Principal and third parties; personal liability of the agent

1. Extent of the agent's authority: section 188

An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do that act. An agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting that business. Illustrations: A is employed by B, residing in London, to recover a debt due to B at Bombay. A may adopt any legal process necessary for recovering the debt and may give a valid discharge for it. A constitutes B his agent to carry on his business of a shipbuilder; B may purchase timber and other materials and hire workmen for the purpose.

This is actual authority, express or implied. Section 189 adds authority in an emergency.

2. Ostensible or apparent authority

The principal is also bound by acts within the authority the agent appears to have, where the appearance was created by the principal. Section 237 is the statutory basis: where an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound if he has by his words or conduct induced those third persons to believe that the acts were within the agent's authority. In Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964), a director who had been allowed by the board to act as managing director, though never appointed, bound the company to pay architects he had engaged.

The typical cases: the principal has allowed the agent to act in a way that suggests authority; the principal has given secret instructions limiting an authority usual for such an agent; or the agency has been terminated but third parties dealing with the agent have not been told (section 208). Secret limitations do not bind third parties who did not know of them.

3. Principal bound by the agent's acts: sections 226 to 229

• Section 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 they had been entered into and done by the principal in person.
• Section 227. When an agent does more than he is authorised to do, and the part within his authority can be separated from the part beyond it, only the part within his authority binds the principal. Illustration: A, being owner of a ship and cargo, authorises B to procure an insurance for Rs 4,000 on the ship. B procures a policy for Rs 4,000 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 on the cargo.
• Section 228. Where the excess cannot be separated, the principal is not bound by the transaction at all.
• Section 229. Notice given to or information obtained by the agent in the course of the business transacted by him for the principal is notice to the principal.

4. Misrepresentation and fraud by the agent: section 238

Misrepresentations made, or frauds committed, by agents acting in the course of their business for their principals have the same effect on agreements made by such agents as if they had been made or committed by the principals. Misrepresentations or frauds by agents in matters not falling within their authority do not affect their principals. Illustration (a): A, being B's agent for the sale of goods, induces C to buy them by a misrepresentation which he was not authorised by B to make. The contract is voidable, as between B and C, at C's option. Illustration (b): A, the captain of B's ship, signs bills of lading without having received on board the goods mentioned in them. The contract between B and the pretended shipper is void.

In Lloyd v. Grace, Smith & Co. (1912) a solicitor's managing clerk, who dealt with clients as part of his job, fraudulently induced a widow to transfer property to him. The firm was held liable, though the fraud was for the clerk's own benefit, because it was committed in the course of the business he was employed to do.

5. Undisclosed principal: sections 231 and 232

An agent may contract without revealing that he is an agent at all. 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 performance of the contract; but the other party has, as against the principal, the same rights as he would have had as against the agent if the agent had been principal. If the principal discloses himself before the contract is completed, the other party may refuse to fulfil it if he can show that, had he known who the principal was, or that the agent was not the principal, he would not have entered into it.

Section 232: where the principal requires performance, he can obtain it only subject to the rights and obligations subsisting between the agent and the other party. So a set-off the third party had against the agent can be used against the principal.

Section 233: where the agent is personally liable, the person dealing with him may hold either him or the principal, or both, liable. Once he elects, with knowledge, to hold one exclusively liable, he cannot later turn to the other (section 234).

6. Personal liability of the agent: section 230

In the absence of a contract to the contrary, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. Such a contract to the contrary is presumed in three cases:

• Foreign principal. Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad.
• Undisclosed principal. Where the agent does not disclose the name of his principal.
• Principal who cannot be sued. Where the principal, though disclosed, cannot be sued: for example, a foreign sovereign or ambassador entitled to immunity.

The presumption is rebuttable by the terms of the contract. Apart from section 230, an agent is also personally liable where he expressly agrees to be, where he signs a negotiable instrument in his own name without indicating that he signs as agent, where he contracts for a principal who does not exist (a company not yet incorporated: Kelner v. Baxter, 1866), and where trade usage makes agents of that kind personally liable.

7. The pretended agent: sections 235 and 236

Section 235: a person untruly representing himself to be the authorised 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 for any loss or damage incurred by so dealing. The English equivalent is liability for breach of implied warranty of authority: Collen v. Wright (1857). Liability arises even if the agent honestly believed he had authority. Section 236: a person who has falsely contracted as agent is not entitled to require performance of the contract, even if he was in fact acting for himself.

8. Problem

P appoints A as manager of his shop and tells him privately not to buy goods on credit above Rs 50,000. A buys goods worth Rs 1 lakh on credit from T, a regular supplier, who knows nothing of the limit. P refuses to pay more than Rs 50,000.

Issue. Whether a principal is bound by an act of his agent that exceeds a secret limitation on his authority.

Law. Section 188: an agent carrying on a business may do what is usually done in conducting it. Section 237: a principal who induces third parties to believe acts are within the agent's authority is bound. Sections 227 and 228 on excess of authority.

Application. Buying stock on credit is the usual business of a shop manager. P, by putting A in charge of the shop, held him out as having that usual authority. The limit was secret and T did not know of it. The purchase is a single transaction, so section 227 does not allow it to be split; the question is ostensible authority, not separability.

Conclusion. P is liable to T for the full Rs 1 lakh. P may in turn recover his loss from A for disobeying instructions (section 211).

How this is examined

Typical questions: “When is an agent personally liable?” (section 230 and the other cases), “Discuss the rights of an undisclosed principal”, and “Explain the liability of the principal for the acts of his agent”, where sections 188, 226 to 228, 237 and 238 with Lloyd v. Grace, Smith make a full answer. Short notes: pretended agent (section 235), ostensible authority.