This article is authored by Parul Kannauje, a fourth-year B.A.LL.B. student of GITAM Law School, Visakhapatnam, during her internship with LeDroit India.
Scope
The aim of this article is to study the concept of ratification according to Sections 196-200 of the Indian Contract Act, 1872. In particular, it describes the means by which one can adopt and validate unauthorized acts on behalf of someone else. The paper focuses mostly on Section 196, which is dedicated to valid ratification, its requirements, and types, retroactivity and limitations, and finally treatment of this matter by the courts of India.
Abstract
This passage outlines the important concept of ratification that is found in the Indian Contract Act of 1872. Ratification is a method by which a person permits their agent to perform an act on their behalf even when the agent was not authorized to carry out the act in question. Section 196 states that the principle allows the principal to either ratify or not ratify the unauthorized act carried out. Once an act is properly ratified, it might have the same effects as when there was authority given. Sections 197 to 200 elaborate on the principles laid out in Section 196 by talking about implied ratification, knowledge of essential facts by the agents, complete ratification of acts and rights of third parties. The courts in India have made it abundantly clear that ratification is to be applied retrospectively but has also emphasized that any act which is not allowed under the law cannot be ratified which would impair the rights of people. This article looks at the concept of ratification and explains it in detail using statutes as well as judicial decisions.
Keywords: Ratification, Agency, Indian Contract Act, Section 196, Unauthorized Acts, Principal, Agent
Introduction
Authority forms the basis of any principal-agent relationship. An agent usually carries out his functions based on the authority given by the principal, and the actions of the agent have implications for the principal. Nevertheless, there are some instances when a person performs acts on behalf of another person even in the absence of authority. Therefore, the law of agency provides a solution to these cases.
This is where the concept of ratification comes into play. Ratification simply means subsequent endorsement of the act done in the absence of proper authority.
This principle is set out in section 196 of the Indian Contract Act, 1872. The provision states that if A acts on behalf of another person without that person’s consent, then the latter may agree to become responsible for the act or reject it. Upon ratification, the act is deemed to have been performed with authority.
Thus, the doctrine affords flexibility in business and agency relationships, but it is limited. Sections 197-200 provide for limitations in relation to the method of ratification, knowledge about the facts, extent of ratification, and matters related to protection of innocent parties.
Meaning and Concept of Ratification
Ratification refers to the acceptance or approval of an act carried out by someone else but without the required authority. The individual with the proper authority of acceptance is called the principal and the person carrying out the act without the authority is called the agent.
For instance, if A makes a purchase on behalf of B without the necessary authority, B can accept this purchase afterward. After B has agreed to the transaction, it is considered as if B has authorized the purchase.
According to this tenet, it provides that the person must be able to ratify an act done on their behalf, after it has been done, upon assessing that it will later be beneficial or acceptable. As stated by the Supreme Court of India in the case of National Institute of Technology, Panna Lal Chaudhary, ratification means, “the rendering of an act already done valid,” and recognizes its retroactive effect. This tenet has been applied over and the other tenets of this principle in Indian jurisprudence.
The Latin phrase usually related to the doctrine is ratihabitio mandato aequiparatur, which means that any later ratification would be equivalent to prior authorization.
Section 196 of the Indian Contract Act, 1872
The primary legal regulation related to ratification is defined in Section 196.
This section provides two ways for someone who has acted without authority to deal with the act:
- The act may be ratified by the agent; or
- The act may be rejected by the agent.
If the principal decides to ratify the act, legal results would be similar as if the agent has had authority to perform the act from the very beginning. The importance of the rule is that it acknowledges the possibility of obtaining authority retrospectively, meaning that the absence of authority at the moment of the act does not prevent the making of the transaction in the future.
Nonetheless, ratification implies that the act must be performed on behalf of the principal. In this respect, the doctrine cannot be used in the case when the person acted in his/her own name without having stated that he/she was acting on behalf of someone else.
Essential Requirements of Valid Ratification
In order for ratification to provide legal effects, there are certain conditions that have to be met.
The Act Must Have Been Conducted on Behalf of the Principal: The first necessity regarding ratification is the fact that the unauthorized act must have been performed on behalf of the individual who wants to ratify it afterwards.
Thus, it is implied that there should be some sort of connection between the unauthorized act and the person who intends to ratify it. A person cannot just ratify an act which is not connected to him/her so as to inflict legal consequences upon some other party.
The Principal Should Have Necessary Legal Power for Ratification: The ratification must occur through a person who actually has power and authority to do that transaction.
The principal cannot be used to assign authority to a person who never had power and capacity to do that act originally. Therefore, ratification can overcome lack of authority in an agent but does not automatically cure absence of a legal power in the principal.
