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1. CC/CT: ABP 257; THE LAW OF AGENCY
(Liability of Principal and Agent under the Law of Agency)
Effect of agency of contract with third person
1. Liability of the principal to the third party;
2. Liability of the agent to the third party;
3. Liability of the undisclosed principal;
4. Liability of the pretended agent; and
5. Liability of the unnamed principal
1. 1. Liability of the principal to the third party
The extent of principal’s liability to third parties for the acts of the agent as determined by the
following rules:
(i) When agent acts within the scope of his actual and apparent authority (Sec. 189);
(ii) When agent exceeds his actual as well as apparent authority (Sec. 227);
(iii) Liability for agent’s misrepresentation and fraud (Sec. 238);
(iv) Notice given to agent as notice to principal (Sec. 229);
(i) When agent acts within the scope of his actual and apparent authority
The principal is liable for all acts of agent done within the scope of his ‘actual’ and ‘apparent’
authority. But the fact that a particular act of the agent is in excess of his actual authority does
not effect of principal’s liability. The principal is also liable for all such acts of agent which are
necessary protecting the principal from loss in an emergency. (Section 189 of the Contract Act,
1882)
(ii) When agent exceeds his actual as well as apparent authority
In this case the principal has option either to disown the authorized acts or to ratify the same.
Where he ratifies, he becomes liable for those acts as if he had authorized them originally, but
where he options to disown them, the following rules shall apply:
(a) Where the excess is separable from the authorized portion, the principal is liable only for
the authorized portion. (Section 227 of the Contract Act, 1882)
(b) Where the excess is not separable from the authorized portion, the principal is not bound
by the transaction. In such a case the principal is entitled to repudiate the whole
transaction and the agent shall be personally liable for that. (Section 228 of the Contract
Act, 1882)
(iii) Liability for agent’s misrepresentation and fraud
The principal is liable for misrepresentation made or fraud committed by the agent acting within
the scope of his actual or apparent authority during the course of the agency business. But the
principal is not liable for misrepresentation made or fraud committed by the agent in matters
which do not fall within the scope of his authority. (Section 238 of the Contract Act, 1882)
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(iv) Notice given to agent as notice to principal
The principal is bound by the notice given to or information obtained by the agent in the course
of the agency business. Knowledge of the agent is said to have constructive notice. But where
knowledge is not acquired by the agent in the course of the agency business, it cannot be imputed
to the principal.
2. Liability of the agent to the third party
An agent is presumed to be personally liable, unless a contract to the contrary exists, in the
following cases:
(i) Where the agent expressly agrees;
(ii) Where the agent acts for a foreign principal;
(iii) Where the agent acts for an unnamed principal;
(iv) Where the agent acts for an undisclosed principal;
(v) Where the agent acts for a principal who cannot sued;
(vi) Where the agent exceeds his authority;
(vii) Where there is a trade usage or custom;
(viii) Where agent’s authority is coupled with interest
(i) Where the agent expressly agrees
If an agent, while contracting with the third party, expressly agreed to be personally liable on the
contract, he can be held personally liable for any breach of the contract.
(ii) Where the agent acts for a foreign principal;
Where an agent contracts for the sale or purpose of goods for a merchant residing abroad, he is
presumed to be personally liable. (Section 230 of the Contract Act, 1882)
(iii) Where the agent acts for an unnamed principal
Where an agent acts for an unnamed principal, he is personally liable to the third party, if he
declines to disclose the identity of the principal or if he could not disclose the identity of the
principal, say, because of his sudden death.
(iv) Where the agent acts for an undisclosed principal
Where an agent acts for an undisclosed principal and contracts in his own name, he is personally
liable to the third party. But if the third party comes to know the existence of the principal, he
may hold either the agent or the principal or both of them liable.
(v) Where the agent acts for a principal who cannot sued
Where the agent made a contract on behalf of a principal who, though disclosed and cannot he
sued, then the agent is personally liable to the third party for that. (Section 230 of the Contract Act,
1882)
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(vi) Where the agent exceeds his authority
Where an agent acts exceeds his authority, and in this way he commits a breach of warranty of
authority, he will be personally liable to the third party for the excess part, if it can be separated
from authorized part, otherwise for the whole transaction. (Section 227 and 228 of the Contract
Act, 1882)
(vii) Where there is a trade usage or custom
An agent is also personally liable where there is a trade usage or custom to that effect. For
example, a jobber may hold a broker personally liable as per the custom of trade in a stock
exchange.
(viii) Where agent’s authority is coupled with interest
Where the contract with the third party, which is related to a subject-matter in which the agent
has a special interest, agent is personally liable to the extent of his interest, because he is really
a principal for that interest.
It should be noted that in second, third, fifth and sixth cases mentioned above, the third party can
hold only the agent personally liable and not the principal.
2. 3. Liability of the undisclosed principal
Where an agent, having authority to contract on behalf of another, makes the contract in his own
name (as for he is the principal himself), and he is not disclosed the name of the principal, but
also the fact that there is a principal, his principal is called “undisclosed principal”.
In the case of an undisclosed principal, the mutual rights and liabilities of the principal, the agent
and the third party are as follows:
(i) Since the agent has contracted in his own name, he is liable to the third party
personally. The agent may be sued on the contract and he has the right to sue the third
party, if the undisclosed principal remains undisclosed.
(ii) If the third party comes to know the existence of the principal before obtaining
judgment against the agent, he may sue either the principal or the agent or both.
(Section 230 of the Contract Act, 1882)
(iii) The principal, if he likes, may intervene and sue the third party for non-performance
of contract. But he cannot exercise this right to the prejudice of the third party and the
third party has, as against the principal, the same rights as he would have had as against
the agent if the gent had been the principal. Further, the principal must allow to the
third party benefits of all payments made by the third party to the agent. ……………
(iv)