SESSION 2011-2016

Contract

Effect on agreement,of fraud and misrepresentation by agent.

Under the Guidance of: Krishna Kant Driwedi Sir Assistant Professor(Law)

Submitted By: Kiran Kachhawaha Roll no. 546 III Semester, Section A
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ACKNOWLEDGEMENT
I express my deepest sense of gratitude to my reverend guide Driwedi Sir, Assistant Professor (Law), Patna for his countenance advice, adherent interest and pain taking nature. He spent no pains in correcting and expertly evaluating my project work. It is pleasant opportunity to pay my regards and sincere thanks to Sir for his valuable support, guidance and immediate help whenever I approached him.

Finally, I wish to thanks my parents and colleagues for their pleasant cooperation, support and encouragement.

KIRAN KACHHAWAHA

III Semester, Section A CNLU, Patna

INDEX

Sr.No.

TOPIC

Pg.No.

Introduction

Object

Methodology

Source of Data Masters Liability of Agent Misconduct

Scope of Authority

11

Liability of Agent

13

Conclusion

15

Bibliography

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1.INTRODUCTION

According to Section 17 of Indian Contract Act, Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent , with intent to deceive another party thereto or his agent , or to induce him to enter into the contract : 1. The suggestion as a fact of that which is not true by one who does not believe it to be true; 2. The active concealment of fact by one having knowledge or belief of the fact; 3. A promise made without any intention of performing it; 4. Any other act fitted to deceive; 5. Any such act or omission as the law specially declares to be fraudulent. According to Section 18 of Indian contract act Misrepresentation means and includes 1.The positive assertion in a manner not warranted by the information of the people making it of that which is not true though he believes it to be true. . 2.Any breach of duty which without an intent to deceive gains an advantage to the person committing it or anyone claiming under him by misleading another to his prejudice or to the prejudice of anyone claiming under him. 3. Causing however innocently a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement. The principal difference between fraud and misrepresentation is that in one case the person making the suggestion does not believe it to be true and in the other he believes it to be true, though in both the cases it is a misstatement of fact which misleads. The language of the contract act throws no light on the relating of fraud to misrepresentation. Fraud, as a cause of recession of contracts, is generally reducible to fraudulent misrepresentation. Accordingly, misrepresentations either fraudulent or not fraudulent . If fraudulent, it is a always
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a cause for rescinding a contract induced by it if not, it is cause of recession only under certain conditions which the definitions of s 18 are intended to express. There are however forms of fraud which do not at first sight appear to include any misrepresentation of fact and the representation, false assertion, ambiguous statements, active concealment, duty to speak and promise without an intent to perform it are intended to cover the field. Under common law fraud will not only render the contract voidable at the option of the party whose consent is so obtainer, but will also give rise to an action for damages in respect of deceit. If a decree is found to have been obtained by fraud, an application moved even belatedly would be maintainable. The court has inherent jurisdiction to grant relief on such an application and even principles of res judicata would not apply. Fraud is conduct either by letters or by words, which induces the other person or authority to take a definite determinative stand as a response to the conduct of the former .It is also well settled that misrepresentation itself amounts to fraud. Indeed, innocent misrepresentation may also give reason to claim relief against fraud. A fraudulent misrepresentation is called deceit and consists in leading a man into damage by willfully or recklessly causing him to believe and act on falsehood. It is a fraud in law if a party makes representation which he knows to be false, and injury ensues therefore although the motive from which the representation proceeded may not have been bad. Fraud and justice never dwell together1. Misrepresentations or fraud by the agent made while acting within the scope of authority affect the principal, and render him liable to the third party for such misrepresentation or fraud ; but not where these are committed by the agent outside the scope of his authority. This is provided in Section 238 of the Indian Contract Act, 1872 as follows. 238. Effect, on agreement, of misrepresentation or fraud by agent. Misrepresentation 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

Ram Chandra Singh vs. Savitri Devi 2003 8 SCC 319

misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals. Illustrations (a) A, being Bs 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 Bs 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. Thus , if the agent acting within the scope of his authority, is guilty of fraud , or misrepresentation in the making of the contract, or has concealed facts which must be disclosed to the other party , the contract is voidable at the instance of that party , who may rescind it as against the principal, and recover from the principal any benefit which has passed under the contract .This principle applies irrespective of whether the principal has or has not been party to such misrepresentation or fraud . Where the other party elects to affirm the contract , or has lost the right to rescind , he may bring an action for deceit if the agent has induced the contract by fraud , or sue for breach of warranty if the representation constituted a warranty.

