The starting point is S.226: a contract entered into by an agent within his authority has the same legal consequences as if the principal had made it himself. The agent drops out of the transaction. S.230 states this as a presumption, and then the Act and case law recognise defined situations in which the agent is personally liable, or personally entitled to enforce.
Legal Framework
| Provision | Subject | Key Rule |
|---|---|---|
| S.226 | Enforcement of contracts entered into through an agent | Contracts made by an agent have the same consequences as if made by the principal in person |
| S.230 | Agent cannot personally enforce or be bound | Presumption that an agent neither personally enforces nor is bound by contracts made on the principal's behalf |
| S.230 (presumptions of contrary intention) | Three statutory exceptions | Foreign principal, undisclosed principal, and principal who cannot be sued |
| S.231 | Rights of parties to a contract made by an agent for an undisclosed principal | The other party may, on discovering the principal, refuse performance if he would not have contracted had he known |
| S.232 | Performance of a contract with an agent supposed to be acting for himself | Where the principal discloses himself before completion, the other party may refuse to fulfil the contract if he can show he had a reason for dealing with the agent personally |
| S.233 | Right of person dealing with agent personally liable | The third party may hold either the agent or the principal, or both, liable |
| S.234 | Consequence of inducing agent or principal to act on belief that only one will be held liable | A party who induces such belief cannot afterwards hold liable the other |
| S.235 | Liability of a pretended agent | A person untruly representing himself as an authorised agent must make compensation to the other party for any loss sustained |
| S.236 | Person falsely contracting as agent not entitled to performance | A person with whom a contract has been made in the character of agent is not entitled to require performance if he was in reality acting for himself |
The General Rule (S.226, S.230)
Where an agent contracts within the scope of his authority and discloses both the existence and the identity of his principal, the contract is between the principal and the third party. The agent is neither liable on it nor entitled to enforce it.
Why the agent drops out: The agent's function is representative. The third party knowingly bargained for the principal's obligation, priced the risk of the principal's solvency, and did not seek the agent's credit. Imposing liability on the agent would give the third party a benefit he never negotiated for and would deter people from acting as agents at all.
Exceptions: When the Agent is Personally Liable
1. Foreign Principal (S.230, first presumption)
Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad, a contrary intention is presumed and the agent is personally liable.
Why: Enforcement against a party outside the jurisdiction was historically difficult and costly. The presumption gives the local third party a solvent, reachable defendant. The presumption may be rebutted by proof of a contrary intention.
2. Undisclosed Principal (S.230, second presumption)
Where the agent does not disclose the name of his principal, a contrary intention is presumed and the agent is personally liable.
| Sub-situation | Third party's position |
|---|---|
| Agency disclosed but principal unnamed | The third party contracted knowing there was a principal; on discovery he may sue the principal or the agent |
| Existence of agency itself concealed | The third party believed he dealt with a principal; he may elect to hold the agent or, on discovery, the principal (S.231, S.233) |
Right of election (S.233) and its limit (S.234): The third party may hold either the agent or the principal liable, but not both to satisfaction. Once he has induced either of them to act on the belief that only the principal or only the agent would be held liable, he cannot afterwards hold the other.
Protection of the third party (S.231): If the principal discloses himself before the contract is completed, the other party may refuse to perform if he can show he would not have entered into the contract had he known who the principal was, or had he known the agent was not the principal.
3. Principal Who Cannot Be Sued (S.230, third presumption)
Where the principal, though disclosed, cannot be sued, the agent is personally liable. This covers a principal who is a minor, or a body not yet in existence.
Facts: Promoters signed a contract to buy wine "on behalf of" a company that had not yet been incorporated. The company was later formed and purported to ratify the contract, then went into liquidation without paying.
Issue: Were the promoters personally liable, and could the company ratify a contract made before its incorporation?
Held: The promoters were personally liable. A company cannot ratify a contract made before it existed, because there was no principal in existence at the time capable of authorising the act. Where there is no principal capable of being bound, the person contracting is liable himself.
Relevance: The leading authority on pre-incorporation contracts and the third limb of S.230. Cite where the named principal had no legal existence.
4. Agent Acting Beyond Authority
Where the agent exceeds his authority, the principal is not bound by the excess (S.227 and S.228), and the agent may be personally liable to the third party for the loss.
5. Agent Signing in His Own Name
If an agent signs a contract or a negotiable instrument in his own name without indicating that he signs as agent, he is personally liable on it.
6. Breach of Warranty of Authority
A person who represents himself as having authority which he does not have gives an implied warranty of authority. If the representation is false, he is liable to compensate the third party for loss, whether or not he was fraudulent.
Facts: An agent, honestly believing he had authority, granted a lease of the principal's farm. The principal was not bound. The intended lessee had incurred costs and sued the agent.
