Five important rules that should be followed in determining the principal’s liability for the acts of an agent

Important rules that should be followed in determining the principal’s liability for the acts of an agent are listed below:

1. When agent acts within the scope of his actual and apparent authority:

The principal is liable for all acts of the agent done within the scope of his ‘actual’ and ‘apparent’ (ostensible) authority”.

The fact that a particular act of the agent is in excess of his actual authority does not affect the principal’s liability and the principal remains liable therefore as usual, provided the act in question is within the scope of the agent’s apparent authority and the third party acts bona fide without knowledge of the curtailment.

The principal is also liable for all such acts of the agent which are necessary for protecting the principal from loss in an emergency (Sec. 189).

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2. When agent exceeds his actual as well as apparent authority:

In this case the principal has option either to disown the unauthorised acts or to ratify the same. Where he ratifies, he becomes liable for those acts as if he had authorised them originally but where he opts to disown them, the following rules shall apply:

(a) Where the excess is separable from the authorised portion, the principal is liable only for the authorised portion (Sec. 227).

Illustration (To Sec. 227):

A, being owner of a ship and cargo, authorises B to procure an insurance for Rs 4,000 on the ship. B procures 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 the premium for the policy on the cargo. (If B had taken only one policy on the ship and the cargo, A would not have been bound at all).

(b) Where the excess is not separable from the authorised 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 (Sec. 228)

Illustration (To Sec. 228):

A authorises B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of Rs 6,000. A may repudiate the whole transaction.

3. Liability for agent’s misrepresentation or fraud (Sec. 238):

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. For this purpose also the law treats the principal and his agent as one and it is immaterial which of them makes the false statement or commits the fraud.

It is to be noted that the only condition of the principal’s liability is that the act in question must be done within the course of the agency business and it does not matter whether the agent has done the act for his personal benefit or for the benefit of the principal, or whether the wrongful act was authorised by the principal or not.

The principal is not liable for misrepresentation made or fraud committed by the agent in matters which do not fall within his authority.

Illustration (Appended To Sec. 238):

(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 the option of C. (b) A, the captain of B’s ship, signs bill of lading without having received on board the goods mentioned therein. The bill of lading is void as between B and the pretended consignor.

4. Notice given to agent as notice to principal (Sec. 229):

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 be the knowledge of the principal; the principal 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.

Illustrations (Appended To Sec. 229):

(a) A is employed by B to buy from C certain goods of which C is the apparent owner. A 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 certain goods of which C is the apparent owner. A was, before he was so employed, a servant of C and then he 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. (Notice that in this case knowledge is not acquired by the agent in the course of agency work and hence it does not have the same effect as if it had been given to the principal.)

5. Liability based on the doctrine of estoppel (Sec. 237):

Here the liability of the principal is based on the doctrine of estoppel and not on any real authority. A principal, who so acts as to make it appear that he has conferred upon his agent authority to make a certain contract, is estopped from disputing the validity of the contract as against a person who dealt for value with the agent in the bona fide belief that the authority had actually been given. Such a principal is bound by the acts of the agent although the agent did not in fact possess any authority in relation to those acts.

Illustration:

A, a merchant, writes to B, a customer, that he has authorised his agent C to see him, and, if possible to come to an amicable settlement. A privately gives instructions to C not to settle for less than a certain amount. C settles the claim with B for an amount less than the amount authorised by A. A is bound by the settlement, B being ignorant of ^4’s private instructions to C.