, the ratification is the exercise of the power created in one who is not a principal, by one not an agent, but who purports to be one”. [9]

The Basic principles of ratification have been dealt below.

The agent must act in the name of the supposed principal

In the case of ratification it is imperative that the agent was not acting for himself but in the name of the supposed principal. Moreover there should be an express intention communicated to the third party that the agent is acting on behalf of the supposed principal. In the absence of such an express intention the act cannot be ratified. In the case of the Keighley Maxsted & Co. v. Durant [10] it was held that –

“Obligations are not to be founded upon undisclosed intentions”.

It was further stated that

“To establish that a man’s thoughts unexpressed and unrecorded can form the basis of the contract so as to bind other persons and make them liable on a contract they never made with persons they never heard of, seem a difficult task”.

Not following the above doctrine may lead to confusion and undesirable results unfair for the third party. The proposition to allow ratification in the case when the agent enters into a contract with the third party with no intention to do so on behalf of the supposed principle and then the supposed principle is allowed to ratify should be rejected. If ratification was allowed in such cases then it would allow too easy interventions upon a contract by a person, in truth not connected with it and uncontemplated by the purported agent, who simply found it to be convenient and to his advantage to adopt the transaction [11] . Conversely, however when the agent intends to act for himself but purports to act for the agent then the principal can ratify.

The person on whose behalf the act is done should be in existence, ascertainable ,capable and competent

The general rule is that the ratification must be by an existing person on whose behalf the contract might have been made at that time [12] . Ratification must be by an existing person on whose behalf the contract might have been made at that time. The act can be ratified only by a person who at the time of the formation of the contract was in existence, ascertainable and was himself capable of entering into the contract [13] . In the absence of such a principal, there will be no agency and the act cannot be ratified and the agent will be personally liable to the third party with whom the contract has been entered into.

This is issue is primarily dealt in the cases when the contracts are made on the behalf of the companies which have not been yet registered. Usually the promoters of the prospective company enter into a contract on its behalf even before its corporation. In such cases it is not legal for the company to ratify the act after incorporation because the corporation was not in existence at the time of entering into the contract. [14]

The fundamental principle with regards to the competency is that the person on whose behalf the act was done must be have been capable of doing it. The person ratifying at the time must be competent both ay the time of the formation of the contract and also at the time of ratification. It has been stated that :

Ratification is in law treated as equivalent to a previous authority and it follows that as a general rule, a person or a body of persons not competent to authorize an act, cannot give it validity by ratifying it. [15] .

Transactions made on behalf of a minor by his guardian are required to be ratified by him on becoming major with the full knowledge of the nature and the effect of the transaction. In this regard it has been laid down that [16] :

It is a transaction in a state of suspense, its validity or invalidity is only determined by the minor adopting it after he has attained majority, though the effect of the transaction will date back to the date of the inception of the contract. If he accedes to adopt it then the transactions become valid from the inception otherwise it will be treated as void and of no effect from the very commencement.

Moreover neither a minor can ratify an act while he is still under age nor can a mentally incapable person nor a person who is an alien enemy even if he was not so at the time when contract was entered into. [17] Therefore, as stated before, the person should be competent both at the time when the contract was entered into and also at the time of ratification.

Acts capable of ratification

Every other act may be ratified other than one which is void, provided that it was done by the principal himself. [18] A transaction which is void ab-initio cannot be ratified [19] . E.g. if the board of directors ratify a contract entered with the third party but the contract is in contravention with the laid down constitution of the corporation then the contract is void- ab initio and hence cannot be ratified [20] .

Moreover the contracts which have been expressly forbidden by the principal who later ratifies the act or by law cannot be ratified. Also the option of ratification can be held to be capable of being exercised within a reasonable time of the act purported to be ratified and not after the expiry of the period for which the option was open. [21]

A contract may be ratified even though it was made by the agent in the fraud of the principal. In Bezonji Byramji & co. v. central bank of India ltd [22] the agent who had the authority to draw bills drew some fraudulently which was then subsequently later ratified by the principal. The principal was held to be liable for the bills.

Where the agent and the third party are able to rescind their transaction prior to the act being ratified so that there nothing remains to be ratified then the ratification stands inoperable. Moreover if the third party knows that the transaction is subject to ratification then there will be no contract until the ratification is communicated to the third party. [23]

Form of ratification : Eexpress and implied

Section 197 of the Indian Contract lays down that ratification may be implied or express similar to the granting of authority.

