Principal and Third Parties under Sections 226 to 238 of the Indian Contract Act, 1872: Excess of Authority, Notice to the Agent, the Undisclosed Principal, the Pretended Agent, and the Principal's Liability for His Agent's Fraud

The whole purpose of agency is to bring the principal into legal relations with third parties, and Sections 226 to 238 work out who may sue and be sued when something goes wrong. Four situations recur: the agent exceeds his authority; the principal was never disclosed; the agent had no authority at all; and the agent commits a fraud in the course of his work. The provisions answer each, and the organising idea that runs through them is that the third party's reasonable perception governs. What he was entitled to believe, from the principal's conduct and from the agent's apparent position, generally determines the outcome.

Who may sue whom, and on what footing

1. The Principal Is Bound: Section 226

Sections 226 and 227 to 229, Indian Contract Act, 1872, in substance

226. 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.

227. Principal how far bound, when agent exceeds authority. When an agent does more than he is authorised 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.

228. Principal not bound when excess of agent's authority is not separable. Where an agent does more than he is authorised 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 recognise the transaction.

229. 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.

1.1 Separable and inseparable excess

	Separable excess, Section 227	Inseparable excess, Section 228
Can the authorised part stand alone?	Yes	No
Effect	The authorised part binds the principal; the excess does not	The principal is not bound to recognise the transaction at all
The principal's options	Take the benefit of the authorised part and disown the rest	Disown the whole, or ratify it under Sections 196 to 200, which must be in full under Section 199
Third party's remedy for the excess	Against the agent, for breach of warranty of authority under Section 235	Against the agent, unless the principal ratifies
Illustration	An agent authorised to sell 50 bales sells 100; the sale of 50 binds	An agent authorised to buy wheat buys a consignment of wheat and barley together at one price

1.2 Notice to the agent

Section 229 imputes to the principal any notice given to, or information obtained by, the agent in the course of the business transacted for the principal. The words do the limiting. Knowledge the agent acquired privately, or in another capacity, or before the agency began, is not imputed. And the rule does not apply where the agent is acting in fraud of his principal, since an agent in that position will not be presumed to have passed on what he knew.

2. When the Agent Is Personally Liable

Sections 230 and 233 to 234, Indian Contract Act, 1872, in substance

230. Agent cannot personally enforce, nor be bound by, contracts on behalf of principal. In the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.

Presumption of contract to the contrary. Such a contract shall be presumed to exist in the following cases: (1) where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad; (2) where the agent does not disclose the name of his principal; (3) where the principal, though disclosed, cannot be sued.

233. Right of person dealing with agent personally liable. In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both, liable.

234. Consequence of inducing agent or principal to act on belief that principal or agent will be held exclusively liable. When a person who has made a contract with an agent induces the agent to act upon the belief that the principal only will be held liable, or induces the principal to act upon the belief that the agent only will be held liable, he cannot afterwards hold liable the agent or principal respectively.

⚠ The three presumptions in Section 230 are rebuttable

Section 230 states the general rule, that the agent neither sues nor is sued on the contract, and then lists three cases in which a contract to the contrary is presumed. The word matters: the presumption may be displaced by evidence that the parties intended otherwise. The foreign principal case rests on the commercial reality that a third party here would not readily extend credit to a merchant abroad; it has weakened with modern communications but the section stands. The undisclosed name case protects a third party who has nobody else to look to. And the principal who cannot be sued case covers a foreign sovereign, a principal without capacity, or a body that cannot be proceeded against, leaving the agent as the only available defendant.

3. The Undisclosed Principal

Sections 231 and 232, Indian Contract Act, 1872, in substance

231. Right of parties to a contract made by agent not disclosed. If an agent makes a contract with a person who neither knows, nor has reason to suspect, that he is an agent, his principal may require the performance of the contract; but the other contracting party has, as against the principal, the same rights as he would have had as against the agent if the agent had been the principal.

If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfil the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract.

232. Performance of contract with agent supposed to be principal. Where one man makes a contract with another, neither knowing nor having reasonable ground to suspect that the other is an agent, the principal, if he requires the performance of the contract, can only obtain such performance subject to the rights and obligations subsisting between the agent and the other party to the contract.

📖 Watteau v. Fenwick, [1893] 1 QB 346

Facts: The owners of a public house employed a manager whose name appeared over the door as the licensee. They expressly forbade him to buy cigars on credit, and confined his purchasing authority to bottled ales and mineral waters. He nonetheless bought cigars on credit from a supplier who believed the manager to be the owner and who had never heard of the principals. The supplier, on discovering them, sued them for the price.

Held: The principals were liable. Where a person is put in a position in which he appears to be the owner of the business, and the acts done are within the authority usually confided to an agent of that character, the principal is bound notwithstanding secret limitations placed on the agent's authority of which the third party knew nothing. The limitation was effective as between principal and agent but could not affect a third party who dealt in ignorance of it.

Ratio: An undisclosed principal is bound by his agent's acts within the authority usual for an agent in that position, and secret restrictions do not bind a third party who had no notice of them.

3.1 The third party's position

He may sue the agent, with whom he dealt and whom he believed to be the principal.
He may sue the principal, once discovered, under Section 233, which allows him to hold either or both liable; but he must eventually elect, and cannot recover twice.
He keeps all his defences. Section 231 preserves against the principal the same rights he would have had against the agent, and Section 232 subjects the principal's claim to the rights and obligations subsisting between the agent and the third party, including set-off.
He may refuse to perform if the principal discloses himself before completion and the third party can show he would not have contracted had he known, which protects a party who had reason to deal only with the person in front of him.
He is protected by Section 234 where he has induced the agent or the principal to act on a belief as to who alone would be liable, and cannot then turn on the other.