2.OBJECT
In this project I propose to discuss Section 238 of The Indian Contract Act, 1872 which deals with effect on agreement, of fraud and misrepresentation done by the agent.. The project also touches upon all the relevant case laws pertaining with the aspect. The object of the study is to understand each and every concept minutely

3. METHODOLOGY
The research methodology is doctrinal in nature. Library and Internet are the main sources. Relevant books, case laws have also been referred.

4.SOURCE OF DATA
For carrying out my project successfully I have taken help from secondary source of data.

5. MASTERS LIABILITY FOR AGENTS MISCONDUCT:

According to the maxim respondent superior, let the principal be held responsible, the general rule is that the master is answerable for every such wrong of the servant or agent as is committed in the course of the service and for the masters benefit, though no express command or privit y of the master be proved. In all these cases, it may be said that the master had not authorized the act. It is true that he has not authorized the particular act, but he has put the agent in his place to do that class of acts and he must be answerable for the manner in which that agent has conducted himself in doing the business which it was the act of his master to place him in. So a master or principal is liable for wrong done to third parties by his servant or agent, provided that the act is done on his behalf and with the intention of serving his purposes. And this has been held to be so even though the principal did not authorize the intentional wrong committed by the agent and even if he had expressly forbidden it2. Thus a Municipal Board was held to be liable for the acts of its Secretary in executing an illegal distress warrant acting under the orders of the Chairman of the Board3. Following the English case of Barwick v. English Joint Stock Bank4, it was held that a principal is liable for the wrongs of his agent committed within the scope of his authority and purporting to be for the benefit of the principal, although no express order can be shown; but, where the fraud is committed by the agent when he was acting, not in the interest of his employers but entirely in his own interests, the principal cannot be held responsible for the consequences of his fraudulent conduct. Where an agent after entering into a contract on behalf of the principal with third party committed fraud and misappropriated the amount, the principal does not escape liability on contract.A principal is liable for the agents fraud acting within the course of his authority , whether the fraud is committed for the benefit of the principal, or for the benefit of the agent. If an agent, authorized to sell the property, commits a fraud against his principal, the principal is the person who ought to suffer, and not a stranger. But a principal is bound only by acts done by his agent on his behalf in good faith and not by his fraudulent actions when a third person who

2 3 4

Contract and Specific Relief, Avtar singh, 10 Edition, Eastern book company
Municipal Board of Mussorrie v. Goodall, 26 All 482. (1867) LR 2 Exch 259.

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relies upon such actions is himself a party to the fraud5. So where an agent acting in collusion with a third party does an act without the consent of his principal and the act is detrimental to the interests of the principal, the latter is not bound by the act. An agent guilty of fraud, duress or any wrong cannot be permitted to escape personal liability on the ground that it was his principal and not himself who was benefited by such fraud or wrong. The intention of the legislature in enacting section 238 was not to lead to any such result. The misrepresentations made or frauds committed by the agents which do not fall within their authority would not affect the principals. An agent not paying money of the principal on demand and who has been improperly dealing with it is liable for interest. There may be cases, outside the scope of the provisions of section 238, in which a fraud or misrepresentation, practiced or made by an agent, may invalidate an agreement entered into by the principal. In another case it was laid down that the true rule of law with regard to the liability of the master for the misconduct of the servant is that the master is liable for the fraud of his servant in the course of his service and for his masters benefit and that a master is not liable for the misconduct of the servant committed by the servant for his own benefit, and that it is not necessary that the benefit should accrue to the master. But under the law of England, a principal is liable for the fraud of his agent acting within the scope of his authority, whether the fraud is committed for the benefit of the principal or for the benefit of the agent. The principle is based on equity and good conscience and is applicable also in this country. Referring to Barwicks case it was pointed out in a later case6,that it is a very different proposition to say that the master is not answerable for the wrong of the servant or agent, committed in the course of the service, if it be not committed for the masters benefit and this was adopted in India in a later case where a previous case7 was held to have been decided on an erroneous construction of the principle laid down in Barwicks case. It was held in that case that there is nothing in section 238 to show that in order to render the principal liable the fraud must be committed for the benefit of the principal, and a principal is liable for the fraud of his agent
5

