Agent’s Responsibility for unauthorised acts – Sec 237 and 188
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Section 237 in The Indian Contract Act, 1872 “Liability of principal inducing belief that agent’s unauthorized acts were authorized.”
237. 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.Interpretation of Sec 237 of the Indian Contract Act, 1872
When an agent without the authority has done acts or incurred obligations from the third parties on behalf or in the name of his principal, the principal is bound by every action of his agent. 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.Section 188 in The Indian Contract Act, 1872 “Extent of agent’s authority”
188. An agent having an authority to do an act has the authority to do every lawful thing which is necessary in order to do such an act.Interpretation of Sec 188 of the Indian Contract Act, 1872
An agent having an authority under the principal to do an act has the authority to do every lawful thing which is necessary to keep the contract going in order to do such an act.It can be clearly seen that there is a resemblance between Sec 237 and Sec 188 of the Indian Contract Act yet the principle underlying the mentioned sections is distinct. According to Sec 188, the agent has the authority to do all such lawful acts which are necessary to do the authorised act. On the other hand, Sec 237 of the Contract Act the principle is liable for the acts of the agent because he has publicly given the authority to the agent and made him competent to do acts for which he is not authorised.
It is evident from the acts of the principal that in these cases principal I stranger between an agent and third party, yet is held liable for the acts of his agent. Such liability of principal is also because he has conferred an ostensible authority upon the acts of agents.Section 237 and Section 188 of ICA, 1872 are related to the unauthorized act done by the agent.
Section 237 states that when the 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 person to believe that such acts and obligations were within the scope of the agent’s authority.
Section 188 talks about the extent of the agent’s authority. It states that when the agent has been authorized by the principal to do any act, then the agent is also authorized to do all the legal acts which are necessary to do such an act. While doing these legal acts if the agent incurred obligations to third persons then the principal will be liable for it. Under both circumstances, the principal will be liable for the acts of his agent. But there is one exception to this i.e. if the agent does any unauthorized illegal acts (like misrepresentation or fraud), then in such a case principal would not be liable for it.
In my opinion, the major difference between both the sections is that under section 237, the agent does an act which is completely unauthorized by the principal but under section 188, the agents do the unauthorized legal acts which are necessary to do the authorized act.Section 188 and section 237 of Indian Contract Act, 1872, are related to unauthorised act done by the agent.
Section 188 states that a agent will have all those power which are compulsory to complete the task provided to him by his authority. All the work, settled down by the agent during completion of his task would be lawful. The principal will be liable for the act of his agent, ab initio.
Section 237 of Indian Contract Act, 1872 states that the principal would be liable for the act done by his agent without any authority which incurred an obligation to third party on behalf of his principal. However, there should be inducement to the third party by principal to make him liable.
The basic difference between section 166 and 237 of ICA, 1872 is that in section 166 the agent committee his act to complete the task assigned to him by his principal and thus it is lawful to act all the necessary things, beyond his authority for the completion of work. But in section 237, the principal would be liable to the act of agent only if the principal himself had induced the third person that the work done by agent is within his authority. The inducement by the principal toward third party for the unauthorized act of his agent shows his consent to the work done by his agent beyond the authority.
Can the principal be made responsible for the contract entered by an agent under section 226 of the Indian Contract Act, 1872? What is the difference between section 226 and section 188 of the Indian Contract Act, 1872?
Section 226 of the Indian Contract Act, 1872 states that “Contracts entered into through an agent, and obligation arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences, as if the contract had been entered into and the act done by the principal in person.”
The interpretation of above-mentioned section enumerates that if any contract has been entered through an agent, then the principal is obliged to follow all the legal consequences arising sue to the contract. It will be presumed that the contract has been made with the principal himself.
However, the contract entered by the agent should be within his authority. If the contract entered into is within his authority and the act was done professedly on behalf of the principal, then the motive of the agent is immaterial and the principal would be liable for the same.
The basic difference between section 226 and 188 is that section 188 deals with the authority of an agent that up to what extent the agent can do any act, but section 226 states that if any agent commits or entered into any contract, the principal will also be liable for the action of his agent, which has been done under such authority.Section 237 of ICA, 1872:
Liability of principal inducing belief that agent’s unauthorized acts were authorized – When an agent 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.Illustrations:
(a) A consigns goods to B for sale and gives him instructions not to sell under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract.(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private orders from A. The sale is good.
Section 188 of ICA, 1872:
Extent of agent’s authority – An agent having an authority to do an act has authority to do every lawful thing that is necessary in order to do such act. —An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act.” An agent having an authority to carry on a business, has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business.Illustrations:
(a) A is employed by B, residing in London, to recover at Bombay a debt due to B. A may adopt any legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same.(b) A constitutes B his agent to carry on his business of a ship-builder. B may purchase timber and other materials, and hire workmen, for the purpose of carrying on the business.
According to Section 188 of Indian Contract Act an agent who has the authority to perform or do one act has an implied or obvious authority to do any necessarily lawful thing which is directly or indirectly associated with the performance of the actual act.
