Vicarious liability of the principal

We will discuss the vicarious liability of principal for the acts of its agent in this post.

Principal is vicarious liable for the acts of his agent. Section 238 of Indian Contract Act 1872 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.

The above stated decision was followed in National Bank of Lahore v. Sohanlal A.I.R. 1962 Punjab 534., and the Bank was held liable for the fraud committed by the manager of one of its branches. In this case, the appellant bank used to maintain a safe deposit vault in its Jullundur City branch, where locker cabinets were rented to its customers for the safe custody of the jewellery and other valuables. One key of the locker was given to the renter of the locker, without which the locker could not be opened. There was a master key of the lockers with the bank, which had to be used in addition to the renter’s key for the opening of a locker. As a matter of precaution, the vault was to remain under the joint control of the cashier and custodian or bank manager. The master key and the keys of unleased lockers were also to remain under the joint control of the two bank officers, and when the locker was to be operated, that too had to be done in the presence of two representatives of the bank. Instructions for these precautions had been issued to all the branches of the bank, but contrary to these instructions, the manager of this branch, Baldev Chand, was the sole custodian of the vault, and the keys of the strong room were kept by him personally, and not in any safe. He was also in sole possession of renter’s keys of unleased lockers.

The plaintiffs had rented certain lockers for depositing their jewellery and other valuables in them. They found their valuables missing from the lockers and brought an action against the bank.

The following facts were also established. The manager, Baldev Chand, who had the sole possession of the renter’s keys of unleased lockers had filed off the levers of the locks of the renter’s portion of the lockers, so that now the lockers could be opened even without the help of renter’s keys. The manager, who lived in the upper portion of the bank premises and had the sole charge of everything concerning the lockers had ample opportunity to tamper with the locks of the lockers. These lockers were rented out to the plaintiffs after the manager had done tampering with the levers of the locks.

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It may also be noted here that at the time of renting a locker, the customer had to sign a condition that the bank will not be liable for any loss, etc.

Out of the points raised, there were three main questions to be decided, as regards the liability of the bank for the wrongful act of its agent, viz. :-

1. Could the bank be exempt from liability on the ground that there was an exemption clause in the agreement for renting the locker?

2. Could the bank be held liable as bailee for the jewellery and other valuables kept by the customers in the lockers?

3. Could the bank be held vicariously liable under Section 238, for the fraud committed by its agent?

The bank was held liable. On the above stated points, the decision was as under :-

1. That the term in the agreement exempting the bank was not reasonable, and it could not exempt the bank from liability for fraud of its employees.

2. That the bank was in the position of a bailee, particularly when the lockers rented out to the plaintiffs could be opened even without the keys with the plaintiffs, and the liability of the bank as a bailee was also there. Some American decisions, in which the bank was held a bailee of things kept in safe deposit boxes, were followed in this case.

3. That a principal is liable for the fraud of its agent committed within the scope of his authority, whether the fraud is committed for the benefit of the principal or the
agent. Lloyd v. Grace, Smith & Co., was followed on this point. The position was considered to be covered by the principle of liability of the principal recognized under Section 238, Indian Contract Act.

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The decision of the Bombay High Court in M.N. Shankar v. Maharashtra State Board of Secondary and Higher Secondary Education A.I.R. 1988 Bom. 234, is another example of the principal’s vicarious liability. In this case, 30 students of a school recognized by the respondent Education Board submitted their applications and fees for the Board’s examination with the Headmaster of their school for being forwarded to the Board. The Headmaster forwarded the same through the clerk of the school, who misappropriated the fees and did not deliver those applications to the Board. It was held that the said school, which was recognized by the Board for accepting the students’ fees and the applications, was the agent of the Board, and had express authority to do so, and if in the process of receipt and transmission, any fraud was committed by the school clerk, the Board was liable for the same. The misdeeds of the school clerk were deemed to be the misdeeds of the Board under Section 238 of the Contract Act. In view of the above stated situation, the Board was directed to allow the said students to appear in their examinations and also to declare their results.

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If the agent is not acting in the course of the principal’s business, the principal cannot be held liable for such an act of the agent. In State Bank of India v. Shyama Devi A.I.R. 1978 S.C. 1263, the plaintiff’s husband gave some cash and cheques to his friend, who was an employee in the defendant bank, for being deposited in the plaintiff’s account. The amount and cheques were given to him in his private capacity as a friend and not as Bank’s agent. No proper receipts for the deposits were obtained. The said employee misappropriated the amount. It was held by the Supreme Court that the employee, when he committed the fraud, was not acting in the scope of the bank’s employment and, therefore, the defendant bank could not be made liable for the same.

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.

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