Define Agency in Business Law

The agency is the agreement in which one party entrusts another party to conduct business
on their behalf. The agency agreement comes in the following forms:
 Express agreement (both oral and written)
 Implication
 Conduct of the principal

1. The Principal should be in Existence

The agent must expressly contract an agent for a principal who is in existence and competent to contract.
No body as an agent can bind by contract a principal who does not exist at the  date of the contract. Thus,
a company cannot ratify or adopt a contract, which was entered into by the promoters on its behalf before
its incorporation.

2. The Agent must have Purported to Act for a Principal

A person can ratify only that which is purported to have been done for him and cannot ratify that which is
purported to have been done for somebody else. Act done by a person on his own account cannot be
ratified. Only when an act is done on behalf of the ratifier, such act can be ratified.

Example: A was authorized by B to buy wheat at a certain price. A, acting in excess of his authority,
bought wheat at a price higher than the price so fixed, in his own name from C. He didn’t disclose the fact
to B also. Subsequently, B ratified his act. But later on, refused to take delivery of wheat due to a fall in
the price of wheat. C filed a suit against B. It was held that the contract could not be ratified as A did
not purport to act as an agent for B.
3. The Principal should have Contractual Capacity
The principal should have contractual capacity both at the time of the contract and at the  time of
ratification. This is because the principal can ratify an act by the agent, provided he himself could do the
act, which he purports to ratify. Thus, when the minor was not in a position to give authority at the date
when acts were performed, he cannot subsequently ratify these acts.

4. The Act should be Capable of Ratification:

The act to be ratified must be lawful and not void or illegal or ultra vires in case of a
company. Accordingly, the shareholders of a company cannot ratify an ultra vires contract made by the
directors.
5. Principal should have Full Knowledge of Material Facts
Sec. 198 of the Act states that No valid ratification can be made by a person whose knowledge of the
facts of the case is materially defective.
So the principal should have full knowledge of material facts.

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.
6. Ratification Cannot be Partial
A contract cannot be ratified partially. This provision is contained in Sec. 199 of the Act, which states,

two parties ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of
which such act formed a part.
Example: A without authority from B, purchased 100 sets of T.V. for him. Subsequently, B discovered
that 80 TVs were good while 20 were defective. B accepted the good T Vs and rejected the defective
ones. In this case, the acceptance of part of the T.Vs amounts to ratification of the whole transaction. And
thus, B is bound to take delivery of all the T.Vs purchased on his behalf, including defective ones.
7. Ratification should be done within a Reasonable Time
The ratification becomes valid only if it is made within a reasonable time after the act to be ratified is
done.
8. Ratification should not Cause any Damage to a Third Person
A ratification is not valid if it causes some damage to a third person or terminates any right or interest of a
third person.

Example: A was holding lease from B, which was terminable on one month’s notice. C, an unauthorized
person, gave notice of termination of lease to A. In this case, the notice cannot be ratified by B so as to be
binding on A.
9. Ratification must be Communicated
There can be no valid ratification of an act unless it is communicated to the other party. Ratifier cannot
keep his thoughts to himself.

10. Ratification Relates back to the Date of the Act of Agent

Ratification relates back to the original dating or making of the act or contract. It has a retrospective
effect. It tantamount to previous authority. It places all the parties in exactly the same position, as they
would have occupied in the case of a precedent authority.