Knowledge of Material Facts: Under Section 198, valid ratification is not possible if a person’s understanding of the facts is materially flawed. This provision safeguards the principal from being held accountable for an act that he has assented to without being aware of its material facts.
For example, if an agent enters into a transaction where liabilities are undisclosed, and the principal agrees to it without understanding those facts, this raises the question of the authenticity of the ratification.
Ratification Should be Connected with the Entire Transaction: Article 199 states that in cases where an unauthorized act is part of a larger transaction, ratification of this act means ratification of the entire transaction. The principal cannot normally agree to the good part of a transaction and reject the bad part. This rule helps to avoid selective implementation and ensures consistency of the doctrine.
Ratification Could Be Express or Implied: According to Section 197, ratification can either be express or implied. Express ratification can be done through a spoken or written confirmation.
In contrast, implied ratification can occur when the actions of the represented party show a desire to accept or approve the relevant transaction.
For example, if an unauthorized person buys items for B and later B sells these items as its own, then this can be considered implied ratification.
Source: Ratification may be expressed or implied – Section 197of the Indian Contract Act, 1872
Express and Implied Ratification
Understanding the difference between express ratification and implied ratification is particularly significant in commercial dealings.
Express Ratification: Express ratification occurs when a principal communicates consent for an act that has not been authorized. This is usually done through writing, resolution, agreement, or some other clear form of acknowledgement.
Implied Ratification: Implied ratification is derived from actions. In some situations, a principal may take action after the fact to show that he has consented to an unauthorized act.
For instance, suppose an agent makes money without the authority of the principal. If the principal later accepts the benefit and acquires knowledge of the circumstances, then the acts may lead to the conclusion that ratification has occurred.
The inclusion of implied ratification in Section 197 means that the use of specific language is not always required where the conduct of the principal has made the adoption apparent.
Source: Ratification may be expressed or implied – Section 197of the Indian Contract Act, 1872
Knowledge of Material Facts and Section 198
The basic principle behind ratification is the idea of consent based on knowledge of the situation or information.
Section 198 prohibits someone from being held liable if they are not informed about any important details regarding consent. This will guarantee that ratification is a real step in the direction of endorsing illegal activities.
This requirement is important mostly in business transactions, since in these situations there are usually many critical aspects, obligations, financial implications, and rights of third parties to consider.
This means that the head must be tactically educated about the relevant circumstances before their actions can be considered ratification from a legal point of view.
The Principle of Whole Transaction Ratification – Section 199
The rule set out in Section 199 states that ratification of a transaction cannot, in general, be divided into components.
Assume there is a transaction consisting of several acts executed by an agent. If the principal accepts one component of the transaction, it will be deemed that the principal ratified the entire transaction.
This principle means that the principal cannot select advantageous components while dismissing the connected obligations.
Protection of Third Parties – Section 200
Despite the flexibility granted to the principal by the doctrine of ratification, it does have limits.
According to Section 200, ratification must not be used to harm third parties. An act done without authority that, if authorized, could injure a third party or deprive him or her of a right or interest cannot be ratified retrospectively. This rule is very important because ratification is basically retrospective in nature; without it, a principal can modify a third party’s legal position after the operation in question took place.
Thus, Section 200 strikes a compromise between the power of a principal to ratify unauthorized acts and the protection of third parties.
The Action of Ratifying and Its Retrospective Effect
Ratification has one of the most important characteristics in relation to its retrospective effect. When a ratification occurs, and the act is deemed valid, the law, in general, deals with the unauthorized act as if the authority existed when the act was first done.
This idea was recognized in the case of Parmeshwari Prasad Gupta v. Union of India by the Supreme Court when an act performed through an invalidly convened meeting was subsequently ratified in a properly convened meeting. The Supreme Court ruled that the ratification was to be considered with respect to the original act.
Therefore, the retrospective nature of ratification is the basis of the doctrine applied.
Important Judicial Judgements
Parmeshwari Prasad Gupta v. the Union of India: The Supreme Court’s ruling in Parmeshwari Prasad Gupta is one of the leading authorities on ratification in India.
The General Manager of the company was dismissed by the Chairman of the company based on a Board resolution that was held in a meeting which was improperly called. At a later properly called meeting of the Board, the resolution was ratified.
The Supreme Court held that the later meeting was competent to ratify the action of the Chairman. The ratification would date back to the date of the original act and, therefore, the termination would be treated as valid from that date.
The case shows that the acts which are not authorized would be treated as valid retrospectively if subsequently done by the proper authority.
