This article is written by Jaya Jha of the Vivekananda Institute of Professional Studies, Delhi. This article deals with a comparative analysis of the agency of estoppel and its various components.
It has been published by Rachit Garg.
Table of Contents
It is widely accepted that a principal is liable for all contracts entered into on his behalf by an agent working under his authority. A person who gives the impression to another person that they are acting as an agent for another person or business legally is known as agency by estoppel. The agent must be given the power to act on behalf of the principal under the terms of the agency agreement. Suppose the agent signs a contract on behalf of the principal even though he is not authorised to do so and the principal is aware of it, and the third party believes the agent to be the agent appointed by the principal legally. In that case, the principal will be estopped (legally prevented) from denying that the agent did not act on him. Section 237 of the Indian Contract Act, of 1872 talks about the agency by estoppel. This article gives an overview of what an agency of estoppel is and its features. It further discusses the agency by ratification.
What is an agency
Agency is a relationship where one individual (the principal) approves another person (agent) to act on his behalf, and the agent consents to act. The relationship between two parties is referred to as an agency when one party transfers some authority to the other, allowing the latter to act on behalf of the first party in a more or less independent manner. Agency might be explicit or implicit. Chapter X of the Indian Contract Act,1872 mentions laws relating to the agency.
An “agent” is a person who represents his principal, business, or firm in an official position. Section 182 of the Indian Contract Act, 1872 defines an agent. For example, a company’s CEO is an agent when she deals with the company’s clients.
The Supreme Court, in the case of National Textile Corporation Ltd. v. Naresh Kumar (2011), defined the term “agency” as a relationship in which one person has the power or ability to establish a legal connection between the person holding the position of primary and a third party.
In the case of Narandas Morardas Gaziwala v. S.P. Am. Papammal (1966), the Supreme Court, while answering the question of whether it is possible for the plaintiff as an agent to sue the principal, held that the agent has no legal recourse against the principal for misrepresenting the account under the Indian Contract Act. The law is not exhaustive, and the agent’s power to bring an accounting claim against the principal is an equitable right that emerges in exceptional circumstances rather than a statutory one.
In the case of M/S Karnataka State Forest v. Indian Rocks (2009), the Supreme Court held that it is the duty of the agent to act upon the direction of the principal.
Creation of agency
There are two types by which agencies can create
- Express agency– principal may appoint an agent to serve as his representative. The agreement for the appointment may be expressed in writing or orally.
- Implied agency– Section 187 of the Indian Contract Act discusses implied authority. A principal can also indirectly appoint an agent which results in the creation of an implied agency contract. This formation of an implied agency contract may result from particular interactions or circumstances.
For example- ‘A’ lives in Calcutta, owns a store in Serampore, and occasionally travels there. The shop is run by ‘B,’ who has a tendency to purchase items from ‘C’ for the shop in A’s name and pay for them with A’s finances while A is aware of it. ‘B’ is impliedly authorised by ‘A’ to order products from ‘C’ on ‘A’s behalf for shop purposes.
In the case of Jawaharlal Diama v. Chinta Chittemma (1988), the Andhra Pradesh High Court held that there is no presumption that by virtue of marriage, there is implied authority in favour of the husband to act as her agent to enter into a contract on her behalf.
Agency by estoppel is one of the types of implied agency.
All you need to know about agency by estoppel
What is agency by estoppel
When one person acts in a way that causes the other to believe that a third party has the authorisation to work on his behalf and the other enters into a transaction with the third party, the person whose actions caused him to do so is liable for the agreement as though the third party had acted on his behalf. This situation is known as agency by estoppel. It is founded on the ideas of equity and natural justice. According to Black’s Law Dictionary, estoppel means “his acts prevent the party from claiming a right to the detriment of other parties who was entitled to rely on such conduct and has acted accordingly.” By establishing an agency by estoppel, one party (the plaintiff) binds another party (the principal) by relying on the promises, declarations, and representations of another party (the agent). For example, B is given products by A to sell and is instructed not to sell them for less than A’s set price. Unaware of B’s directive, C makes a deal with B to purchase the products for less than the reserved price. This agreement made by C binds A, and he has to sell the product for a lower price.
