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IAI Actuarial Core Principles · Business Management · Trusts and agency

Suraj Textiles Ltd's managing director signed a supply contract for a large quantity of cotton with a Surat vendor, though the board had never authorised that purchase. After learning of it, the board, with full knowledge of the material facts, wrote to the vendor confirming the contract. Which statement about the legal position is correct?

The company is bound from the date of the original contract. Ratification made with full knowledge of the material facts operates retrospectively, so the unauthorised act is treated as authorised from the start. No fresh consideration or consent from the vendor is needed.

  1. AThe company is bound from the date of the contract because the board ratified the unauthorised actCorrect
  2. BThe company is bound only from the date of the confirmation letter
  3. CThe contract was void and cannot be validated afterwards
  4. DOnly the managing director is bound, since ratification requires the vendor's consent
  5. The company is bound only if the vendor paid additional consideration

Explanation

Under Indian agency law, ratification with full knowledge of material facts has retrospective effect. The principal is treated as bound from the time the act was done. The vendor's consent or fresh consideration is not required.

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