Legal and Regulatory Liability for agent’s torts or other wrongs

Environment of
Where an agent commits a tort or other wrongful act (for example, misrepresentation or fraud)
Business
during his/her agency, the principal is liable. The principal is liable even if the tort or wrongful
Notes act is committed exclusively for the benefit of the agent and against the interest of the principal
[Section 230]. Examples to this effect are presented in Box 6.18

Box 6.18 Principal Liable for Agent’s Torts

Example 1
An agent, employed to collect evidence for his principal in a pending law suit, offered to bribe a
witness. It was held that the act was within the course of the employment of the agent and that the
principal was bound by it [Chicago City Rly. Co. vs McMohan16] [Appended to Section 230].

Liability of principal under doctrine of estoppel

When an agent has, without authority, done acts or incurred obligations to third persons on
behalf of his/her principal, the principal is bound by such acts or obligations, if he/she 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 237]. In this case, the principal incurs his/her
liability to third persons by estoppel.

Liability of unnamed principal

If the agent while contracting with third parties discloses the existence of the principal but
does not disclose the name of the principal, the principal is bound by the contract. If however,
the agent refuses to disclose the identity of his principal upon being asked by third parties, the
agent becomes personally liable on the contract.

Liability of undisclosed principal

When an agent who has the authority to contract on behalf of another enters into a contract
in his/her own name (i.e., he/she discloses neither the name of the principal nor his/her exist-
ence), the principal is called ‘undisclosed principal’. In such a case the agent becomes personally
liable to third party. However, if the third party discovers that there is a principal, then as per Section
233, the third party has the option to sue the agent or the principal or both. For example, A enters
into a contract with B to sell him 100 bales of cotton and afterwards discovers that B was acting as
an agent for C. A may sue either B or C or both, for the price of the cotton.

Termination of Agency
Agency, as a contract, gets terminated by any event that terminates a contract, such as by
performance, revocation, or destruction of subject matter, and also in certain special ways.
Accordingly, the various modes of terminating an agency can broadly be classified into the
following two categories:
1. By act of the party, and
2. By operation of law.

Termination by act of the parties

The termination of agency may be caused by an act of the principal or the agent, or by an
agreement between the two. A brief description of putting an end to agency relationship by
act of the parties is given below.

Revocation of authority by the principal

Self-Learning
116 Material The rules governing revocation of authority by the principal may be summarised as under.