Liability of Principal

Introduction

In agency law, a principal is bound by acts done by an agent within the scope of authority. The law ensures that third parties can safely deal with agents. Sections 226–238 of the Indian Contract Act explain when a principal is liable and when they are not.

Meaning / Definition

Liability of a principal means the legal responsibility of the principal for acts done by the agent while acting on their behalf. When an agent acts within authority, the principal is treated as if they did the act themselves.

Modes or Types

Liability for Acts within Authority (Sec 226)

When an agent acts within their authority, the principal is bound by the contract with the third party. The principal is treated as if they personally entered into the contract.

Liability when Agent Exceeds Authority

If the agent acts beyond their authority, the principal is not liable for those acts.

When Authorized and Unauthorized Acts are Separable (Sec 227)

If the agent performs both authorized and unauthorized acts, and these can be separated:

• The principal is liable only for the authorized part
• The principal is not liable for the unauthorized part

Liability for Notice to Agent (Sec 229)

Any notice or information given to the agent is treated as given to the principal, if it is received during the course of the agency.

Liability for Fraud, Misrepresentation, and Torts (Sec 238)

• If the agent commits fraud or misrepresentation within authority, the principal is liable
• If such acts are outside authority, the principal is not liable
• The same principle applies to wrongful acts (torts)

Distinction / Comparison

Principal vs Agent Liability

• Principal is liable when agent acts within authority
• Agent is generally not personally liable (Sec 230)
• Agent becomes personally liable only if:
  • There is a contract stating so
  • They act outside authority
  • They do not disclose the principal

Practical Example

A appoints B as an agent to buy goods worth ₹10,000.

• If B buys goods worth ₹10,000 → A is liable
• If B buys goods worth ₹15,000 → A is liable only up to ₹10,000 (if separable)
• If B commits fraud while purchasing → A is liable if it was within authority

Summary

• Principal is bound by acts of agent within authority
• No liability when agent exceeds authority
• If acts are separable, liability applies only to authorized part
• Notice to agent is treated as notice to principal
• Principal is liable for agent’s fraud and wrong acts within authority
• Agent generally has no personal liability unless agreed otherwise