Agency by Estoppel

Agency by estoppel occurs when a person’s actions lead another to believe that a third party has the authority to act on their behalf and that other party enters into a transaction with the third party. This principle is based on equity and natural justice. When a plaintiff relies on the promises, declarations and representations of an agent, they can bind the principal in a legal agreement. 

In such cases, the person whose actions led to the belief that the third party had authorisation is liable for the agreement as if the third party had acted on their behalf. This concept is explained in Black’s Law Dictionary as estoppel, where a party’s conduct prevents them from claiming a right to the detriment of another party who has relied on that conduct and acted accordingly.

For example, if A gives products to B to sell and instructs B not to sell them for less than a certain price, but C makes a deal with B for a lower price without knowing about A’s directive, A is bound by the agreement made by C with B.

Case Laws on Agency by Estoppel

In the case of Kashinath Das v. Nisakar Rout (1962), A owned land and appointed B as the Tahsildar to manage the land. A instructed interested buyers to contact B to purchase the land and B sold the land. Later, A claimed that he did not authorise B to sell the land, but estoppel prevented A from breaking his promise.

According to the Bombay High Court’s decision in Govt. of Goa v. Goa Urban Cooperative Bank (2010), the principal is responsible for the agent’s negligence during the course of their employment. Even though the principal did not authorise the agent to act negligently, the principal cannot escape liability for the agent’s negligence. 

The liability of the principal for the agent’s wrongful act is based on the fact that the principal is the person who has selected the agent and the principal should bear the risk of delegating the performance of a particular class of acts to the agent. The agent’s acts should have been committed in the course of their employment to hold the principal liable.

Features of Agency by Estoppel

Agency by estoppel has distinct features that set it apart from other forms of agency. One key feature is that the liability of the principal is limited to losses caused by the agent’s mistake, rather than expected damages. 

Additionally, the principal’s negligence only exposes them to liability for damages and does not transform an illegal agreement into a contract. Another important feature is that recovery is only possible if the third party acted in good faith and relied on the agent being authorised by the principal.

In United India Periodicals Pvt. Ltd v. CMYK Printech Ltd. (2018), the Delhi High Court held that a principal is responsible for the agent’s actions if third parties reasonably believe that the agent has implied authority to act on behalf of the principal. This creates an estoppel, where the principal is bound by the agent’s actions, even if the agent had no actual authority. The third party is given an assurance that they rely on and it would be unfair for the principal to deny the authority granted.

However, estoppel only works in one direction. The principal does not have the right to enforce the agreement against the third party. As held by the High Court of Calcutta in Rohtas Industries Ltd. v. Maharaja of Kasimbasar China Clays Mines (1951), the third party can seek damages from the principal unless the agreement is validated by ratification.

Moreover, for agency by estoppel to apply, the third party must rely on the other party who has the authority to act on behalf of the principal. In Ahmednagar District Secondary Teachers Co-operative Credit Society v. General Secretary (1979), it was noted that if the third party honestly believes that the other party has the authorisation to work on behalf of the principal and the third party enters into a transaction with the other party, the person whose actions caused the transaction is liable for the agreement as though the third party had acted on their behalf.

Difference between Agency by Ratification and Estoppel

Agency by ratification and agency by estoppel are both types of agency relationships in which the principal is bound by the actions of an agent. However, there are some key differences between the two:

• Agency by ratification is when a principal confirms an unauthorised act performed by an agent after the fact. In contrast, agency by estoppel arises when a principal causes a third party to believe that an agent has the authority to act on the principal’s behalf, even if the agent does not actually have that authority.
• Agency by ratification requires the principal to have knowledge of the agent’s actions before they are ratified, while agency by estoppel does not require the principal to have actual knowledge of the agent’s actions.
• In agency by ratification, the agent has no actual authority to act on behalf of the principal at the time the action is taken, whereas, in the agency by estoppel, the agent may have some actual authority to act on behalf of the principal, but not to the extent that the third party believes.
• In agency by ratification, the principal is bound by the agent’s actions from the moment the act is ratified, while in agency by estoppel, the principal is only bound by the agent’s actions if the third party relied on the principal’s conduct.

Conclusion

Agency by estoppel is a legal concept that protects the rights of third parties who have relied on the actions or representations of a principal or an agent, even when the agent had no actual authority. It is based on the principles of equity and natural justice and helps prevent injustice by holding the principal accountable for the actions of their agents.