Section 238 - Effect, on agreement, of misrepresentation or fraud by agent

Section 238 - 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 authorized by B to make. The contract is voidable, as between B and C, at the option of C.

(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.

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The Section 238 is all about Agent guilty of Fraud. Where an Agent is guilty of fraud or misrepresentation in matters that are outside the scope of his authority, he is personally liable, and do not affect his Principal.
Thus According to Section 238, The Principal is liable for any fraud or misrepresentation made by his agent during the course of his business, as if the fraud or misrepresentation was done by the Principal himself.
The liability of the principal is based on the rule ‘Qui facit per alium facit per se’, which means the act of the agent is the act of the principal.

In fact if an agent commits a tort or other wrong (e.g. misrepresentation, fraud, etc.) during his agency whilst acting within the scope of his actual or apparent authority, the principal is liable. But the agent is also personally liable and he may be sued also. The principal is liable even if the tort is committed exclusively for the benefit of the agent and against the interests of principal. 

Under section 238 of the Act misrepresentation or fraud committed by an Agent may be classified into two categories:-

i) Under his actual or ostensible authority. the principal is liable for the acts which fall under actual or ostensible authority.

ii) Which is not covered within his authority, the principal is not liable for the acts which do not fall under actual or ostensible authority. Where an Agent is guilty of fraud or misrepresentation in matters that are outside the scope of his authority, he is personally liable, and do not affect his Principal.

Depending upon the acts of an agent, the fraud or misrepresentation done by agent following are the variations: -
Agent exceeds authority & act not ratified: Where an Agent acts either without any authority or exceeds his authority, he shall be held personally liable when the principal does not ratify his acts.

Agent receives or pays money: Where an Agent receives or pays money by mistake or fraud to a third party, he shall be personally liable to such third party. Also he can personally sue the third party if the fraud or mistake is accountable to such third party.

Personal liability of an agent to third party: - 

An agent is personally liable in following cases:

a) where agent has agreed to be personally liable to the third party.

b) where an agent acts for a principal residing abroad.

c) when an agent signs a negotiable instrument in his own name without making it clear that he is signing it only as agent.

d) when an agent acts for a principal who cannot be sued (e.g. minor principal).

e) an agent is liable for a breach of warranty of authority. Where a person contracts as agent without any authority, there is breach of warranty of authority. He is liable to the person who has relied on the warranty of authority and has suffered loss.

f) Where authority is one coupled with interest or where trade, usage or custom makes the agent personally liable, he will be liable to the third party.

g) he is also liable for the torts committed in the course of agency.

Case Laws:

1) A leading case on this subject is of Lloyds v/s Grace Smith in which it was held that a principal is liable for the fraud of his agent within the scope of his authority whether the fraud is committed for the benefit of the Principal or for the benefit of Agent.
2) National Bank of Lahore v. Sohan Lal: - the manager of a bank, tampered with the locks of the lockers in which plaintiffs’ valuables were kept, the bank was held vicariously liable for the loss which has been caused to a customer due to the theft of their valuables from the lockers.

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Thanks for reading till the end. 
Note: -
1) This blog is for study purpose only.
2) The highlighted part is same as it is in the bare act of Indian Contract Act, 1872.
Please share this blog with each law student you know.

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Index of Indian Contract Act, 1872.

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