Introduction

(Section 226 to 238)

Agent’s Authority : The acts of the agent within the scope of his authority bind the principal. Section 226 of the Contract Act gives statutory effect to the principal by declaring that :

226. Enforcement and consequences of agent’s contract :

Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into the acts done by the principal in person.

Illustrations

(a) A buys goods from B, knowing that he is an agent for their sale, but not knowing who is the principal. B’s principal is the person entitled to claim from A the price of the goods, and A cannot, in a suit by the principal, set-off against that claim a debt due to himself from B.

It is necessary for this effect to follow that the agent must have done the act within the scope of his authority. The authority means his capacity to bind the principal.

Where agent exceeds authority (S 227 & 228)

227. Principal how far bound, when agent exceeds authority

When an agent does more than he is authorized to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority is binding as between him and his principal.

Illustration

A, being owner of a ship and cargo, authorizes B to procure an insurance for 4,000 rupees on the ship. B procures a policy for 4,000 rupees on the ship, and another for the like sum on the cargo. A is bound to pay the premium for the policy on the ship, but not the premium for the policy on the cargo.

228. Principal not bound when excess of agent’s authority is not separable :

Where an agent does more than he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction.

Illustration

A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for a sum of 6,000 rupees. A may repudiate the whole transaction.

Effect of notice to agent (S 229)

229. Consequences of notice given to agent

Any notice given to or information obtained by the agent, provided it be given or obtained in the course of the business transacted by him for the principal, shall, as between the principal and third parties, have the same legal consequences as if it had been given to or obtained by the principal.

Illustrations :

(a) A is employed by B to buy from C certain goods, of which C is the apparent owner, and buys them accordingly. In the course of the treaty for the sale, A learns that the goods really belonged to D, but B is ignorant of that fact B is not entitled to set-off a debt owing to him from C against the price of goods.

(b) A is employed by B to buy from C goods of which C is the apparent owner. A was, before he was so employed a servant of C, and then learnt that the goods really belonged to D, but B is ignorant of that fact. In spite of the knowledge of his agent, B may set-off against the price of the goods a debt owing to him from C.

(Illustration B) :

B  (Principal)                                   A (Agent)

C (Third party, apparent owner)      D (Actual owner)

Principal B told to agent A…. to buy goods….from C(apparent owner)

…Agent A bought it from C…but in the course, he came to know that C is actually not owner….but…but, Principal B is totally ignorant of this fact….. B is not entitled to set off a debt owing to him from C

Acting on this principle of section 229, the Calcutta HC held that, where the secretary of a society was de facto (real) as well as de jure (lawfully) incharge of the affairs of the society, a notice given to him of the fact that a partner of a firm with which the society had dealings had retired, operated as a notice to the society. (Jani Nautamlas Venishanker v. Vivekanand Coop Hsg Soc)

Personal liability of Agent (S230)

(Reference sec 182 : An “agent” is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or is so represented, is called the “principal”.)

(Reference sec 226 : Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into the acts done by the principal in person.)

230. Agent cannot personally enforce, nor be bound by, contracts on behalf of principal

In the absence of any contract to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.

Presumption of contract to the contrary: Such a contract shall be presumed to exit in the following cases-

(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad;

(2) Where agent does not disclose the name of his principal;

(3) Where the principal, though disclosed, cannot be sued.

This is known as the principle of the agent’s immunity from personal liability. The agent may contract to undertake personal liability.

The section further goes on to provide that such contract is presumed in the following cases :-

1. Foreign principal (sec 230(1)) : When an agent contracts for “a merchant resident abroad” there is the presumption that the agent undertakes personal liability.

Tutika Basavraju v. Pary & Co : A company registered in England, and having a place of business in India, has been held to be a foreign principal for the purposes of this presumption and the Indian agent acting for it was held personally liable.

2. Principal unnamed (sec 230(2)) : Where an agent contracts for an undisclosed principal, he definitely is personally liable, being a party to the contract. But when he contracts for an unnamed principal, there is only a presumption of his personal liability.

The presumption may arise even where the agent discloses his representative character, but not the name of his principal.

Accordingly, the honorary secretary oof a school was held personally liable for the rent of a house hired by him in his own name though for purpose of the school. (Bhojabhai v. Hayen Samuel)

But where an agent disclosed his character as the secretary of a club, personal liability could not be imposed on him. (North-Western Provinces Club v. Sadullah)

3. Non-existent or incompetent principal (sec 230(3)) :- An agent is presumed to incur personal liability where he contracts on behalf of a principal who “though disclosed cannot be sued”. An agent who contracts for a minor, the minor being not liable, the agent becomes personally liable.

Rights and liabilities of undisclosed principal (Sec 231 & 232) :-

The rights and liabilities of a principal under contracts made by his agent depends upon whether :-

1. The principal’s existence and name were disclosed by the agent.
2. The principal’s existence was disclosed but not his name.
3. Neither existence nor name of the principal were disclosed.

Where principal disclosed :-

In such cases section 226 applies, according to which the agent’s act and contracts will have the same legal consequence as if the contracts had been entered into and the acts done by the principal in person.

The principal may sue the third party upon the contract & vice versa.

The agent can neither sue nor be sued upon a contract made by him on behalf of his principal.

Unnamed principal ;-

Even where the agent does not disclose the name of his principal, but discloses his representative character, the contract will be the contract of the principal.

Undisclosed principal :-

The doctrine of undisclosed principal come into play when the agent neither discloses the existence of his principal nor his representative character. In such circustances the question arises what are the mutual rights and liabilities of the principal, the agent & the third party.

J. Thomas & Co v. Bengal Jute Baling Co. : Since the agent has contracted in his own name, he is bound by the contract. He may be sued on it and he has the right to sue the third party and the principal is not liable in such cases.

