In this post, We will discuss the relations of principal and agent with third person in detail.
When an agent acts on behalf of the principal, he creates relationship between the principal and the third person. In a contract of agency, an agent deals with the third parties on behalf of his principal. He enters into contracts with the third parties and is responsible for his acts to the principal.
Liability of the Principal
For contracts entered into through an agent, the principal becomes bound towards a third person as if he entered into the contract himself. Section 226 makes the following provision regarding the enforcement and consequences of contracts entered into through an agent :
“226. Effect of agency on contracts with third persons.- Contracts entered into through an agent and obligations arising from the 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 and the acts done by the principal in person.”
The Section has been explained with the help of the following illustration:
(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.
(b) A being B’s agent, with authority to receive money on his behalf, receives from C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B.
Authorized and Unauthorized acts
Principal’s liability for various kinds of acts has been noted above. It has already been noted that the principal is liable for such acts of the agent for which the authority has been conferred upon him. Such authority may be ‘Express’ or ‘Implied.’ The principal’s liability also arises for acts done in a situation of ‘Emergency.’ Principal can also be made liable towards third person on grounds of ‘Estoppel’. Even if the acts are done without the principal’s authority, he becomes bound when there is ratification of such acts by him. Apart from that, there is a presumption of agency in ‘husband-wife’ relationship so as to make the husband liable for the acts of his wife.
In addition to the kind of acts mentioned above for which, as it has already been discussed earlier, a principal is liable, the question of principal’s liability in various other situations may also arise. Herein below are being discussed various other aspects of principal’s liability-
1. When agent exceeds authority;
2. When agent receives notice on principal’s behalf;
3. When agent commits a fraud or some other wrong against a third person.
1. Principal’s liability when agent exceeds authority
A principal is bound only for such acts of the agent which are within the authority of the agent. If the agent’s act is in excess of the authority, the principal is not liable for the same. Sometimes a part of the act done by the agent may be within the authority and the other part outside it. If the two parts can be separated, then the principal is bound by such part only as is within the authority, and he is not liable for the part of the act which is outside the authority. If the two parts cannot be separated, then the principal is not bound to recognize the transaction.
Position when the authorized and unauthorized acts are separable
Section 227 explains the position when the acts done by the agent within the authority and those outside it can be separated. The provision is as follows:
“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.”
The provision has been explained by the following illustration:
A, being owner of a ship and cargo, authorizes B to procure 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.
The point may be explained by referring to the decision of the Kerala High Court in Ahammed v. Mamad Kunhi A.I.R. 1987 Ker. 228 In this case, an agent was authorized by power of attorney to sell half right over certain property. He, however, entered into an agreement with purchaser-plaintiff to sell the entire property. The authorized and the unauthorized portions were separable. It was held that specific performance of that half portion of the property could be claimed by the purchaser under the Specific Relief Act, in respect of which the authority for sale was given to the agent.
Position when the authorized and unauthorized acts are not separable
According to Section 228, where an agent does more than he is authorized to do, what he does beyond the scope of authority cannot be separated from what is within it, the principal is not bound to recognize the transaction. For instance, 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.
2. Principal’s liability for notice to the agent
According to Section 229, 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 person have the same legal consequence 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 the 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.
3. Principal’s liability for agent’s fraud, misrepresentation and torts (Section 238)
When an agent, acting in the course of the principal’s business, makes misrepresentation or commits a fraud, it has the same effect on agreements made by such agent as if such misrepresentation or fraud had been made, or committed by the principal. Section 238 contains the following provision in this regard :
(i) Misrepresentation made, or frauds committed by agents acting in the course of their business for their principals, have the same effects on agreements made by such agents as if such misrepresentations or frauds had been made, or committed by the principals;
(ii) But misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals.
If the agent acts in the course of the principal’s business that entitles the third person to avoid the contract on the grounds of fraud or misrepresentation. The following illustrations to Section 238 explain the provision :
(a) A, being B’s agent for the sale of goods, induces C to buy them by 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.