Held: The agent was liable. A person who professes to contract as agent impliedly warrants that he has the authority he claims. Breach of that warranty makes him liable in damages even though he acted in good faith and without fraud.
Relevance: The foundation of breach of warranty of authority, reflected in S.235. Note that liability is strict and does not depend on dishonesty.
7. Pretended Agent (S.235)
A person who untruly represents himself to be the authorised agent of another, and thereby induces a third person to deal with him, must make compensation for any loss sustained if his alleged employer does not ratify his acts.
8. Agency Coupled with Interest
Where the agent has a personal interest in the subject matter, he may sue and be sued personally to the extent of that interest.
9. Trade Usage or Express Contract
Custom of a particular trade, or an express term, may make the agent personally liable, as with certain classes of brokers.
When the Agent May Personally Enforce
| Situation | Basis |
|---|---|
| Agent contracts in his own name for an undisclosed principal | S.230 presumption; the agent may sue on the contract |
| Agency coupled with interest | The agent enforces to the extent of his interest |
| Trade usage permits | Custom of the trade |
| Express provision in the contract | Terms so provide |
Limit under S.236: A person with whom a contract has been made in the character of agent is not entitled to require performance if he was in reality acting not as agent but on his own account. A person cannot use the character of agent to obtain a contract and then enforce it as a principal.
Illustrations
-
General rule: A, agent for a disclosed principal P, buys goods for P from S within his authority. S must sue P, not A, for any breach. A drops out of the transaction under S.226 and S.230.
-
Foreign principal: A, an agent in Chennai, buys cotton for a merchant resident in Singapore, disclosing the principal. Under the first presumption in S.230, A is personally liable to the seller unless a contrary intention is shown.
-
Unnamed principal and election: A buys goods saying only that he acts "for a client" whom he does not name. On default, the seller may sue A. If the seller later discovers the principal, he may elect to sue the principal instead, but under S.234 he cannot pursue both to satisfaction once he has induced one to act on the belief that only the other would be liable.
-
Third party's right to refuse: A contracts to sell property, disclosing that he acts for an unnamed principal. Before completion the principal is revealed to be a person with whom the seller has an ongoing dispute and would never have dealt. Under S.231 the seller may refuse to perform, provided he can show he would not have contracted had he known.
-
Pre-incorporation contract: Promoters sign a purchase contract "on behalf of" a company yet to be incorporated. Applying Kelner v Baxter (1866) and the third limb of S.230, the promoters are personally liable and the company cannot ratify.
-
Breach of warranty of authority: An agent, believing in good faith that his authority subsists, grants a lease after the principal has in fact died. The lease does not bind the estate. Applying Collen v Wright (1857), the agent is liable to the intended lessee for the loss, despite his honesty.
-
Signing in own name: An agent signs a promissory note in his own name without adding words showing he signs for a principal. He is personally liable on the instrument.
-
S.236 bar: A obtains a contract by presenting himself as agent for an unnamed buyer when he was in truth buying for himself. He cannot sue for specific performance, because S.236 denies performance to a person who contracted in the character of agent while acting for himself.
Recall Check
- State the general rule in S.226 and S.230 on the position of an agent who contracts within authority for a disclosed principal.
- Name the three presumptions of contrary intention in S.230.
- Why is liability for breach of warranty of authority strict rather than fault-based?
Key Cases
Kelner v Baxter (1866) Kelner v Baxter 1866
Issue: Whether promoters are personally liable on a pre-incorporation contract and whether the company may later ratify it.
Rule: A principal must exist at the time of the act; where no principal capable of being bound exists, the contracting person is personally liable.
Held: The promoters were personally liable and the company could not ratify.
Collen v Wright (1857) Collen v Wright 1857
Issue: Whether an agent who honestly but wrongly believed he had authority is liable to the third party.
Rule: A person professing to contract as agent impliedly warrants his authority; breach makes him liable in damages regardless of good faith.
Held: The agent was liable to the intended lessee for the loss suffered.
Distinctions
| Basis | Disclosed and Named Principal | Unnamed Principal | Undisclosed Principal |
|---|---|---|---|
| Third party's knowledge | Knows of the agency and the identity | Knows of the agency, not the identity | Believes he deals with a principal |
| Who is liable | The principal alone | Agent, and the principal on discovery | Agent, and the principal on discovery (S.231, S.233) |
| Third party's right to refuse | None | S.231 protection available | S.231 and S.232 protection available |
| Agent's right to sue | No | Ordinarily yes | Yes |
| Basis | Liability under S.235 (pretended agent) | Breach of Warranty of Authority |
|---|---|---|
| Source | Statutory | Common law, reflected in S.235 |
| Requires dishonesty | Untrue representation suffices | No; honest mistake is enough (Collen v Wright) |
| Remedy | Compensation for loss sustained | Damages for loss |
| Effect of ratification | Ratification by the alleged employer removes liability | Ratification cures the want of authority |
Flashcards
State the general rule on an agent's personal liability.