231. Right of parties to a contract made by agent not disclosed

If an agent makes a contract with a person who neither, knows nor has reason to suspect, that he is an agent, his principal may require the performance of the contract; but the other contracting party has, as against the principal, the same right as he would have had as against if the agent had been the principal.

If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfill the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract.

This right of the principal has been described as “anomalous” because it does not fit in any of the established principles of the law of contract.

232. Performance of contract with agent supposed to be principal

Where one man makes a contract with another, neither knowing nor having reasonable ground to suspect that the other is an agent, the principal, if he requires the performance of the contract, can only obtain such performance subject to the right and obligations subsisting between the agent and the other party of the contract.

Illustration

History : A is supposed to give Rs. 500 to B, his personal liability towards B, i.e., third party.

Present : Agent A sells rice worth Rs 1000 to B. But B is not aware nor have any reason or ways to know that A is agent of B and he is selling in the capacity of his agent.

C cannot force B for buying rice without his right to set-off his Rs. 500 which he is supposed to get it from Agent A.

Election by third party :-

233. Right of person dealing with agent personally liable

In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them liable.

Illustration

A enters into a contract with B to sell him 100 bales of cotton, and afterwards, discovers that B was acting as agent for C. A may sue either B or C, or both, for the price of the cotton.

234. Consequence of inducing agent or principal to act on belief that principal or agent will be held exclusively liable

When a person who has made a contract with an agent induce the agent to act upon the belief that the principal only will be held liable, or induces the principal to act upon the belief that the agent only will be held liable, he cannot afterwards hold liable that agent or principal respectively.

In such case, the third party lose his remedy against the agent or the principal.(When he has made final election, he will not be estopped from making a fresh election.

Pretended Agent (S 235) (Holding out) :

235. Liability of pretended agent

A person untruly representing himself to be the authorized agent of another, and thereby inducing a third person to deal with him as such agent, is liable, if his alleged employer does not ratify his acts, to make compensation to the other in respect of any loss or damage which he has incurred by so dealing.

Where a person pretends to act as the agent of another, he may be saved by the principal by ratifying his act. But if no ratification is forthcoming, the pretended agent becomes personally liable to the third party for any loss.

Shet Manibhai v. Bai Rupaliba : The false representation must be the cause of the contract. If the truth is already known to the other party, no liability arise.

The agent himself cannot sue on a contract which he has made pretending to be an agent. This disability has been provided in s 236.

236. Person falsely contracting as agent, not entitled to performance

A person with whom a contract has been entered into in the character of agent, is not entitled to require the performance of it, if he was in reality acting, not as agent, but on his own account.

When a person has, in fact, no principal, yet persuades the other to contract with him as an agent of another, he is estopped from saying that he had no principal, and since the contract was with principal and not with him, he has no locus to sue under that right.

Ostensible or apparent authority ( S 237)

Ostensible or apparent authority is the authority of an agent as it appears to others. It often coincides with actual authority.

Thus, when the board of directors appoint one of their members to be a managing director, they invest him not only with implied authority, but also with ostensible authority to do all such things as fall within the usual scope of that office. …Other people who see him acting as managing director are entitled to assume that he has the usual authority of a managing director. But sometimes ostensible authority exceeds actual authority.

For instance, when the board appoint the managing director, they may expressly limit his authority by saying he is not to order goods worth more than say Rs. 500 without sanction of the board. In that case his actual authority is subject to the Rs. 500 limitation, but his ostensible authority includes all the usual authority of a managing director. The company is bound by his ostensible authority in his dealing with those who do not know of the limitation. Thus, if he orders goods worth Rs 1000, the company is bound to the other party who does not know of the Rs. 500 limitation.

Thus when it is said that an agent’s act was within the scope of his apparent authority all that is meant is that the act appeared to be authorised.

Valapad Coop Stores Ltd v. Srinevasa Iyer, the case before the Kerala HC, it was held that a person having responsibility to carry on the business of the store of a co-op soc must be deemed to have authority to purchase goods on credit notwithstanding that the society had advanced him enough money for the purpose.

The doctrine of ostensible authority is given statutory shape in section 237 of the Contract Act.

237. Liability of principal inducing belief that agent’s unauthorized acts were authorized

When an agent has, without authority, done acts or incurred obligations to third person on behalf of his principal, the principal is bound by such acts or obligations, if he has by his word or conduct induced such third person to believe that such acts and obligations were within the scope of the agent’s authority.

Illustrations

(a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B’s instruction, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract

(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private order from A. The sale is good.

However, a person contracting with the agent has actual or constructive notice of any restriction on the agents ostensible authority, he is bound by the restrictions.

Liability for agent’s wrongful acts. (S238)

Section 238 of the Contract Act lays down the principle by which the liability of the principal for the wrongful acts of the agent is to be determined. The section provides :

238. Effect, on agreement, of misrepresentation or fraud by agent

Misrepresentation made or fraud committed, by agent acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principals;

but misrepresentations made, or frauds committed, by agents, in matters which do not affect their authority, do not affect their principals

Illustrations

(a) A, being B’s agent for the sale of goods, induces C to buy them by a misrepresentation, which he was not authorized by B to make. The contract is voidable, as between B and C, at the option of C.

(b) A, the captain of B’s ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor.

To fix the principal with vicarious liability for the wrongs of his agent, it is necessary that, the wrong must have been committed in the course of the principal’s business. Although the particular act may not be suthorised but, if it is done in the course of carrying on the authorised business, the principal is liable. (A. Thangal Kunju Musaliar v. M. Venkatachalam Potti.).

Lloyed v. Grace Smith and Co : It is not necessary that the act should have been done by the agent for the principal’s benefit. It was ruled that, the only condition of the principal’s liability is that the act in question must be within the course of the agency business.