Vicarious liability of the principal
Section 238 provides that when there is fraud or misrepresentation by an agent while making an agreement on behalf of the principal, apart from affecting the validity of the contract, an agent’s fraud or wrongful act makes a principal liable if the agent is acting in the course of the principal’s business. Principal’s liability is based on the rule “Qui facit per alium facit per se”, which means that the act of an agent is the act of the principal.
The point may be explained by referring to the case of Lloyd v. Grace, Smith & Co. (1912) A.C. 716. In this case one Mrs. Lloyd, who owned two cottages but was not satisfied with the income from them, went to the office of Grace, Smith & Co., a firm of solicitors, to consult them about the matter of her property. She was attended by the firm’s managing clerk. The managing clerk, who was acting as firm’s agent, advised her to sell the two cottages and then invest the money in a better way. She was asked to sign two documents, which were supposed to be sale deeds. In fact, the documents got signed were gift deeds in the personal name of the managing clerk. The managing clerk then disposed of the cottages and misappropriated the proceeds. He had acted without the principal’s knowledge and solely for his personal gain. It was held that since the agent was acting in the course of the principal’s business, the principal was liable for fraud.
Apart from fraud and misrepresentation, the principal is also liable for torts committed by the agent. Thus, if an agent drives negligently, his principal will be vicariously liable for the same.
Personal liability of Agent
As a general rule, when an agent acts on behalf of his principal in his dealings with a third person, a contractual relationship between the principal and the third person is created and the agent is not personally liable. It is the principal who is liable to the third person. Neither the agent can personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. As an agent acts for and on behalf of the principal prima facie a suit for specific performance is not maintainable against the agent. This rule is contained in Section 230. This rule is subject to a contract to the contrary. Section 230 is as follows:-
“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.”
According to Section 230, an agent is presumed to have consented to be personally liable in the following cases :-
(1) Where the contract is made by an agent for the sale or purchase of goods for merchant resident abroad;
(2) Where the agent does not disclose the name of his principal;
(3) Where the principal, though disclosed, cannot be sued.
In the three exceptional cases mentioned above, the presumption is that the agent agrees to undertake personal liability. The personal liability of the agent also arises in certain other situations, i.e.,
(4) When there is a contract for the agent’s personal liability;
(5) When the agent makes a breach of some legal obligation;
(6) When he untruly represents that he has an authority to act on behalf of the principal.
An agent is merely an extended hand of the principal and cannot claim independent rights.
In Prem Nath Motors Ltd. v. Anurag Mittal A.I.R. 2009 S.C. 567, the Apex Court dealt with the relationship of agent and principal and held that in view of the provisions of Section 230 of the Indian Contract Act, 1872, an agent was not liable for the acts of a disclosed principal subject to a contract to the contrary.
“When the relationship of principal and agent is established”, the Court ruled that the agent could not be sued when the principal had been disclosed.
In Southern Roadways Ltd. Madurai v. S.M. Krishnan A.I.R. 1990 S.C. 672, the issue before the Supreme Court was whether the possession of the agent could be termed to be the possession of the principal for all purposes including the acquisition of title. Deciding the issue, the Court held that-
agent who receives property from or for his principal, obtains no interest for himself in the property for the reason that possession of the agent is the possession of the principal and in view of the fiduciary relationship, the agent cannot claim his own possession.
It is thus, well settled that suit does not lie against an agent where the principal is known or has been disclosed.
Likewise, where the agent had received applications with cheques drawn in favour of the principal, for the delivery of cars, the agent would not be liable in case the applicants neither got delivery of the cars nor refund of amount paid.
(1) When agent acts on behalf of a foreign principal
When an agent has entered into a contract for the sale or purchase of goods on behalf of a principal resident abroad, the presumption is that the agent undertakes to be personally liable for the performance of such a contract. The object of this provision is to avoid hardship to a third person which would be there in suing such a principal, or enforcing a decree against him. The presumption that in such a case the agent is personally bound can be rebutted by a contract between the third person and the agent.