In the case of Kashinath Das v. Nisakar Rout (1962), the land was owned by ‘A’, who appointed Tahsildar ‘B’ to manage the agricultural land’s activities. Many people wanted to purchase the land, and the principal instructed interested buyers to contact B to purchase the land. B sold the land, and even if A later claimed that he was not authorised to sell the land, estoppel prevented him from breaking his promise.
The Bombay High Court, in the case of Govt. of Goa v. Goa Urban Cooperative Bank(2010), held that the principal is responsible for the agent’s negligence during the course of his employment as an agent. The liability of the principal for the negligence and wrongful act of the agent is on the ground that the principal is a person who has selected the agent and the principal having delegated the performance of a particular class of acts to the agent, the principal should bear the risk. All that is necessary for holding the principal liable is that the acts should have been committed by the agent in the course of his employment. Although the principal did not authorise the agent to act negligently, the principal cannot escape liability for the agent’s negligence.
Features of agency by estoppel
- The third party’s right to compensation is restricted to losses brought on by the principal’s failure to prevent the agent’s mistake, not expected damages. In reality, the principal’s negligence only subjects the principal to liability for damages; it does not make an unlawful agreement into a contract. No recovery can be done if the third party does not in good intentions rely on the agent being hired by the principal for that party. In the case of United India Periodicals Pvt. Ltd v. CMYK Printech Ltd. (2018) the Delhi High Court held that a principal is responsible for the activities of the agent if third parties mistakenly believe that the agent has the authority implied in a relationship with them. This means the agent’s actions bind a principal, even if the agent had no actual authority, whether expressed or implied. It raises estoppel because the third party is given an assurance that he relies on and it would be inequitable for the principal to deny the authority given.
- Estoppel only works one way. The principal does not have any right to claim an agreement against the third party. In the case of Rohtas Industries Ltd. v. Maharaja of Kasimbazar China Clays Mines (1951) High Court of Calcutta held that the principal cannot enforce the agreement against the third party, but the third party may seek damages from the principal (unless it is made valid by ratification). The party making the claim has the burden of establishing that the third party relied on the principal’s actions.
- Third-party should rely on the other party that has the authority to work on the behalf of the principal. In the case of Ahmednagar District Secondary Teachers Co-operative Credit Society v. General Secretary (1979), it was observed that, when the third party honestly believes that the other party has the authorisation to work on the behalf of his principal and the third enters into a transaction with the other party, the person whose actions caused him to do so is liable for the agreement as though the third party had acted on his behalf.
What is apparent authority
Estoppel and the theory of apparent authority are closely related. Both doctrines strongly emphasise holding the principal accountable when a third party mistakenly believes that they have the power to act on the principal’s behalf.
Apparent authority means when someone is believed to have authority even if it may not have been explicitly stated or indicate someone is believed to have authority even if it may not have been explicitly stated or indicated, is known as apparent authority. It happens when a principal’s action needs a third party’s assessment in order for them to comprehend why the agent would be able to act.
In situations involving apparent authority, even if it hasn’t been given to the agent, the principal unintentionally or knowingly causes others to assume the agent possesses it. Only after an agent has been appointed and assigned some actual authority can there be apparent authority. It is a rudimentary principle of agency law that an agent who acts without or beyond his actual authority may still bind the principal if those acts fall within his apparent authority. Apparent authority is established if the principal, by words or conduct, represents that the agent is authorised to act. A third party relies on such representation without notice of the agent’s lack of authority.
Apparent authority is also called ostensible authority.
In the case of LIC v. Rajiv Kumar Bhaskar (2005), the Supreme Court held that ostensible or apparent authority comes about where the principal, by words or conduct, has represented that the agent has the requisite actual authority. The party dealing with the agent has entered a contract with him in reliance on this representation. The principal, in this case, is stopped from denying that actual authority existed.
It was observed in the case of Valapad Cooperative Stores Limited v. Srinivasa Iyer (1964), that one has to find out in respect of what transaction an agent has apparent authority and towards whom.