4. The Pretended Agent: Section 235

Section 235, Indian Contract Act, 1872

Liability of pretended agent. A person untruly representing himself to be the authorised agent of another, and thereby inducing a third person to deal with him as such agent, is liable, if his alleged employer does not ratify his acts, to make compensation to the other in respect of any loss or damage which he has incurred by so dealing.

📖 Collen v. Wright, (1857) 8 E & B 647

Facts: An agent, honestly believing that he had authority from a landowner to grant a lease of a farm, agreed to grant one to the plaintiff. The landowner in fact had no such land available to let on those terms and refused to complete. The plaintiff, having incurred costs in an unsuccessful suit for specific performance, sued the agent's estate.

Held: The agent was liable. A person who professes to contract as agent impliedly warrants that he has the authority he claims, and is liable in damages if the warranty is untrue, even though he acted in perfect good faith and honestly believed he had authority. The liability does not depend on fraud or negligence; it rests on a collateral contract of warranty which the third party accepts by dealing with him.

Ratio: A person who represents himself as an agent warrants his authority and is liable for breach of that warranty regardless of good faith. Section 235 gives statutory form to the same principle.

The measure of compensation is what the third party has lost by dealing with the pretended agent, which ordinarily means the value of the contract he would have had if the authority had existed, subject to remoteness and mitigation under Section 73. Ratification by the alleged employer removes the liability altogether, which is why Section 235 is expressed to operate only if his alleged employer does not ratify.

5. Agency by Holding Out: Section 237

Section 237 provides that 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 and 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. This is the statutory form of apparent authority, and it explains the outcome in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd., [1964] 2 QB 480, where the board's acquiescence in a director acting as managing director was the representation.

6. The Principal's Liability for the Agent's Fraud: Section 238

Section 238, Indian Contract Act, 1872

Effect, on agreement, of misrepresentation or fraud by agent. Misrepresentations 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.

Illustration (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.

Illustration (b). A, the captain of B's ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor.

The test is whether the fraud was committed in the course of the business the agent was employed to transact, and not whether the principal authorised it. No principal authorises fraud, and a rule requiring authorisation would make the section useless.
Illustration (a) is the key. The misrepresentation was one the agent was not authorised to make, and the contract is nonetheless voidable at the third party's option, because the misrepresentation was made in the course of the sale he was employed to conduct.
Fraud outside the scope of the agent's authority does not affect the principal, and Illustration (b) shows the line: signing bills of lading for goods never received is outside the captain's authority, which extends only to goods actually shipped.
The principal may be liable even where the fraud was for the agent's own benefit, which is the point of Panorama Developments (Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd., [1971] 2 QB 711.
The principal's remedy is against the agent, under Sections 211 and 212 and the fiduciary duties in Sections 215 and 216.

7. Agency Distinguished

	Agent	Independent contractor	Servant or employee
Power to bind another in contract	Yes, within his authority	No	Only if also an agent
Control	Over the result; the principal directs what is to be achieved	None over the manner of work; he is his own master as to how	Over the manner of doing the work as well as the result
Relationship with third parties	Creates privity between principal and third party	Contracts on his own account	Ordinarily none
Liability of the employer for wrongs	Section 238 for fraud in the course of the business	Generally none, subject to exceptions such as non-delegable duties	Vicarious liability for torts in the course of employment
Remuneration	Commission or fee	The contract price for the work	Wages or salary
Governing law	Sections 182 to 238	General contract law	Employment and labour legislation

7.1 Agency and partnership

The two are connected rather than opposed. Section 18 of the Indian Partnership Act, 1932 provides that a partner is the agent of the firm for the purposes of its business, and Section 19 gives him implied authority to bind the firm by acts done in the usual way of that business. The differences are that a partner is also a principal as regards his co-partners, that he shares profits and losses, and that his liability to outsiders is joint and several and unlimited, none of which is true of an ordinary agent.

8. The Position Stated Shortly

Section 226 makes contracts through an agent enforceable as if made by the principal in person.
Section 227 binds the principal to the separable authorised part of an excessive transaction; Section 228 releases him where the excess cannot be separated.
Section 229 imputes to the principal notice given to or information obtained by the agent in the course of the business, save where the agent acts in fraud of him.
Section 230 provides that the agent neither sues nor is sued, subject to three rebuttable presumptions: foreign principal, undisclosed name, and a principal who cannot be sued.
Sections 231 and 232 permit an undisclosed principal to enforce, but subject to all the rights the third party had against the agent, including set-off.
Watteau v. Fenwick: secret limitations on a manager's usual authority do not bind a third party who dealt in ignorance of them.
Section 233 allows the third party to hold the agent or the principal or both liable; Section 234 estops him where he induced either to act on a belief as to exclusive liability.
Section 235 makes a pretended agent liable to compensate, and Collen v. Wright shows the liability arises regardless of good faith.
Section 237 binds a principal who has induced a third party to believe the acts were within the agent's authority.
Section 238 makes the principal answerable for fraud committed in the course of the agent's business, whether or not authorised, but not for fraud outside the scope of his authority.

9. Related Topics and Provisions

Topic or provision	Connection
Agency under Sections 182 to 238	Creation, authority, delegation and termination
Ratification under Sections 196 to 200	Adoption of an unauthorised act, which removes the pretended agent's liability
Fraud under Section 17	The fraud for which the principal is answerable under Section 238
Contract of Indemnity under Sections 124 and 125	The agent's indemnity under Section 222
Sections 226 to 229, Indian Contract Act	Contracts through an agent, excess and notice
Sections 230 to 234, Indian Contract Act	Personal liability and the undisclosed principal
Sections 235, 237 and 238, Indian Contract Act	Pretended agent, holding out and the agent's fraud
Sections 18 and 19, Indian Partnership Act, 1932	A partner as agent of the firm