In Midland Overseas v. CMBT Tana A.I.R. 1999 Bom. 401, it has been held that if the circumstances indicate that the agent acts on behalf of a principal resident abroad, but does not undertake to be personally liable, then the agent’s personal liability does not arise.
In this case, the agent had acted on behalf of a foreign principal who was named and disclosed. Moreover, while contracting, the agent had not undertaken any personal liability. Under these circumstances, the agent could not be sued personally, nor could he be made personally liable for the breach of contract. Therefore, it was further held that the plaint against such an agent could be rejected under Order 7, Rule 11 of the Code of Civil Procedure.
Likewise, in Jet Air Pvt. Ltd. v. Makers & Sellers Union A.I.R. 2008 NOC 669 (NCC), it was held that an agent of an International Air Carrier, where carrier carried cargo and delivered it, without collecting original documents from the consignee, could not be sued, since he was merely selling, regulating and monitoring cargo bookings for the principal.
Option to sue foreign principal or Indian agent
Under Section 230, the plaintiff has an option to sue either the foreign principal or the Indian agent. He cannot sue both of them.
In W.B. Essential Commodities Supply Corp. Ltd. v. Koren T.T. Corpn. A.I.R. 2002 Cal. 211, there was a contract of carriage of goods from port outside India to port within India. Goods landed in India were in short quantity. For short landing of goods the plaintiff sued the foreign principal. Thereafter, the plaintiff filed another suit against the Indian agent.
It was held that when an action was brought against the foreign principal, Indian agent was automatically discharged from the liability. The plaintiff did not have a right to sue both the foreign principal and the Indian agent.
Agency Coupled with Interest
An agent coupled with interest has a right to sue. Such agencies are contemplated under the laws of contract. In Tashi Delek Gaming Solutions Ltd. v. State of Karnataka A.I.R. 2006 S.C. 661, the respondent State made a declaration, in the exercise of power conferred under the Lotteries (Regulation) Act, 1998, to put ban on Internet lotteries carried out by other States in the State of Karnataka. As a consequence, the appellants who were appointed agents of the States, were to lose a huge amount of money which they had invested, besides they would be deprived of their right to carry on business. The question which arose for consideration was as to whether the appellants herein had any independent right to question the validity of the said notification imposing ban by the State of Karnataka.
Holding that in certain situations, an agent coupled with interest might be sued as regards his own liabilities independent of his principal, he might in his own right maintain action if by a statutory provision his right to carry on his business was affected. Since, the agent could be prosecuted for violation of the terms of notification, he could challenge the validity thereof. The Court ruled that access to justice being a human right; it would not be correct to say that an agent could enforce his rights only through his principal and not independently.
Holding that the ordinary rule laid down in Section 230 of the Contract Act, 1872 which reads as “In the absence of any contract to the contrary, an agent cannot personally enforce contract entered into by him on behalf of his principal, nor is he personally bound by them”, in case of an “agency coupled with interest”, it was settled law in England and as observed by Pollock and Mulla :
“The like rule is laid down by Indian Courts that where an agent enters into a contract as such if he has an interest in the contract, he may sue in his own name. This is not a real exception to the rule laid down at the beginning of the Section, the agent being in such a case virtually a principal to the extent of his interest in the contract.”
In M/s. Link International v. Mandya National Paper Mills Ltd. A.I.R. 2005 S.C. 1417, the respondents purchased from U.K. Company a Suction Press Roll Machine and in that transaction the appellants had acted as agents of the U.K. Company. The U.K. Company chose not to correspond directly and routed its correspondence through the appellants. The order placed was for a Suction Press Roll Machine but what was supplied was merely the shell of a Suction Press Roll Machine and a save-all tray. In the suit for specific performance of the contract or in the alternative for damages, the plaintiffs contested, inter alia, that they being agents of a disclosed principal could not be made personally liable.
