Circumstances Where Agent Becomes Personally Liable

Introduction

Generally, an agent is not personally liable for contracts made on behalf of a principal. However, the Indian Contract Act provides several exceptions where the agent can be held personally responsible. These rules protect third parties when the principal cannot be made liable.

Meaning / Definition

Personal liability of an agent means that the agent becomes legally responsible for the contract or wrongful act, either alone or along with the principal. This is an exception to the general rule under Sec 230.

Modes or Types

Foreign Principal (Sec 230)

When an agent contracts for a principal who resides abroad, the agent is presumed to be personally liable.

Undisclosed Principal (Sec 230, 231, 232)

• If the agent does not disclose the principal, the agent is personally liable
• Third party can sue the agent
• Undisclosed principal can also enforce the contract (Sec 231)
• Third party can proceed against the principal once discovered (Sec 232)

Principal Cannot Be Sued (Sec 230)

If the principal cannot be sued (e.g., becomes of unsound mind), the agent becomes personally liable.

Principal Not in Existence

If the agent acts for a principal who does not exist at the time (e.g., pre-incorporation contracts), the agent is personally liable.

Acts Not Ratified

If the agent acts without authority or exceeds authority and the principal does not approve (ratify), the agent is personally liable.

Acting in Own Name

If the agent enters into a contract in their own name without disclosing agency, they are personally liable.

Express Agreement

If the agent expressly agrees to be personally liable, such agreement is binding.

Trade Custom or Usage

If business practice (custom) makes agents personally liable, they will be liable.

Agent with Interest (Sec 202)

If the agent has a personal interest in the subject matter, they can sue and be sued personally.

Fraud or Misrepresentation (Sec 238)

If the agent commits fraud or misrepresentation outside authority, they are personally liable.

Receipt or Payment by Mistake or Fraud

If the agent receives or pays money by mistake or fraud, they are personally liable to the third party.

Pretended Agent

A person falsely claiming to be an agent is personally liable for loss caused.

Important Case Law

Subramanya v. Narayana

An agent with a special or beneficial interest (like an auctioneer) can sue and be sued personally.

Distinction / Comparison

Principal Liability vs Agent Personal Liability

• Principal liable → when agent acts within authority
• Agent personally liable → when exceptions apply (e.g., undisclosed principal, excess authority)
• Liability can be joint and several (both liable together) under Sec 233

Exclusive Liability (Sec 234)

If a third party makes the agent or principal believe that only one will be liable, they cannot later change and sue the other.

Practical Example

A acts as an agent for a foreign company and enters into a contract with B.

• B can sue A directly because the principal is abroad

A signs a contract without disclosing the principal:

• A becomes personally liable

A exceeds authority and principal refuses to approve:

• A alone is liable

Summary

• Agent is generally not personally liable (Sec 230)
• Becomes liable in special cases like foreign principal and undisclosed principal
• Personal liability arises when authority is exceeded or not approved
• Agent is liable for fraud, mistake, or acting in own name
• Trade custom and express agreement can impose liability
• Both agent and principal may be liable together (joint and several liability)
• Third party cannot later shift liability once fixed (Sec 234)