“An agent cannot enter into a contract of guarantee on behalf of his principal.” – Do you agree?

Do
you think the principal can subsequently ratify such an agreement if the agent does enter into such a
contract?

The general rule of contracts is a contract imposes obligations and grants rights to the parties to the
contract. So, the parties to the contract are enforceable to one another. Consequently, the Doctrine of
Privity of contract under the Indian Contract Act, 1872, which talks about the performance of contracts,
says that only parties to the contract have rights to sue/ to be sued by the contract i.e., only the parties
to the contract have the power to enforce the contract.

Now, when an agent enters into a contract, the principal has full right to enforce the contract against his
agent. However, two conditions must be fulfilled first i.e., the agreement must not be outside the scope
of authority of the agent and the agent must appear in the contract on behalf of his principal. This is an
exception to the general rule of the Doctrine of Privity of contracts.

The answer to the question being asked as to whether a agent can/cannot enter into a contract of
guarantee on behalf of his principal is – Yes, an agent can enter into a contract of guarantee on behalf of
his principal, applying the exception to the rule of Doctrine of Privity. If Section 230 of the Indian
Contract Act, is considered in conjunction with this exception to the doctrine, a meaningful statement
could be made. ‘An agent can enter into a contract of guarantee on behalf of his principal but he (the
agent) cannot enforce the contract at his own will nor be bound to do so’.

Subsequently, Section 196 of the Indian Contract Act, 1872, states that if an agent on behalf of the
principal, without prior enlightening of his principal commits an act, the principal may choose either to
ratify or disown it. “If the principal has knowledge of the facts of the contract, a valid ratification can be
made by him. This ratification could be in expressed (oral or written) or implied form” as mentioned in
Section 198 and Section 197 of the Indian Contract Act, 1872 respectively. There could also be a
situation where the principal ratifies an unauthorised act done by the agent on his behalf. If this
happens then the principal has to ratify the whole transaction done on his behalf as in Section 199 of the
Indian Contract Act, 1872.