The Apex Court held the appellant liable for the loss caused to the respondent. Irrespective of the fact as to whether the contract was entered into by the appellant on behalf of the Foreign Company or it was a direct contract, the Court said that Section 233 of the Indian Contract Act, 1872 permitted the respondents to recover either from the agent or from the principal or from both.
(2) When agent acts for an Undisclosed Principal
Another exceptional situation, when an agent is presumed to be personally liable according to Section 230, cl. (2), is “where the agent does not disclose the name of his principal.” When the agent discloses that somebody is the principal but he does not disclose his name, there arises a presumption that he himself undertakes to be personally liable.
When the agent does not disclose that he is somebody’s agent, i.e., he contracts in his own name, he is himself bound by the contract with the third person. When the principal is undisclosed, the liability under Section 230 is of the agent only and the principal cannot be sued in such a case.
Right of undisclosed principal to require performance
According to Section 231, 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.
Right of third person against undisclosed principal
If the principal wants to obtain performance of the contract, he can do so subject to the rights and obligations between the agent and the third person. When the third person is innocent and ignorant that the agent was acting for a principal, if the principal wants performance of the contract, the rights of such third person are protected. Section 232 contains the following provision in this regard :
“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 rights and obligations subsisting between the agent and the other party to the contract.
Illustration
A, who owes 500 rupees to B, sells 1,000 rupees worth of rice to B. A is acting as agent for C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set off A’s debt.”
So far as the third person is concerned, according to Section 231, he has, as against the principal, the same rights as he would have had against the agent if the agent had been the principal. If, however, the principal discloses himself before the contract is completed, then the other contracting party may refuse to fulfil 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.
(3) When the principal, though disclosed, cannot be sued
Another exceptional situation, when the agent is presumed to have agreed to be personally liable, as provided in Section 230, cl. (3) is “where the principal, though disclosed, cannot be sued.”
When the principal is incompetent to contract, e.g., he is a minor, a contract entered into on his behalf cannot be enforced against him. In such a case, the agent is personally liable in respect of that contract. Similarly, if the directors of a company which has yet to be formed, make a contract on behalf of the non-existent company, they incur personal liability.( Kelner v. Baxter, (1866) 2 C.P. 174)
This provision does not create the liability of an agent, if the principal, who cannot be sued, has entered into a contract directly with the third person. It covers only such cases where the agent enters into a contract on behalf of a principal, and he discloses the name of the principal, but the principal cannot be sued. The decision of Union of India v. Chinoy Chablani & Co. A.I.R. 1982 Cal. 365, explains the point.
In Union of India v. Chinoy Chablani & Co. A.I.R. 1982 Cal. 365, on behalf of the plaintiffs, i.e., the Union of India, the Mineral and Metal Corporation of India Ltd. made an agreement with the Black Sea Steamship Company of U.S.S.R., whereby the said shipping company agreed to carry a consignment of some fertilizers from the port of Odessa in U.S.S.R. to any port in India. The respondents, i.e., Chinoy Chablani & Co., were the steamer agents in Calcutta for discharging the said consignment. When the cargo was discharged, certain bags containing the fertilizers were found cut and torn and certain quantities contained sweepings only. This loss to the plaintiffs had occurred due to the negligence and wrongful acts of the carriers. The plaintiffs sought to claim a sum of Rs. 73,285 as damages from the respondents, i.e., the Steamer Agents, and contended that since the Shipping Company belonged to the Soviet Government and the same could not be sued in India, the agents of the Shipping Company in India should be liable for the same under Section 230, clause (3). It was held that in order to make the agent liable under this provision, the first prerequisite is that there must be a contract entered into by an agent on behalf of the principal. Since in this case, the contract had been entered into by the principal (Shipping Company) with the Union of India directly, the question of liability of Shipping Agents did not arise, and they were not liable for the same. It was observed that clauses (1), (2) and (3) of Section 230 should be read together and just as in clauses (1) and (2), it is clearly mentioned that such a liability of the agent arises when he enters into a contract on behalf of the principal, the same is necessary under clause (3) also.
