Introduction
An “agent” is someone who is authorized by the principal to carry out certain transactions with the third party in his name. This authority flows from the principal, thus agent should as per instructions of the principal and within the scope of authority. Such authority may either be expressed or implied i.e., can be explicitly conveyed by the principal in oral or written means, or can be implied from the facts and circumstances associated thereto. The scope of agent’s authority extends to undertaking all the necessary ancillary lawful acts. All the acts done by the agent in compliance with the instructions of the principal, make principal answerable to the third party. The contract so formed is of the principal, by the agent, with the third party, therefore he is liable to the third party.
Another way in which agency can be created apart from conferring authority, is by way of ratification. Ratification is essentially an act authorized by the principal which has already been performed by the agent. However, principal has choice either to ratify such act or deny such act. If he chooses to ratify, then such act will have same effect as one done under authority.
The scenario that this write up shall be dealing with is one where there is certain representation made to the third party. If the third party is thus induced to act upon such representation by then the principal is liable. This is called Agency by Estoppel. The principal is estopped from going against the earlier representations made by himself or by his agent.
Agency by Estoppel
A principal is estopped from retracting the representations made by him in course of a transaction with the third. If an impression is so made that the person dealing with the third party is duly authorized to do so, then principal will be made liable. This is so because it is a contract of the principal and the third party. Agency by Estoppel protects the interests of the third party. This is not by virtue of a valid contract or because there was meeting of minds of the principal and third party but due to the manifested intentions of the principal which induced the third part. This representation of the intent maybe made by the principal himself or through his agent. This is so because the act of the agent has same legal consequence as the act of the principal as long as done within the scope of authority. Qui facit per alium facit per se is the maxim which essentially means that he who is acting through another is deemed to be acting himself.
Agent’s Ostensible Authority
As per Section 237 of the Indian Contract Act, if an act is done by agent in the mane of the principal, without authority to do so, and principal has also acted such that the third party believed that agent was acting within authority, the principal is bound. This is called agent’s ostensible authority, where it appeared to be an authority but was not in reality.
For example, A is a principal and his agent B, is authorized to get maximum Rs. 5,000/- in A’s name. However, the agent borrows Rs. 10,000/- from a third party in principal’s name. The third party was unaware of the restrictions or bar put on the borrowing capacity of the agent by the principal. Here, principal i.e., A is liable to pay entire amount of Rs. 10,000/- to the third party. This was decided in the case of Jagrup Singh v. Ram Kishan Das. The act here appeared to be an authorized act to the third party.
In case of Ram Pertab v. Marshall, the principal was held liable for the acts done by the agent in excess of authority conferred upon him. This decision of the privy council was backed by the reasoning that third party had sufficient circumstances to reasonably believe that the agent was acting within the authority.
Now, consider a situation in which A, the principal notified the third party that B is his agent and is authorized to act on behalf of A. A instructed B to not settle for less than a particular amount. However, the agent and the third party settled on an amount lesser than that. Should the principal be bound by this settlement? The answer is affirmative because the third party had no knowledge of such verbal instructions and agent was acting within the authority. Now there arises another question that what if agent had other ulterior motives to act in a certain way. The settled authority is that, if the agent acts within the scope of authority, then principal is liable regardless of agent’s motives.
Principal’s Liability-
Situations in which the principal can be held liable
The apparent authority maybe inferred from the conduct of the principal, or by the course of dealings of previous transactions. If the principal has authorized his agent to draw bills in his own name and make payments and this has been done previously too then the principal is bound by such payment for goods so procured. In another such situation in which the principal has authorized the agent to purchase a commodity on credit and has made payment for such arrangement then he will be liable for subsequent transactions of similar nature. However, principal is liable only for the authorized acts, so if the act is unauthorized, then he will not be liable for subsequent transactions even though he had paid for previous one.
So far this has been clearly established that a principal can be held liable for the acts of the agent for which he has authorized. Thus, in cases where Principal has rendered no authority towards the agent, no liability arises. An agent’s own representation cannot bind the principal. Where the agent of the crown without being given an authority sells steel plates, the sale is not binding on the crown because he never authorized and thus no apparent authority arises.
Extent of Principal’s Liability
Even though principal is liable for the acts of the agent, however, there is a certain limit. The authority ceases to exist on termination. Nonetheless, if principal has terminated the agent’s authority, then it is a pre requisite for him to inform the third party in order to be not bound by acts of the agent. If the third party has no knowledge of such termination and he acts on the belief that the agent has the authority, then principal will be held liable. Thus, termination of authority within a private arrangement between the principal and agent will have no effect on the third party. It has to be brought to the knowledge of the third party. In one of the cases where the principal had authorized the agent to purchase certain commodity, he was held liable even after terminating such authority. This was so because the third party had no knowledge of termination of agency and had reasonable grounds to believe that the person acting was a duly authorized agent.
The liability of principal is a fact-based analysis and needs to be judged from surrounding circumstances. In Life Insurance Corporation v Rajiv Kumar Bhaskar, the Supreme Court observed that even though LIC did not employ its employees for purpose of acting as insuring agents but it is implied from the acts of LIC that there was a principal-agent relationship. This was because LIC ‘s conduct gave such apparent impression that agent had the authority to carry out transaction on behalf of LIC, even though he was not employed by LIC as its insurance agent. Thus, there was a creation of apparent authority and LIC was held accountable because all the acts between LIC and customer were carried out through the employee i.e., the agent. To the contrary in Harshad J. Shah v LIC, the agent ‘s act of collecting premium from customers on LIC ‘s behalf was refuted on the ground that there was strict prohibition. As per LIC Act, 1956, the agents were prohibited from doing so and thus there was no actual authority could be established. What further made easier for Salve to argue was the fact that appellant did not argue on lines apparent authority. Thus, LIC was not held liable. Another such situation in which principal can argue his non liability is one where the third party had a knowledge that there were certain restrictions to the agent’s authority. Such knowledge binds the third party in dealing with the agent because he had sufficient knowledge of extent of agent’s authority.
Moreover, as per Section 227 of the ICA, principal is liable only to the extent of the acts he has authorized i.e., authorized and unauthorized act needs to be severed and principal is bound by only the authorized acts. If the act is that the authorized and unauthorized act cannot be severed then the principal has the power to repudiate the entire act. If an act done by the agent is fraudulent and misrepresents certain facts, then principal will be held accountable only to the extent of scope of authority.
Conclusion
Through the above analysis we have established a connection between agency and estoppel. There is no doubt regarding principal’s liability in cases of actual authority. The grey area lies where there is no actual authority but an implied one. We have discussed different scenarios in which a principal can be held liable and in which he cannot be. It is clear from the authorities and provisions cited that the principal is liable for the act of his agent even though he has not expressly conferred such authority. His conduct will estop him from denying the liability. However, for principal to be held accountable by way of estoppel, some of the elements need to be sufficiently established that- a) he induced the third party to act on his representations b) third party had honestly and reasonably believed on such representations c) the agent was acting within the scope of authority. The line of reasoning somewhere seems to be more in favor of the third party even though the principal, in some cases, is equally innocent or disadvantaged. The reason can be the fact that it is the principal who is more intricately connected to the agent.
Author Bio
