QUESTION 1 :

( March 2002 )

Aman, a security officer, had previously arranged a fire insurance policy for

his employer, TG Music Hall. Three days before the policy was due to expire,

Aman renewed it on their behalf even though he had not received any instructions

from them.

One week later, the music hall was burnt to the ground. TG Music Hall

wished to ratify the contract of insurance which was renewed by Aman and submit

their claim for losses to the insurance company.

Advise, TG Music Hall as to the requirements of a valid ratification.

ANSWER :

Based on this case, we can identify that the agency was created or formed by ratification. Ratification means the certification or acceptance by the principal for an act done without authority or exceeding the authority given. This is where the principal has appointed an agent to act for him but the agent exceeded the authority given by the principal to the agent. If the principal later approves of the unauthorized act of the agent, the principal is said to ratify the action and an agency by ratification is created. It can also occur when a person is not appointed as an agent but acts as if he is an agent of another person. When the principal approves of this unauthorized action, an agency by ratification is created.

Therefore, agency by ratification may arise in the following situations:

a) When an agent, who was expressly appointed by the principal, has exceeded his given authority, or

b) When a person, who has no authority to act for the principal, has acted as if he has the authority to act on behalf of the principal.

If any of the above situations occurred, the principal has a choice either to reject or accept the contract which had been made on his behalf. The principal has the right to reject as he never gives the authority to act on his behalf. If this is the case, the agent or the person is personally liable for the contract. On the other hand if the principal accepts and confirms the contract this means that he ratifies the act or the contract. As a result, agency by ratification is created and the principal is bound by the contract with the third party.

In other words, agency by ratification can be defined as an agency relation that is created when the principal accepts or ratifies the contract of either:

a) The agent who has exceeded his given authority, orb) A person who is not an agent but has acted as if he is the agent of the

principal.

Section 149 provides that:

‘Where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or to disown the acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.’

The ratification can either be express or implied as stated in section 150, ‘Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.’

Effect of Ratification:

The effect of ratification is to render the render the contract as binding on the principal as if the agent had been properly authorized beforehand. The principal is bound by the contract retrospectively, that is, the contract is effective from the date when the original contract was made by the agent, not from the date of the ratification by the principal.

In the case of BOLTON & PARTNERS v LAMBERT, an offer by the defendant to sell some sugar works was accepted by the managing director of a company. The managing director acted as agent of the company but without its authority. The defendant then withdrew his offer before the company ratified the manager’s acceptance. It was held that the contract is effective from the date when it was made, not from the date it was ratified by the principal. Hence the defendant bound by the contract with the company.

However, there are some conditions to be fulfilled in order for the ratification to be valid. The conditions that related to the case above are as follows:

a) The act or contract done by the agent was unauthorized either without authority or exceeds the given authority.

b) The unauthorized act done by the agent must be one which is recognized by law, not illegal.A contract which is void or illegal cannot be ratified because an illegal or void contract cannot be enforced by the law. Neither can the principal ratify a criminal act. For instance, in the case of BROOK v HOOK , it was held by the court that the principal may not ratify a contract in which his signature had been forged by the unauthorized agent. This is because, forgery is an illegal act.

c) When the contract was made the principal must actually be in existence.When the principal ratifies the unauthorized act of the agent, the ratification takes effect from the time the contract was made by the agent and the principal is bound by the contract retrospectively. Hence, at the time when the contract was made, it is necessary that the principal must be in existence so as to be able to be bound by such actions or contracts made by the agent.This is illustrated in KELNER v BAXTER, it involved a contract to buy a hotel made by an agent on behalf of a company which was not registered or formed. It was held that the contract could not be validly ratified by the company because the company (principal) did not exist at that time.However, for a company, the position in Malaysia is now governed section 35 of the Companies Act 1965. The section allows the company to ratify any contract made on its behalf even though the contract is made before the company itself is formed or registered. The section provides that any contract entered into by a company or its agent prior to its formation may be ratified by the company after its formation. Upon ratification, the company is bound by the contract as from the date the contract was made. Prior to ratification, or if no ratification by the company, the agent purporting to act for the proposed company will be personally liable unless there is an agreement to the contrary.

In COSMIC INSURANCE CORPORATION LTD v KHOO CHIANG POH, the issue was whether the company bound by the contract which was made pre-incorporation of the company. It was held that the pre-incorporation contract was validly ratified by the company and therefore the company bound by it as it complied with the two conditions required by section 41 of the Singapore Companies Act 1967 (equivalent to section 35 of the Malaysian Companies Act). The conditions are:1) The contract purported to have been entered into by a person on

behalf of the company prior to its formation, and2) The company ratifies the contract after its formation.

d) The principal must have contractual capacity at the time when the contract is made and at the time of ratification.According to section 11 of the Contracts Act 1950, a person having the capacity to enter into a contract must be of the age of majority, sound mind and must not be disqualified by the law. Hence, a principal must have all those qualities at the time of making the contract and at the time of ratification in order to be able to validly ratify the contract. This is because, as stated earlier, the principal will bear the liability in the contract from the time the contract is made. Therefore, he must have full capacity. In BOSTON DEEP SEA FISHING & ICE CO v FARNHAM, the Court held that since the principal was an alien enemy at the time, clearly he cannot ratify.

e) The principal must have full knowledge of all material facts at the time of ratification.Section 151 states that ‘No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective’. When the principal ratifies the unauthorized act or contract made by the agent, he must have full knowledge of all facts which are important in the contract as he would be liable for the contract. Facts which are material include names of parties, subject matter, terms and conditions of contract. In MARSH v JOSEPH, a principal had ratified a contract without the full knowledge of all material facts. The court held that the principal was not bound by such contract.

f) The principal must ratify the whole act or contract. He cannot accept only part of the contract.

Section 152 provides that ‘A person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of which the act formed a part’.Hence, a principal cannot ratify or approve only part of the contract. He must ratify the contract in totality or wholly.

g) Ratification must be made within a reasonable time.The principal must ratify the unauthorized act of the agent within reasonable time, as soon as possible. What is reasonable time depends on the circumstances of the case, the nature of the contract, the subject matter of the contract. For instance, in METROPOLITAN ASYLUM BOARD v KINGHAM & SONS, the agent contracted to buy eggs without the authority. The principal tried to ratify the contract one week after it was made. It was held that the ratification was too late.

QUESTION 2 :

( October 1999 )

Notrah instructed Meor, her agent to store 1000 sacks of potatoes, 200 chairs

and 300 desks, which belonged to her in Meor’s warehouse until she could find a

buyer for them. A few days later, Meor discovered that the other perishable goods

kept in the warehouse.

He tried to contact Notrah but was informed that she was out of town and

could not be reached. Meor later sold the potatoes, desks and chairs to Hazlifah

below market price.

Advise Notrah.

ANSWER :