For example if an agent wants to establish a school so he has an authority to do any lawful act which is important or usually done or required in the course of establishment of that school.
Whereas, according to section 237 of ICA states that the principle will be liable for the unauthorised acts of his agent. If a principle has said something to agent like to do things in a certain manner during the course of his business and the agent has without authority incurred obligations to third party on behalf of his principle, then in such cases the principle is bound by such acts, if the agent has induced the third party by his acts or words to believe that he is within the scope of his authority. For example if a principle instructs his agent to sell a product only at a price of 200 or above and the agent sells the product to C at a price of 150, here the principle is bound by the act of the agent. The distinction between two articles is that in section 237 the principle is clearly stating the agent what to do and if he did anything to keep that specific instruction in mind then the principle will not be liable. Section 237 is a bit specific than section 188.1. Section 188 of the Indian Contract Act, 1872 states extent of agent’s authority. Section 237 of the Indian Contract Act, 1872 states third party right and liability of principal.
2. Section 188 describes how agency can be created by necessity. Section 237 describes how agency can be created by estoppel
3. Section 188 mentions that if an agent is bound to perform some act, he can lawfully take up necessary measures required in completion of the task.
Whereas section 237 mentions that if an agent performs acts exceeding his authority, the principal is bound by such acts moreover, the sections also mentions that the principal induces the other party to
believe that the agent is performing under his authority limit and thus the principal would be liable.4. Example:
Section 188: A is employed by B, residing in Canada, to recover at Kolkata a debt due to B. A may adopt any legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same
Section 237: A consigns goods to B for sale, and gives him instructions not to sell under a fixed price say, rs 1000. C, being ignorant of B’s instructions, enters into a contract with B to buy the goods for 800, lower than the reserved price. A is bound by the contract.The basic difference between Section 187 and Section 237 of ICA is the definition
Section 187 says, ” Definitions of express and implied authority.—An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things are spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case”.
and Section 237 says, “Liability of principal inducing belief that 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
Section 187 talks about two-party only: one Principal and other Agent
and Section 237 talks about three-party: one Principal and second Agent and third is the third party
The difference between both the sections is of purposeIn S.187 of ICA In this case chairman L.I.C v. Rajiv Kumar Bhaskar, as per the salary saving scheme of L.I.C, the boss was supposed to subtract the premium from the employee’s salary and credit it with L.I.C. Upon the demise of the employee, it was found by his successors that the employer has evaded in doing so, causing the policy to delay. A clause in the receipt letter was discussed, in which the boss had said that he would act as the manager of the employee and not as that of L.I.C. It was held that the employer was acting as the manager of the company, thereby creating the company (L.I.C) accountable as a Principal due to the mistake of the Agent (the employer)
Contracts creating a connection of the agency is very common in business law. It can be express or implied. An agency is shaped when a person delegates his power to another person, that is, employs them to do some precise job or a number of them in specified areas of the job. Formation of a Principal-Agent relationship consults rights and obligations upon both parties. There are numerous instances of such a relationship: Insurance agency, advertising agency, travel agency, factors, brokers, etc.
So in S.237 of ICA When supposedly P allows third parties to trust that A is acting as his official agent, he will be prohibited from refuting the agency if such third-parties trusting on it make a contract with an even when A had no power at all. Similarly, where an individual is held out by another as his agent, the third-party can hold that person accountable for the acts of the alleged agent, or the agent by holding out. Associates are each other’s agents for building contracts in the normal course of the partnership business.
Both section 237 and section 188 of the Indian Contract Act, 1872 somewhat deal with the extent of the agent’s authority. However, there is a basic difference between the two.
• Section 188 states that an agent is authorized to do not only the work allocated to him by the principal, but also every lawful thing required for completing such act. Similarly, if an agent is appointed to conduct a business, he has the authority to do all such things done within the normal course of the business. Let us understand this with an example.
Suppose Aruna appoints Aparna to deliver a parcel to another person in Shillong. To do the task, Aparna will have to avail some means of transport, let us say, a train. Therefore, seat-booking in the train becomes an authorized act.
When an agent does an authorized act, by general rule, the principal becomes liable for such acts. In cases of unauthorized acts, the agent himself is liable.
• Now that a distinction has been established between an authorized and an unauthorized act of the agent, section 237 will be easy to comprehend.
Section 237 talks about a situation where the principal has made a third party believe that some unauthorized act of the agent, in fact, was authorized. It may include obligations to third persons. Such beliefs can be induced both by words or the conduct of the principal.
In this case, even when the agent works outside the scope of his authority, the principal will be held liable and be bound by such acts or obligations to the third party.
For example, Aruna gives expressed instructions to her agent Aparna not to sell a defective video game set. Ignoring the instruction, Aparna sells the set to a customer anyway and the transaction happens in presence of Aruna. The customer may make Aruna liable for the defect in the game set. Estoppel is applied on the principal from making herself exempt from the liability in this case.
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