Liability Of The Principal For The Acts Of The Agent Including Misconduct And Tort

By | December 7, 2019
Liability Of The Principal

Last Updated :

Liability of the Principal for the acts of the agent including misconduct and tort is very important as well as the tricky topic. The general principle of Respondeat Superior or “let the master answer” is not universally applicable and there are exceptions where an agent can also be personally liable. The present article tends to explore this fine line.

Introduction

At the very foundation of agency lies the alter ego principle where the act of one is performed by another. Hence, acts performed by that “another” would be in pursuance of the authority so granted by the “one”. This leads to the binding effect of the acts of the former over the latter.

Indian Contract Act contains the provisions in its Chapter X, governing the concept of agency. The Principal can vest the authority or capacity of a person to create or affect the relationships with third parties.

Statutory Provisions

Regarding the liability of the Principal towards the acts of the agent, the following provisions in the Indian Contract Act, Chapter X need to be perused.

  1. Agent to be indemnified against consequences of lawful acts.—The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.
  2. Agent to be indemnified against consequences of acts done in good faith.—Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of third persons.
  3. Non-liability of employer of the agent to do a criminal act.—Where one person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that Act.
  4. Compensation to agent for injury caused by principal’s neglect.—The principal must make compensation to his agent in respect of injury caused to such agent by the principal’s neglect or want of skill.
  5. Enforcement and consequences of agent’s contracts.—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 the contracts had been entered into and the acts done by the principal in person.
  6. Principal how far bound, when agent exceeds authority.—When an agent does more than he is authorized to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority is binding as between him and his principal.
  7. Principal not bound when an excess of agent’s authority is not separable.—Where an agent does more than he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction.
  8. Consequences of notice given to agent.—Any notice given to or information obtained by the agent, provided it be given or obtained in the course of the business transacted by him for the principal, shall, as between the principal and third parties, have the same legal consequences as if it had been given to or obtained by the principal.
  9. Liability of principal inducing belief that an agent’s unauthorized acts were authorized.— When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority.
  10. Effect, on agreement, of misrepresentation or fraud, by agent.—Misrepresentation 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 such misrepresentations or frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals.

Acts of Agent

The perusal of the above-mentioned provisions clearly indicates towards the risks that are involved in appointing an agent. The Principal can be held liable even for the unauthorised acts of the agent if the impression of his or her agency is created in front of the third party.

For example, the Principal can also be held liable for the defamation conducted by the agent towards the third party in the course of negotiations.[1]

This becomes the rule of prime importance, thus, that the principal is liable for the acts of his agent done in the course of and within the scope of his employment. The reasons for the imposition of such liability are explained by Dal Pont, in three points-

  1. The principal selects the agent and has better means of ascertaining the quality, strengths and weaknesses of the person.
  2. As the principal has delegated the performance of a certain class of acts to the agent, it is not unjust that the principal, who will derive the benefit of the agent’s efforts, should bear the risk of the agent exceeding his or her authority.
  3. The principal has given the agent-general authority to commit the wrongs.[2]

Hence, Principals are vicariously liable for the acts of the Agent. A person actually delivering goods to a railway company for carriage is considered competent to sign a risk note and thereby bind the owner.[3]

Now the question arises, which acts will come within this scope and which will not. In common law, this is a question left to the facts of each case, to be decided by the jury.[4] There are certain qualifications which have to be met in law.

As a general rule, the contract made by the agent, with the authority of the Principal will bind the Principal. It happens if, at the time of making the contract, the name or existence of the relationship was disclosed to the third party.[5] An act that is done without the authority is not binding upon the Principal and cannot be enforced against him.[6]

For example, if the Principal has given the authority to a consignee to take delivery of goods. This will not authorise the latter to rebook the goods to another railway station or to rebook them on different conditions.[7]

Liability of Principal

The Principal is liable u/§ 222 to indemnify the agent for the consequences of the lawful acts of the agent and its consequences. The matter is enforceable to forward contract and enforceable.[8]

Specific Instances of Liability of Principal

U/§ 227, the separable portion of the unauthorised acts of the agent can be kept aside. The Principal would become liable for those acts of the agent which are done within the authority. The philosophy is that such acts are distinctly pursued.[9]

The classic example is the situation where an agent is authorised to be surety of A only. But he becomes a surety of B and C also. Hence, by applying this principle of separability, the suretyship was restricted to A only.[10]

U/§ 228, the logic is that third party cannot make Principle liable where the agent has exceeded the powers given to him.[11]

The principal can become liable for the unauthorised acts of the agent as well. This happens in the situation when the Principal has received some benefits from that transaction.[12] The receipt of benefits is essential to make the act binding upon the Principal.[13]

This shows that if the Principal has received some benefits from the transaction, he must repay it. He is rather, bound to repay the said amount.[14]

If the act was done is beyond the scope of authority of the agent, the Principle otherwise cannot be held liable.[15]

U/§ 238, the Principal is liable for the acts done by the agent, even if wrong. The Principle holds the responsibility for the wrong done to the third parties by the agent. The condition applied is that the act is done on the Principal’s behalf and with the intention of serving the purpose of the Principal.[16]

Misconduct by Agent

If the directions given by the Principal are being disregarded by the agent and it leads to direct loss, the action amounts to misconduct.  Such disregard may have been due to nothing worse than negligence or overconfidence in the honesty of others, such misconduct on the part of the agent is clearly actionable.[17]

An example would be a case where the Principal has fixed a price for sale. If the agent sells it below that price, he or she becomes liable towards the Principal.[18]

In the landmark English case of Barwick v. English Joint Stock Bank[19], one of the plaintiff’s agent presented a bill on which the defendant paid. The Plaintiff was made to pay the amount at the end. Thus, the Principle is liable for the wrongs committed by the agent

Tort by Agent

For a tort committed by an agent in the course of his dealings with the third persons, a tricky situation arises.