(4) When there is a contract for the agent’s personal liability
Section 230 which provides that an agent can neither enforce a contract nor is personally liable for the same begins with the words “in the absence of any contract to that effect.” It means that whenever there is a contract indicating agent’s personal liability, he can be made personally liable. The above mentioned three exceptional situations when the personal liability of the agent arises are mere presumptions when the agent is deemed to have agreed to be personally liable. These situations are not exhaustive. There may be many other cases also where it may be shown that the agent agreed to be personally liable. In Alliance Mills v. India Cements Ltd. A.I.R. 1989 Cal. 59, the agent entered into a contract for the purchase of goods in his own name describing himself as the purchaser. He did not disclose that he was acting as an agent. The contract note itself cast all obligations on the purchaser. It was held that in such a situation, the agent could personally enforce the contract, and also could be made personally liable for the same.
(5) When an agent makes a breach of some legal obligation
When there is some legal obligation such as contractual obligation or a statutory duty cast upon the agent, he must fulfil the same, otherwise he renders himself personally liable for the breach of such an obligation. Similarly, when the agent commits a tort against a third person, that also creates his personal liability for the consequence thereof. In Nepal Food Corporation v. U.P. Import & Export Ltd. A.I.R. 1988 Cal. 243, the plaintiff loaded rice in a vessel for carriage by sea. The agent of the owner of the ship who was under a contractual as well as statutory obligation to issue the bill of lading withheld the same. It was held that by doing so, the agent had not only made a breach of his contractual duties but also committed the tort of conversion. He along with his principal, i.e., the ship owner was held to be liable for damage in respect of the loss suffered by the consignor as a consequence of the delay in the issue of the bill of lading.
(6) Liability of pretended agent
When an agent having no authority to act as an agent does so, the person on whose behalf the act is done, i.e., the principal has option either to disown the act or to ratify the same. If the act is ratified, the same effects will follow as if the act had been done by prior authority.( Section 196)
If, however, the principal disowns the act, i.e., he does not ratify the same, the pretended agent himself will be liable. Section 235, which contains a provision in this regard, is as follows:
“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.”
When an agent having certain amount of authority, goes beyond the authority conferred upon him, and the third person is misled to believe that the agent has an authority for the act he is doing, then also the agent can be made personally liable for the breach of warranty of authority. The agent is also liable to compensate the principal for the loss suffered by him due to such unauthorized act of the agent.
In Krishan Kant v. Dilip Kumar AIR 2014 Raj 27, the plaintiff had purchased a parcel of land belonging to the defendant No. 1 through defendant No. 2, generally authorised to sell property of defendant No. 1. He had already sold some parcels of land belonging to defendant No. 1, holding special power of attorney. As far the suit property no such power of attorney was given but the defendant No. 2 continued assuring the plaintiff that a formal sale-deed would be duly registered on obtaining a power of attorney by defendant No. 2 from defendant No. 1, who at the relevant time was residing in USA.
Since no power of attorney was given by defendant No. 1 to defendant No. 2, the Rajasthan High Court held that there being no privity of contract between the owner and the vendee, the vendee was held not entitled to relief of specific performance. The defendant No. 2 was held having no implied or ostensible or apparent authority to execute the sale, was held to be liable to make compensation to the plaintiff in respect of any loss or damage which he had incurred under the agreement under Section 235 of the Indian Contract Act, 1872.
Option of the third person to sue the agent or principal
According to Section 233, 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. For instance, 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.
Estoppel against third person
It has been noted above that in certain cases, a third person gets an option to sue either the principal, or the agent, or both of them. This rule is subject to an exception when the third person agrees that he will make only one of them liable and not the other. If he induced such a belief, he is bound thereby. Section 234 contains the following provision in this regard:
“234. Consequences 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 induces 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 the agent or principal respectively.”