This article has been written by Pronoy Prakash Gupta pursuing a Diploma in Legal English Communication – oratory, writing, listening and accuracy course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Estoppels generally mean to stop any agency or individual from reversing back on their claims, which they asserted to the party on behalf of the principal. Black’s Law Dictionary clearly defines estoppel as where the party believes the third party has authority to act on behalf of the principal and enters into an agreement. As it’s very commonly seen in India, the agency that acts on behalf of the principal with the party usually denies its claims when the obligation of performance arises. There are wide ranges of mutual agreements that are decided by the agencies in India, but when the time of delivery arrives, the agreements are unseen and the party is expected to blindly follow the present schemes of things that the agencies are proposing.

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The dilemma of betrayal arises and the main question also comes forward: how to make the agency responsible for their walk-and-talk action. It’s very tedious work for the party to hold the agent or agency responsible for the haven-like promises they have made in the name of the principal. Here comes the protector role of estoppels, which holds the agency responsible to complete the agreements, which are done as an agency with the party, because

The estoppel is the only means for the party to get what they believe they are having. And the chance of getting the justices also increases for the party.

Estoppels in Indian context

Section 115 of the Indian Evidence Act, 1872, clearly outlines the doctrine of estoppels, which was included due to the surging cases of agency fraud in various deals.

In cases of estoppels, the party has to deal with the rigorous burden of proof. When it’s certain that the principal allowed the agent to act in such a manner that it was obvious for the party to assume the agent had the authority to conduct the dealing, the principal cannot deny the responsibility of the agent as it is estopped by law.

It’s also important that the party’s assumptions be reasonable enough to believe the agent had the full authority to crack the deal on behalf of the principal. There should be certain reasons to believe the claim of the party before holding the principal responsible. The law always tries to protect the third party from fraud and misrepresentation while also safeguarding the principal right from any kind of unauthorised act.

Claims of third party

The legal doctrine of estoppel plays a crucial role in determining the validity of claims made by third parties regarding agency relationships. While the mere assertion of an agency relationship by a third party does not automatically lead to estoppel, courts carefully examine the circumstances surrounding the claim.

One key factor considered by courts is the extent to which the third party’s reliance on the alleged agency relationship was justified. The court will assess whether the third party conducted reasonable due diligence to verify the agency relationship and whether they had a genuine belief in the authority of the purported agent.

Circumstantial evidence alone may not be sufficient to establish estoppel. Courts often require more substantial proof, such as written documentation or prior dealings between the parties that indicate an established pattern of agency. In routine commercial transactions, however, a regular history of dealings between the parties may be sufficient to establish agency under the estoppel clause.

The rationale behind this approach is that in the context of ongoing business relationships, parties often rely on established patterns of conduct and may not have the opportunity to conduct extensive due diligence before each transaction. Therefore, courts recognize that in such situations, estoppel can serve as a fair and equitable way to protect the legitimate expectations of third parties who have acted in good faith.

It’s important to note that the application of estoppel in agency cases can vary depending on the specific jurisdiction and the circumstances of each case. Some jurisdictions may have more stringent requirements for establishing estoppel, while others may adopt a more flexible approach. Legal counsel should be consulted to determine the specific rules and precedents applicable in a particular jurisdiction.

Digital era

Nowadays, digital transactions and electronic communications are common, so online contracts, representations through emails, websites, or other social media platforms are crucial in determining the estoppels on agency. Indian common law jurisdiction is very efficient with the international principle of law in its own unique way when we see the Indian statutes and various case laws.

Corporate estoppel

Any company or governmental organisation employee or officer representing the corporate invites estoppels on agency. Because it’s obvious that the employer gives the right to their own employees to represent the company to the third party, which is directly applicable under estoppel policies and also holds the corporate liable for the agent’s representation. It has many practical repercussions for the company to understand the intricacies of estoppel for their businesses and companies to develop proper risk management and also have sound internal rules and policies.

Rectification

Rectification is also done by the principal many times by accepting the representation of the agency and fulfilling it; ultimately, the agency’s authority gets justified in this scenario. Consumer protection is also achieved as consumers directly rely upon the representation of the agency, which acts as a proxy for the company, so estoppel is needed.

 Many times contractual obligations and terms are indispensable to be estopped for the delivery of the contract in a successful manner. Even in business transactions, estoppel is mandatory on many occasions.

Landmark case laws of estoppel

Freeman & Lockyer vs. Buckhurst Park Properties (Mangal) Ltd. year (1964)

We must not forget the landmark case law of Freeman & Lockyer vs. Buckhurst Park Properties (Mangal) Ltd. (1964), which paved the way for the implications of estoppels., in which the court held the company responsible for the action of an individual that is not authorised by the company to act on their behalf, but they also failed to take action against such an agent who used the company’s name for false representation.

Armagas Ltd vs. Mundogas SA (The Ocean Frost) year (1986)

In the landmark case of Armagas Ltd vs. Mundogas SA (The Ocean Frost) (1986), the legal principle of apparent authority was critically examined. The court ruled that the principal (Armagas Ltd) could be held liable for the actions of a third party (Mundogas SA) if that third party was perceived to have the authority to act on behalf of the principal, even if they did not have explicit authorisation.