An express ratification within the meaning of this section cannot become complete until it is communicated to the agent and till then it is liable to be revocated [24] . An express ratification must be evidence either by clear adoptive acts or by equivalent acquiescence. Thus in the case of express ratification the issue is not what the principal intended to do but what he did such that his acts are conclusive evidence of his intention. Since an authority to execute a contract need not be in writing it follows that the same principle applies for ratification and hence ratification also need not be in writing.

Express ratification, however will be comparatively rare and the acts will usually be ratified from conduct or words which constitute implied ratification. However these words or conduct should be unequivocal and hence should not lead to different inferences upon interpretations. Such reasoning has been given to protect the principal from being too easily being held liable as having ratified the act. [25]

When an agent acting for and on behalf of another stipulates a profit for the principal under the contract and the principal without demur avails himself of that benefit, the law implies a ratification of that contract on behalf of that principal by conduct. [26] Other example of implied ratification includes suing on the basis of the act or omission to disaffirm transaction within a reasonable time [27] . In case of an agent exceeding his authority mere silence or acquiescence can be implied to be ratification. [28] Similarly where the agent’s authority to mortgage his principal’s property is not proved but it is proved that the principal was well aware of the transaction going on and the money raised by the mortgage was received by the principal, the mortgagee would be entitled to recover the property from the principal.

Ratification by acquiescence is another type of implied ratification. In the case of ratification by acquiescence it need not be necessarily proved by positive acts of adoption. If the principal having the knowledge of all the material facts and knowing that he is being regarded as the principal does not take any step to disown that character or does not object or notify of his dissent to the agent’s unauthorized act within a reasonable period of time then the unauthorized act shall be presumed to be ratified [29] .

LIMITATIONS

It is not enough for the principal to approve the acts of the agent for the transaction to be a valid one. In some cases, due to lack of certain factors, the ratification of the principal and insufficient. Sections 198 [30] and 200 [31] of the Indian Contract Act deal with the limitations to the powers of ratification by the principal with respect to actions of his agent. They state that imperfect knowledge of the agent’s act is an impediment to legitimate ratification. Furthermore, the effect of ratification should not be such that it hurts the interests of third parties to the contract.

According to Lord Russell, [32] previously unauthorized acts to be validly ratified needed to fulfil two conditions. Firstly the act or acts must have been done for and in the name of the supposed principal. Secondly, the principal must have full knowledge of the actions of the agent or make “such an unqualified adoption” that it may be inferred that the principal is willing to suffer any and all consequences of the act/acts irrespective of whether they be beneficial or detrimental.

This reasoning was closely followed in the Surendra Nath case [33] where the plaintiff was trying to enforce a property deal that he claimed was sold to him by the defendant’s son, acting for the defendant. Justice D.N. Mitter relied upon the conductof the defendant as well as a letter sent by him to the plaintiff which stated, “I don’t know what conversations were there with you… But when Sriman Felu (the defendant’s son) has given you his word then action will be taken accordingly… no efforts will be spared to complete the transaction at the earliest date.” The court held this sufficient with other evidence presented to decide that the defendant had given authority to his son in selling the property.

In certain cases people cannot ratify contracts or actions done by agents. One such example is when the ratifying party has no power to ratify the act at the time it was performed on his behalf. A case in point being Boston Deep Sea Fishing Co. v. Farnham. [34] In it, the plaintiff was a English company who were acting as agents for a French shipping firm. A vessel belonging to the principal was harboured in England when the war broke out and France was taken over by Germany. The dispute was regarding whether the English firm who carried out business under the name of the parent firm were liable to pay taxes on the extremely profitable ventures they took during the war years. It was held that the English agents were not liable to pay taxes under the All Schedule Rules of the Income Tax Act, 1918 which stated that the taxpayers were exempted from paying the specified tax unless they were an authorised person “carrying on a regular agency” of the French principal. There could not be an effective legal ratification by the French as at the time of the tax assessment they were to be considered as an alien enemy an incompetent to be the principal of the tax payers as it could not have itself performed the act. Bird v Brown [35] is another example of the principle that the ratifier must have the legal capacity to ratify the act in question.

Another example of invalid ratification is that of contracts which were void ab initio. This was laid down in the case of Mulamchand [36] where the plaintiff was trying to enforce a contract for which he had successfully tendered but was deemed void as it did not follow the provisions of Article 299 of the Constitution which deals with government contracts. Responding to the petitioner’s argument about ratification of contracts, Justice Ramaswami stated, “If the plea of the respondent regarding estoppel or ratification is admitted that would mean in effect the repeal of an important constitutional provision intended for the protection of the general public. That is why the appeal of estoppel or ratification cannot be admitted in this case.”