Agency by ratification
The phrase “agency by ratification” refers to the process of giving someone authority after they had previously acted without authorisation. When a person accepts or approves an action taken by someone acting on his or her behalf without their consent or knowledge, they establish agency through ratification. Since an agency develops after an act occurs, this is also known as an “ex-post-facto agency.” In other words, an agent works on the principal’s behalf without the principal’s direct consent. Eventually, the principal “ratifies” or agrees to the effects of the agent’s actions or behaviour. Ratification means“to approve of something.” Section 196 of the Indian Contract Act tells about the effect of ratification.
If the act is approved, an agency relationship will be established, and it will be as if he had already given the individual permission to serve as his agent. The ratification results in the agent’s unauthorised actions becoming authorised ones, as though they had been carried out with the principal’s consent.
Types of ratification
There are two types of ratification:
Expressed ratification: the terms of authority are expressly stated, either orally or in writing, such as on a receipt, with expressed ratification.
Implied ratification: when the authority is presumed but not declared, it is implied ratification. For example, it is assumed that if someone orders food at a restaurant and sits down, they will pay for it after the meal.
In the case of Marathwada University v. Seshrao Balwant Rao Chavan (1989), the Supreme Court held that “ratification” is generally an act of principle concerning a contract or an act done by his agent. The principles of ratification in the contract of the law of agency do not have any application to the exercise of powers conferred under statutory provisions. The statutory authority cannot extend beyond the power conferred, and any action taken without power has no legal validity. It is void ab initio and cannot be ratified.
In the case of Britannia Buildings v. State of Orissa (1961), the Court held that according to Section 237, of the Contract Act, if an agent acts or incurs obligations on behalf of his principal without authorisation, the principal is responsible for those actions if, through his words or conduct, he led those third parties to believe that the agent’s actions and obligations were authorised.
In J.M. Baxi and Company v. Food Corporation of India (2006), the trial court passed a joint decree against the principal and its agent as the joint offender, but the High Court of Calcutta held that the facts of the present case itself say that the principal itself has avowed in its pleading that its agent was merely acting on the principal’s guidelines to the parties and had no liability in the matter, so the agent will not be a party to this litigation and no decree can be passed against him even if the loss is caused by the agent’s negligence.
Difference between agency by estoppel and agency by ratification.
|Criteria for comparison||Agency by estoppel||Agency by ratification|
|Meaning||Estoppel means the principal cannot argue the existence of an agency relationship even though it does not exist in reality if the principal makes third parties believe that someone is his agent and that third party deals with the agent.||According to “ratification,” an agency relationship has been created in the past if a person who has no power of any kind pretends to act in the capacity of an agent. The supposed principal later accepts the agent’s actions.|
|Defined in Section||Section 237 of the Indian Contracts Act, 1872.||Section 196 of the Indian Contract Act, 1872.|
|Consideration||The principal does all the work. The agent has no power, but the principal does something that allows a third party to assert that the principal is restrained (or estopped) from denying that the agent was truly acting for the principal.||The principal is the one acting yet again in the case of ratification. The principal takes action to confirm the agreement between the principal and the third party, notwithstanding the agent’s lack of authority.|
|Confirmation by the principal||Principal confirms the agency contract.||The principal confirms the third-party agreement.|
|Types||Agency by estoppel does not have any types.||Express ratificationImplied ratification|
Estoppel today is a complex doctrine, with extensive academic and judicial efforts pouring into its exposition daily. Though it originated in private law, it has by no means remained confined. The notion of agency by estoppel has been around for centuries. However, the modern definition of estoppel is based on equity principles that hold that a person is responsible for any loss brought on by a representation he made to another. But the person is solely responsible for the loss they caused, not the loss of advantages they had anticipated.
Frequently Asked Questions(FAQs)
Who is the Principal?
A principal, as defined by Section 182 of the Indian Contract Act of 1872, is a person who delegates authority to the agent. For instance, A, who lives in Mumbai, has a store in Kolkata that is managed by B, whom he recruited. Here, A is the principal, and B is his agent. A has delegated his authority to B.
What are the different types of agents?
There are three types of agents:
- General agent
- Mercantile agent
- Special agent
What is the principal-agent relationship?
In a principal-agent relationship, one entity formally designates another to act on its behalf. When there is a principal-agent connection, the agent represents the principal and shouldn’t have competing interests when performing the act. The law of agency defines rules for a relationship known as “agency,” which is the relationship between the principal and the agent.