Under S.226 and S.230, an agent who contracts within authority for a disclosed and named principal is neither personally liable nor entitled to enforce the contract.
Name the three presumptions of contrary intention under S.230.
Where the principal resides abroad, where the principal's name is not disclosed, and where the principal, though disclosed, cannot be sued.
Can a third party sue both the agent and the undisclosed principal?
He may elect to hold either liable under S.233, but S.234 prevents him from holding one after inducing the other to act on the belief that only that one would be liable.
What is the position of promoters who contract for a company not yet incorporated?
They are personally liable and the company cannot ratify, because no principal existed at the time (Kelner v Baxter, 1866).
Does liability for breach of warranty of authority require fraud?
No. Collen v Wright (1857) held the agent liable although he honestly believed he had authority. The warranty is strict.
What does S.235 provide?
A person untruly representing himself as an authorised agent must compensate the other party for loss sustained, if the alleged employer does not ratify.
What does S.236 prevent?
A person who contracted in the character of agent while really acting for himself cannot require performance of the contract.
When may an agent sue on a contract in his own name?
Where he contracted for an undisclosed principal, where the agency is coupled with an interest, where trade usage permits, or where the contract so provides.
Exam Scenario
Problem: Rohit approaches a timber merchant and buys teak worth Rs. 8 lakhs, saying he is purchasing "for a client" whom he declines to name. The merchant delivers on 60 days' credit. Payment is not made. The merchant then discovers the client is Sameer, a trader with whom he had earlier litigated and whom he would never have supplied. Meanwhile, in a separate transaction, Rohit had granted a five-year lease of Sameer's warehouse to a logistics firm, honestly believing his power of attorney was still valid, when in fact Sameer had revoked it a week earlier. The logistics firm had spent Rs. 3 lakhs on fit-out before being told the lease was void. Advise the merchant and the logistics firm.
Step 1: Classify the timber sale and map the provisions
Rohit disclosed the agency but withheld the identity, so this is an unnamed principal.
| Provision | What it does | On these facts |
|---|---|---|
| S.230 | Presumes the agent personally liable where the principal is unnamed | The second presumption applies, so Rohit is personally liable |
| S.233 | Gives the third party an election between agent and principal | Having discovered Sameer, the merchant may sue either Rohit or Sameer |
| S.234 | Bars pursuit of one party once the other has been induced to rely | The merchant must choose deliberately and avoid conduct suggesting a release |
| S.231 | Allows refusal of performance where the principal discloses himself before the contract is completed | Fails. Delivery is done and the merchant has performed, so there is nothing to unwind |
Step 2: Advise the merchant in this order
- Establish Rohit's personal liability under S.230.
- Elect under S.233. The merchant has two solvent targets and may choose the better one.
- Sue in debt for Rs. 8 lakhs. Rescission under S.231 is not open, so the claim is for the price, not for unwinding the sale.
Step 3: The lease, breach of warranty of authority
Rohit represented that he had authority when it had been revoked a week earlier. That is a breach of warranty of authority.
Under Collen v Wright (1857) his honest belief is no defence, because the warranty of authority is strict. S.235 provides the statutory route to the same result: he untruly represented himself as an authorised agent and must compensate the logistics firm for the Rs. 3 lakhs.
Step 4: Sameer's position on the lease
Sameer is not bound by the lease, since the authority had been revoked before it was granted.
The firm might explore apparent authority if Sameer had not given notice of the revocation.
S.234 can destroy the election. Once the merchant induces one of Rohit or Sameer to act on the belief that only the other will be held liable, he cannot afterwards pursue that other.
S.231 is a pre completion remedy. It requires disclosure of the principal before the contract is completed, plus proof that the party would not have contracted had he known. Delivery having been made, the merchant's remedy is in debt, not rescission.
Honest belief is no answer to a warranty of authority. Collen v Wright (1857) makes the warranty strict, so Rohit's belief that his power of attorney survived does not save him from S.235.
Conclusion. The merchant may recover Rs. 8 lakhs from Rohit or Sameer at his election. The logistics firm recovers Rs. 3 lakhs from Rohit personally.
See Also
- Relations with Third Parties and Doctrine of Apparent Authority : when the principal is bound despite the absence of actual authority.
- Rights and Duties of Agent : the indemnity the agent may claim from the principal for lawful and good faith acts.
- Termination of Agency : the effect of revocation on authority and the need for notice to third parties.