If the agent has, in such a situation, fraudulently established that he has the authority to transact the business, then his liability will arise.[20] In such cases, the Principal cannot be held as liable.[21]

The agent would also have to incur the liability in the case; he or she is negligent in giving advice during the conduct of business. [22] The important condition is that the duty of care for the agent must be established.[23]

Fraud and Deception

If the Principal did not invest the agent with any apparent or ostensible authority, the act of the agent pretending the same would be deception. It would not amount to any estoppel as against the Principal since the customer was deceived by the agent beyond his authority.[24]

The agent is not allowed to practise fraud and plunder. But, when such agent is acting within the scope of his authority on behalf of his Principal, it is considered in law to be fraud committed by the Principal.[25]

In the case of Hukumchand v. B.N. Rly, the railway station master gave a railway receipt showing the consignment of goods from his station to another. It turned out to be completely false. Also, this act was not within the scope of the station master. Thus, the railway company was not held liable.[26]

The agent cannot make secret profits and if made, he/ she has to account for it.[27] If any misrepresentation or fraud does not fall within the scope of authority of the agent, it would not affect the Principal.[28]

Thus, when an agent was not paying the money belonging to the Principal on demand and had been improperly dealing with it, he was made liable for interest.[29]

Conclusion

The Liability of the Principal is not a universal phenomenon. It arises in certain qualified circumstances. The most important condition is the conduct of the act within the permissible stretch of the authority so granted. If the act is not within the authority so granted and crosses the scope, the Principal can put his hands off.

This is also applicable in cases where the act of misconduct or tort is committed beyond the authority. Though it is a question of fact, the law is not empty on this issue. The past judicial experience has fairly settled the notion of the liability. Now, it becomes more important for the agent to make sure that his acts do not breach the scope of authority.


[1] https://www.dundaslawyers.com.au/the-legal-relationship-of-agency/#_ftn1.

[2] https://www.lawteacher.net/free-law-essays/commercial-law/vicarious-liability-of-principal-for-acts-of-agent-commercial-law-essay.php.

[3] GIP Rly v. Chakravarti Sons, 55 Cal 142.

[4] Ratcliffe v. C., M. & St. P. R. Co., 153 Wis. 281, 141 N.W. 229 (1913).

[5] Halsbury Laws of England, Vol. 1, 5th Edn., March 1, 2008, Agency, ¶125.

[6] Govind Ram v. GIP Rly, AIR 1916 All 306; Raja Sri Pratap Bahadur Singh v. Mulchand, AIR 1943 Oudh 174; State of Orissa v. United India Insurance Co. Ltd., (1997) 5 SCC 512.

[7] Mahommed Ekram v. Union of India, AIR 1959 Pat 337.

[8] AIR 1961 Raj 52.

[9] Story on Agency, §170.

[10] Mayandi v. KRRM Raman Chettyar, AIR 1937 Ran 499.

[11] Bhagwanji v. Ganga, AIR 1916 Sind 37; Malaiperumal Chettiar v. Arunachalla Chettiar, AIR 1918 Mad 706.

[12] Suppayya Pattar v. Dawood Haji Ahmad Sait, AIR 1916 Mad 1025.

[13] Kettlewell v. Refuge Assurance Co., (1908) 1 KB 545 (CA); Bannatyne v. Maclver, (1906) 1 KB 103; Reid v. Rigby & Co., [1894] 2 QB 40.

[14] TR Pratt (Bombay) Ltd. v. ED Sasson & Co. Ltd., (1935) 60 Bom 326.

[15] Glyn v. Baker, (1811) 13 East 509; Marsh v. Keating, [1824- 34] All ER Rep 226.

[16] Ishwar Chander v. Satish Chunder, 30 Cal 207.

[17] A.G. Muukherji v. Municipal Board, Benares, AIR 1924 All 467.

[18] Chelapathi v. Surayya, (1902) 12 Mad LJ 375; Pani Bai v. Sire Kanwar, AIR 1981 Raj 184.

[19] Barwick v. English Joint Stock Bank , (1867) LR 2 Exch 259.

[20] Pohill v. Walter, [1824- 34] All ER Rep 161; West London Commercial Bank v. Kitson, (1884) 13 QBD 360.

[21] Randell Ltd. v. Trimen, (1856) 18 CB 786.

[22] Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] AC 465; Mutual Life & Citizens Assurance Co. Ltd. v. Evatt, (1971) 1 All ER 150.

[23] Chitty on Contracts, 28th edn., Vol. 2, pp 62-63, ¶ 32- 109- 10.

[24] Russo- Chinese Bank v. Li Yau Sam, 14 CWN 381, PC.

[25] Swedish Match Co. v. Adamjee, 4 Rang 381.

[26] Hukumchand v. B.N. Rly, 45 IC 856.

[27] Story on Agency, ¶ 207.

[28] Shriram Refrigeration Industries Ltd. v. State Bank of India, AIR 1983 Pat 203.

[29] Trojan & Co. v. Nagappa, AIR 1953 SC 235.


  1. Various Methods of Creation of Agency
  2. Difference Between Servant And Agent