Similarly prohibited transactions cannot be ratified as they are devoid of any legal effect. [37] A lot of controversy exists about ratification of forgeries. When a person copies or forges another’s signature or seal then such an act is incapable of ratification. In Greenwood v. Martins Bank [38] the appellant could not claim a refund from the respondent bank for paying forged cheques in his name as the husband was aware his deceased wife had forged the cheques and failed to inform the bank he was duty bound to do. But when the agent signs for somebody or uses the seal, in excess of his authority, the act may be ratified. This is because in this scenario the agent is acting for someone else whereas in the previous situation there is no intention to act for a person but to use his or her identity to carry out the individual’s purposes.

An undisclosed principal can never ratify. Lord Justice A.L. Smith in a judgement [39] cited several cases over the last couple of centuries which proved that the position on this point of law was well settled. In the case at hand the appellants had sold wheat to one Roberts, who at no time purported to act on behalf of anyone else, and now wished to recover the amount from the respondents who were later named as principal by the said Roberts who stated it was his intention to act for the respondents at the time of making the purchases. Lord Smith said,

It will be seen that every one of the learned judges whose judgements I have cited from, when dealing with the question of ratification, have always used the following expressions as to when a contract made by an unauthorised agent is capable of being ratified by a stranger. The contract must [i] have “professed” to have been made on behalf of another. [ii] have “purported to have been made on behalf of another. [iii] the agent “must have assumed to act on behalf of another”; every one of those expressions, in my judgement, is wholly inconsistent with an unauthorised agent keeping locked up in his own mind a mere undisclosed intention that another shall afterwards participate in the contract. [40]

Another class of people for whom acts are performed but may not ratify are minors and unauthorised guardians. In Karim Khan v. Marwadi [41] the defendant tried to escape payment towards one Marwadi on the grounds that he was a minor at the time of creating the debt and he was in no position to understand the effect of this transaction. In addition to this, it was carried out by his mother who according to muslim law cannot act as a legal guardian to her son. Justice Bose accepted this contention of the appellant-defendant. “But this (ratification by a minor) pre-supposes a legal guardian for there can be no legal ratification of an act which is void in its inception. Any action, therefore, by a person who is not a guardian and had no authority to act on behalf of the minor, is incapable of ratification.” [42]

Thus it is seen that it is not merely sufficient to ratify contracts. But one must fulfil certain criteria for effecting a valid ratification and this imposes conditions on both the principal in certain cases and on the agent in others.

PERFECT KNOWLEDGE AND RIGHTS OF THIRD PARTIES

It is a characteristic of common law that there must be consensus ad idem or the meeting of minds to form a valid contract. Section 198 of the Contract Act, which states that the principal must have complete knowledge to validly ratify an unauthorised act, underlines the importance of this theory. In fact the Law Commission had recommended a change [43] to the above mentioned section in order to streamline the clause with the position followed by the rest of the common law countries.

This position was aptly demonstrated in the case of Permila Devi v. People’s Bank of Northern India. [44] Lord Romer in his concluding observations remarked that “There can be in truth no ratification without an intention to ratify, and there can be no intention to ratify an illegal or irregular act without knowledge of that illegality.” The decisions made by the English courts in Powell v Smith [45] and Lewis v. Read [46] were also alluded to in the judgement.

The English case dealt with the point whether acceptance of the benefit conferred by the act was irrefutable proof that the principal had ratified the unauthorized act of his principal or any person claiming to act on his behalf. In Powell v. Smith, the principal was unaware that his agent had not paid heed to his instructions, and accepted the outcome of the irregular transaction as part of the normal day to day business he was ordinarily supposed to be in charge of. When confronted in court by liability arising out of this transaction he challenged the presumption of ratification. The courts sided with him and held that as he did not know the transaction was illegal, he could not have said to adopt it in the absence of such knowledge. In Hindustan v Khalsa Bank [47] the judiciary laid down that the burden of proof as regards the knowledge requisite for valid ratification should be on the party that depends on the ratification.

As regards the effects of ratification on third parties, section 200 of the Indian Contract Act [48] lays down that ratification cannot adversely affect the rights enjoyed by, or otherwise injure other parties. But this section was deemed inadequate in today’s commercial scenario and the law commission of India had made a recommendation [49] as regards changing the present clause.

This is in line with the decision in Chettiar v. Krishna Rao. [50] The court had to read beyond the letter of the law mentioned in the Act. The verdict stated that s. 200 was not exhaustive and that certain general precedents and principles were to followed no matter what the provisions of the Act stated. One such fundamental principle is that ratification cannot apply when the rights of third parties get affected. The usual effect of ratification that states the act of ratification relates back to the time of performing the act [51] does not apply in