High Court of Judicature for Rajasthan v. P.P. Singh: In the case of High Court of Judicature for Rajasthan v. P.P. Singh, the Supreme Court analyzed the impact of later approval of an action occurring previously and disputed on procedural matters.
The ruling shows that ratification may apply retrospectively when a competent authority subsequently endorses the action. The case is noteworthy for demonstrating how ratification can be used in contexts beyond simple commercial agency.
National Institute of Technology v. Panna Lal Chaudhary: The Supreme Court elaborated on the concept of ratification in the case of National Institute of Technology vs. Panna Lal Chaudhary and took into account the previous ruling of Parmeshwari Prasad Gupta.
The concept of ratification was explained by the Court as series of procedures that tarries with respect to a previously performed act. The ruling provides good modern understanding of the basic principle and clarifies why the doctrine of ratification is considered as equivalent to the doctrine of prior authority.
Claude-Lila Parulekar v. Sakal Papers (P) Ltd.: The ruling made by the Court in the case of Claude-Lila Parulekar versus Sakal Papers (P) Ltd. shows an essential limitation of the principle. It has been pointed out by the Court that ratification cannot be applied to rectify an action that is essentially against the basic statutory rule. This means that ratification is capable of rectifying absence of authority but hardly ever overruling requirements of the statutory provisions in this particular case. This is an important distinction because not all unauthorized actions are illegal ones. The former falls within the scope of usage of ratification.
Limitation of Doctrine
There are a few significant constraints to the doctrine of ratification.
In the first place, for ratification to be valid, the person authorizing the action must have the necessary legal proficiency to carry out the process.
In the second instance, for ratification, adequate information about the relevant details should be available in compliance with Section 198.
In the third position, ratification, in accordance with Section 199, usually covers the complete transaction without allowing partial agreement.
In the fourth place, according to Section 200, no ratification can take place in a case where the rights of third parties are impaired or violated.
In the last place, the concept of ratification cannot apply to situations when a prohibition is imposed by law. The case of Claude Lila Parulekar illustrates this essence of ratification.
Thus, ratification may not be taken as a universal remedy for defects in transactions.
Significance of the Doctrine
The application of the doctrine of ratification is required in practical terms in the context of commercial and business relationships.
Modern enterprises use the services of their directors, officers, employees, agents and various representatives to run their business. Therefore, they may act beyond the limits of their authority for such reasons as misunderstandings, formal errors, or urgent situations in business.
If all unauthorized actions were considered invalid without further evaluation, the industry would have to deal with a lot of problems, including countless lawsuits.
The doctrine of ratification offers a means whereby an authorized principal can approve a particular act. Relevant provisions of Sections 198-200 eliminate any possibility of unfairness for the principal as well as other parties to the contract and third parties.
Ratification and the Difference Between Unauthorized Acts and Void Acts
It is necessary to make an important distinction between unauthorized acts and acts that are invalid or prohibited by the law.
Unauthorized acts are those that have been done without adequate authorization. But if the law allows subsequent approval, ratification may remedy the problem.
A void act, on the other hand, is one which has no legal effect due to a more serious cause. Namely, if a law expressly prohibits a certain transaction or demands compliance with a legislative provision, one cannot assume that subsequent approval will turn the illegal act into a legal act.
This distinction is especially relevant in the case of Claude-Lila Parulekar where the Supreme Court refused to accept ratification as a means of getting around the legal requirement of compliance with the law.
Thus, the doctrine should be used very carefully. The issue is not only whether an act has been unauthorized or not, but also why it has been unauthorized and whether the defect can be cured in the eyes of the law.
Conclusion
The doctrine of ratification found in Section 196 of the Indian Contract Act, 1872 plays a significant role in legitimizing unauthorized deeds performed by one person in the name of another. It provides the principal with an alternative of either approving or disapproving the act. For valid ratification, the effect of the act is similar to that of an act that has been approved from the very beginning.
Sections 197 to 200 of the Indian Contract Act describe the principle mentioned in Section 196 and explain the distinction between express and implied ratification, the significance of knowledge about important facts, ratification covering the complete transaction, and the idea about the rights of third parties.
The Indian case law concerning ratification, including Parmeshwari Prasad Gupta v. Union of India case and National Institute of Technology v. Panna Lal Chaudhary case explains that ratification is effective retroactively and cannot be regarded as a universal remedy against unlawful action.
Thus, the doctrine has a balanced stance in the area of agency law. It ensures commercial flexibility while upholding the principles of informed consent, compliance with the law and protection of the rights of third parties. When properly interpreted, ratification does not eliminate illegality as such, but rather offers a legitimate mechanism in order to make an unauthorized act effective as if it were authorized.
