In agency contract, the person acting as agent must be permitted to act on behalf of the principal. But where the agent is not authorized to represent the principal, still enters into contract with a third party and the principal is well aware about it, yet the third party believes him to be the agent appointed by the principal legally and deal with such person; in such a situation, the principal cannot get away by disowning the agent of his actions if they cause damage to the plaintiff, i.e., third party. The principal who is defendant is “estopped” or “prevented” from denying that the agent did not acted for him.
The doctrine of estoppel has been there for centuries and has quite evolved in modern times. In Black’s Law Dictionary estoppel is defined in the following words: a “party is prevented by his own acts from claiming a right to detriment of other party who was entitled to rely on such conduct and has acted accordingly.”
In the Common Law, it is not necessary to prove that agency existed to establish agency by estoppel. On the other hand, in Indian Contract Law it is important to show that there exists a relationship of agency to make the principle of agency by estoppel applicable. [Benares Bank Ltd., Agra v. Prem & Co., AIR 1937 All 255]
The agency by estoppel doctrine is given in Section 237 of The Indian Contract Act, 1872. In simple words the Section says that when an agent having no authority deals with a third person on the behalf of the principal, the principal is bound by the alleged agents conduct if he implied through his behaviour or words to the other party that the agent was authorised by him to act.
A is aware that C is dealing with B on his behalf. He does not stops C from entering into the transaction. A becomes liable for the contract that C has entered into with B. B suffers losses due to C’s conduct. Ultimately, A is responsible for the harm as he could have prevented the mistake but did not.
This means that agency by estoppel does not makes an invalid agreement valid, but holds the principal for paying damages to the plaintiff. Moreover, estoppel is only one way. The principal has to pay the damages. He cannot go on to enforce the agreement against the third party unless done by ratification.
There must be apparent authority to seek remedy under agency by estoppel. Apparent authority is when one is led to believe that a person is acting on behalf of the principal and within the scope of the authority. X enters a retail store and sees Y in a uniform like other staff of the store and having a tag of his post as “Manager”. It is quite obvious for X to believe Y to be the manager of the store. But actually, Y is not the manager. Now if X relies on the behaviour and words of Y and suffers losses, he can invoke agency by estoppel argument against the store owner. The store owner will be liable as he did nothing to remove Y from the store, tolerated his behaviour and let him to speak on behalf of the store.
In Harshat J. Shah v. LIC , the plaintiff argued that LIC was liable on the basis of doctrine of apparent authority of the agent to collect premium from the policy holders. The Court held that collection of premium amount is a general practice of LIC agents. LIC did not made the policy holders believe that agents were authorised to collect premium. The plaintiff had no material record to prove his point and the case was dismissed.
Whereas in Ram Chandran v. Registrar, Co-operative Societies (AIR 1963 Mad 105), a clerk of a society was also a cashier. The society barred him from receiving payments from the society members. The clerk was held to be an agent of the society in terms of having the authority to receive money from its members The clerk had apparent authority. Thus, Section 237 was applicable.
It is upon the plaintiff to prove that the principal’s conduct made them deal with the alleged agent. [Rohtas Industries Ltd. v. Maharajah of Kasimbazar China Clay Mines, ILR (1951) 1 Cal 420]
Briefly, for proving agency by estoppel the agent must be unauthorised, the principal should be negligent in not avoiding the agent to represent him and there should apparent authority of the agent. The concept is very old. In the modern sense, it is based on the principle of equity where a person is liable to other for losses because of representation in their name. In order to avoid the loss and paying of it for no actual fault of his, the principal should stop the agent beforehand as well as the third person must check thoroughly before entering into contract with such unauthorised agent.
Black’s Law Dictionary
The Indian Contract Act, 1872 (Bare Act)
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