Rights and Liabilities of Principal and Agent to Third Parties
The rights and liabilities of a principal in relation to third parties under contracts made by his agent depend upon, whether an agent is
- acting for a named principal,
- acting for an unnamed principal,
- acting for an undisclosed principal.
1. Agent Acting for a Named Principal
The rights and liabilities of a named principal for the acts of his agent may be discussed as below:
1. Acts of an Agent within the Scope of his Authority
If an act is carried on by an agent within his authority, his acts are binding on the principal. However, the act done should be lawful.
Example: A authorized his agent, B, to collect money on his behalf. B received from C a sum of money due to A. This receipt of money is binding on A, and C is discharged from his obligation to pay this amount to A.
2. Acts of an Agent Exceeding his Authority
It can be discussed under two heads as shown below:
1. Where the work can be separated – Where an agent exceeds his agency to do the work of the principal, the principal is bound by that part of the work which is within his authority if it can be separated from the part of the work which is beyond his authority.
Example: A, owner of a ship and cargo, authorizes B to procure an insurance policy for Rs.4,000 on the ship. B procures a policy for Rs.4,000 on the ship and another for Rs.6,000 on the cargo. A is bound to pay the premium for the policy on the ship, but not the premium for the policy on the cargo.
2. Where the work cannot be separated – When an agent does more than what he is authorized to do, and such act cannot be separated from that which is within his authority, the principal is not bound by the transaction. He is in such a case entitled to repudiate the whole transaction. So if the agent does something in excess of his powers, the transaction is not binding on the principal.
Example: A authorized B, an agent to buy 500 sheeps. But B purchased 500 sheeps and 200 lambs, for a sum of Rs.6,000. In this case, the principal may repudiate the whole transaction.
3. Notice Given to Agent
The principal is bound by the notice given to the agent in the course of business. Thus, the knowledge of the agent is the knowledge of the principal.
However, if the knowledge is not acquired by the agent in the course of his employment, it cannot be imputed to the principal. Further, if the agent had committed a fraud on the principal, the rule of this section will not apply.
Example: X engaged Y’s agent to insure him against loss of eye-sight for $500 in case of total loss of eye-sight and $250 in case of loss of only one eye. At the time of the insurance, it appeared that X was in fact a one-eyed man. Held, the knowledge of the agent that X was one-eyed man should be attributed to the company and that X could recover $500 when he lost the other eye.
4. Liability by Estoppel
The principal is liable for the unauthorized acts of the agent, if the principal has created an impression on the third party by his conduct, that the agent has the authority to do such acts.
Example: A, an owner of a house held out that B, the auctioneer had authority to sell the house. B sold the house by auction to a third party for an amount less than the amount authorized by A. It was held that the purchaser is not affected by A’s instructions to the auctioneer not to sell below a certain price.
5. Liability for Misrepresentation or Fraud
The principal is liable for the misrepresentation or fraud committed by his agent while acting in the course of his business. It is immaterial whether the misrepresentation or fraud has been committed for the benefit of the principal or of the agent himself.
Example: A offered to buy a residential flats consisting of number of flats in it and enquired C, the property manager of B, whether all the tenants were paying their rents regularly. C informed A that the tenants were paying rents regularly with immaterial exceptions. This statement turned out to be false. B was held liable for fraud because his agent (property manager) who knew the real facts had made a false statement.
2. Agent Acting for an Unnamed Principal
When an agent contracts, as an agent for a principal but does not disclose his name, the principal is liable for the contract of the agent. But the unnamed principal should be in existence at the time of the contract and the acts must be within the scope of agent’s authority.
Example: A appointed B as his agent to purchase some goods. B entered into an agreement with C for purchasing those goods. B signed the agreement as a broker “to my principal” but did not disclose the name of the principal. Here, B is not personally liable because he contracted in the capacity of an agent.
However, the agent is personally liable if he declines to disclose the identity of the principal when asked by the third parties.
3. Agent Acting for an Undisclosed Principal
In case of an agent acting for an undisclosed principal, the mutual rights and liabilities of the agent, principal and the third party are as follows:
1. Rights and Liabilities of Agent
Here agent contracts in his own name. So he is bound by the contract. He is personally liable to the third party also. On such contracts, he can sue and be sued in his own name because in the eyes of law he is the real contracting party. In such cases, the principal and the agent have their respective rights against each other.
2. Rights and Liabilities of Third Party
If the third party has discovered that there is a principal, he may file a suit against the principal, or his agent or both. In such a case, the third party must allow the principal, the benefit of all payments received by him from the agent.
Example: A sold 100 bales of cotton to B on credit. Afterwards, A discovered that B was acting as an agent of C. In this case, A may sue either B or C, or both for the performance of the contract.
3. Rights and Liabilities of Principal
The principal has the right to intervene and require the performance of the contract from the third party. In such cases, the other party may sue either the principal or the agent or both. The principal if he likes may also require the performance of the contract from the other party. But in such a case, he should allow, the benefit of all payments made by the third party to the agent, to the third party.
Example: A contracted with B, a shopkeeper, to purchase furniture. A advanced a part payment of the price to B. Afterwards, A discovered that B is the agent of C. In this case, C may ask A to perform the contract. But he must account for the advance money received by his agent B.