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Indian Contract Act 1872

Responsibilities of Principal to Third-parties

In a contract of agency, an agent deals with the third parties on behalf of his principal. He enters into contracts with the third parties and is responsible for his acts to the principal. However, there are also some Responsibilities of Principal to Third-parties for the acts of the agent.

Responsibilities of Principal to Third-parties

The effect of a contract that an agent makes differs according to the situations under which the agent contracts. The agent may contract under the following three situations:

1. Disclosed Principal

Where the name of the principal is disclosed and an agent enters into a contract on his behalf, he usually incurs no rights and liabilities under such contract. He drops out of the contract as soon as it is made.

Thus, the contract is between the principal and the third party and also the rights and obligations arise between them only. The legal effect of such a contract is the same as if the principal himself directly contracts with the third party.

The legal effect implies that all the acts of the agent within the actual or ostensible authority bind the principal. It is noteworthy here that the acts though out of the scope of the actual authority of a general agent but within his apparent authority are binding on the principal. Thus, any secret restrictions on the powers of the agent do not bind the third party.

Learn more about the Rights of Pawnee and Pawnor here in detail.

2. Undisclosed Principal

In this case, where the agent discloses that he is only an agent but hides the identity of his principal, he is not liable personally. Thus, the principal when discovered is liable for the contract made by his agent and is also responsible for the acts of the agent.

3. Concealed Principal

Where an agent seems to be contracting in his own capacity without disclosing that he is an agent or the name of his principal, he becomes personally liable. In this case, the third party may sue the agent or the principal on discovering him or both.

However, if the third party sues the principal and not the agent, then he shall allow the principal the benefit of all payment that he made to the agent. He is also eligible to obtain the benefit of anything that he pays to the agent under the contract.

In a case where the principal discloses himself before the completion of the contract, the third party may refuse to fulfill the contract if he shows that:

  1. If he knew the principal he would have not entered into the contract.
  2. If he knew that the agent is not the principal he would have not entered into the contract.

Responsibilities of Principal to Third-parties

Source: freepik.com

Principal Liable for Agent’s Misconduct

When an agent commits a wrong or tort or fraud while acting within his actual or ostensible authority, the principal is liable for his acts.

An agent is also personally liable in this case and can be sued also. Even if the agent commits such fraud for his benefit and against the interests of the principal, it renders the principal liable.

Solved Example For You

When is an agent personally liable to the third parties?

Ans.

An agent is personally liable to the third party in the following cases:

  1. He agrees to be personally liable to the third parties.
  2. He acts for a principal who resides abroad.
  3. When he signs a negotiable instrument in his own name without disclosing that he is merely an agent.
  4. Where a principal cannot be sued e.g. a minor
  5. When he contracts as an agent without authority
  6. Where he commits any kind of tort.
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Varinder Gulati

Can a pledgee to whom the gold jewellery is pledged can re pledge the jewellery to some other financer

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