In this case, Mundogas SA had entered into a contract with a third party, believing that they had the authority to do so on behalf of Armagas Ltd. Armagas Ltd., however, denied that Mundogas SA had such authority. The court found that Armagas Ltd was responsible for allowing Mundogas SA to appear to have the authority to act on its behalf. This was because Armagas Ltd had failed to take reasonable steps to prevent Mundogas SA from misrepresenting themselves as having such authority.

The court’s decision in this case serves as a cautionary tale for principals. It highlights the importance of carefully controlling who is authorised to act on their behalf and ensuring that third parties are not misled into believing that someone has the authority to bind the principal to a contract or other legal obligation.

Ultimately, the principal is responsible for any misrepresentation of authority by a third party. This means that principals must be vigilant in monitoring the actions of those who claim to have the authority to act on their behalf. They must also take steps to prevent any unauthorised individuals from holding themselves out as having such authority. Failure to do so could result in the principal being held accountable for the actions of the unauthorised individual, even if the principal was not aware of the misrepresentation.

International Sponge Importers Ltd vs. Watt & Sons Ltd (1911)

In the 1911 case of International Sponge Importers Ltd vs. Watt & Sons Ltd, a similar legal principle arose concerning the extent of an agent’s authority and the principal’s responsibility for their actions. In this case, the agent exceeded the scope of their allotted authority by making representations or entering into agreements that were not authorised by the principal. Crucially, the principal did not take any steps to curtail or correct the agent’s misrepresentation, leading to the other party forming a mistaken impression of the facts based on the agent’s actions.

As a result of the principal’s inaction, the court ruled that the principal was estopped from denying the agent’s authority. Estoppel is a legal principle that prevents a party from asserting a right or defence that contradicts their previous conduct or representations. In this case, the principal’s failure to correct the agent’s unauthorised acts led the other party to reasonably believe that the agent had the necessary authority, and the principal cannot later deny that authority to avoid liability.

The court’s ruling in International Sponge Importers Ltd vs. Watt & Sons Ltd serves as a cautionary tale for principals regarding the importance of carefully selecting and monitoring their agents. Principals must ensure that their agents act within the scope of their authority and promptly address any instances of unauthorised conduct to avoid being held responsible for their agent’s actions.

Limitations and challenges

It’s very challenging to hold the principal responsible for the wrongdoing of the hired agency; however, the agency possesses the right to represent the principal, which again points towards the principal as the main author of the action done by the agency. But that brings the same question: what about the wrong act done by the agency in its own way? When the agency is held responsible for misrepresentation, the principal is obligated under the doctrine of estoppel to fulfil the agency’s commitments, leading to a dilemma.

It’s necessary for the court to not hold the principal responsible for the wrong and unauthorised act of the agency so the proper evaluations of the agency and the third party claims are needed to get fair justice and the right application of the doctrine.

Imperative reforms

Till now, it’s very apparent that new reforms and suggestions are requisite to form intact estoppel clauses in the new age of jurisprudence. As time and business are dynamic, the new estoppel clauses should be inculcated. Day by day, new contemporary issues are being raised. It’s clear that more robust reforms in the estoppel clause are the need of the hour, which must be more clear and specific in nature.

Suggestions

In my opinion, the first step towards this is proper legal education and training to better understand the legal clause of estoppel. Yes, the legislative framework is not as clear and precise as it should be, and for that, a well-drafted judicial guideline should be made by inviting the suggestions of the principal businesses and the agencies for the constructive formulation of the estoppel clause. Simultaneously, with an awareness campaign, the contract draft templates should be framed for easy application.

 All documentation should be done as per the set standards because it will reduce the confusion related to various documentation processes. The relevant and most critical database of the case laws, rules, and regulations related to estoppel should be made available in the public domain so it can be referred to by the general public.

It would be beneficial if it were mandatory for all the agencies and the agents to register themselves with the recognised authority to become more reliable for the third party. All these data can be integrated with the help of technology and the latest database advancements.

Lastly, Alternate Dispute Resolution (ADR) should be promoted because it will reduce the cost and time to solve the disputes of the parties. Mediation and arbitration are the best suggestive methods to solve disputes raised due to the issue of false representation by the agency. In such scenarios, the principal and the third party can settle their claims through mediation or arbitration.

All these aforementioned ways do not make the principal liable for the action of the agency; the principal will only be liable for the damages. It’s not possible to convert an illegal agreement made by the agent with the party into a full-fledged contract. It’s important that the party believed the agency on the face value of the principal and acted upon considering the agency as an authorised body by the principal.

Conclusion

In conclusion, it’s very clear that the onus is on the principal if the hired agency goes into an agreement with the party. The principal is solely responsible for the deed if they allow the agency’s apparent act in their name without interference. It’s also important for the third party to have sufficient reasons to believe the agency’s misrepresentation, because the court may also consider the actual reasons that made the party trust the agency blindly and, on the other hand, what stopped the principal from intervening at the right time in the dealing that took place between the agency and the party under the principal’s nose.

Alternate dispute resolution methods, like mediation and arbitration, can facilitate efficient and fair conflict resolution stemming from agency misrepresentations. While principals are accountable for agent actions, thorough evaluation of agency and third-party claims by the court is crucial for equitable outcomes. The evolving nature of business necessitates robust and transparent estoppel clauses to safeguard all parties and maintain commercial integrity.

References

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