Ganga Bakhsh v. Maula Bux, 1926 Oudh 337: 92 IC 612; Shipway v. Broadwood, (1899) 1 QB 369, Smith v. Sorby, (1878) 1 QBD 552 n. 6 Lloyd v. Grace, Smith and Co., LR (1912) AC 716.
7

Gopal Chandra v. Secy. of State, 13 CWN 619.

acting within the scope of his authority whether the fraud is committed for the benefit of the principal or for the benefit of the agent. So where certain goods consigned were misappropriated by the agents while carrying them in the boat in course of their business for their principal, held, in a suit by the consignor for damages, that the principal was also liable for misappropriation committed by his agents. Plaintiff and the defendant had dealings together and the defendant was in the habit of paying to the plaintiffs servants. One of the plaintiffs servants presented a bill on which the defendant paid. The bill was afterwards found to be a forgery. Held, following Barwick v. English Joint Stock Bank, that the plaintiff was liable to make good the amount paid by the defendant8. It is, however, important to note that where a contract is entered into by an agent fraudulently, in furtherance of his own interests, and contrary to instruction, the principal will be bound by the contract only if third persons dealing with the agent have acted in good faith9. The onus of proving good faith lies on such third persons claiming against the principal. Section 238 is not exhaustive , and there may be cases outside the provisions, in which a fraud or misrepresentation practiced or made by the agent may invalidate an agreement entered into by the principal. For instance, where the principal has referred the other party to the agreement to some person for information , the person supplying the information would be the agent of the principal , and if the information supplied is false , it would amount to fraud or misrepresentation as to bind the principal. A principal is liable for the misfeasance or tort of his agent, when such misfeasance or tort has been done or committed with the subsequent assent, adoption or ratification of the principal. Where it is found that a principal was cognizant of and countenanced the act of his agent it may be inferred that he assented to it.

8 9

Partap Narain v. Jute Mills, 50 Mad 29.

Chitty on Contracts ,30th Edition, Sweet & Maxwell

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6. SCOPE OF AUTHORITY
Merely because a person gets an opportunity to behave fraudulently by virtue of his being appointed as an agent , his principal cannot be liable , unless the fraud committed by the agent is in a matter which falls within his authority. The fraud of an agent, when such agent is acting within the scope of his employment on behalf of his principal, is considered technically in law to be the fraud of the principal10. In order, therefore, that the principal may be liable for the fraud of the agent, the agent must have acted within the scope of his authority. In a way the application of the Section 238 requires that to make the principal liable, the misrepresentation or fraud must be committed in the course of business or employment i.e., falling within the scope of authority of the agent. The meaning of the words acting in the ordinary course of business came up for determination in Oppenheimer v Attenborough. The court observed: When you are dealing with a person who is a mercantile agent you have to find out whether in the customary course of his business as such agent he has authority to sell or consign for sale or buy or raise money of goods . There are many kinds of agent who receive possession of goods, such, for instance , as carriers, and yet it is no part of the customary course of the business of such agent to sell them or consign them for sale or raise money on them .Therefore , when you are dealing with an agent in possession of goods, you have no doubt, to consider what kind of agent he is, and what his customary course of business would be when he is acting under the capacity of agent. Where a railway station master gave a railway receipt purporting to show that some goods were consigned from his station to another which was simply false, it was held that this act did not constitute an act within the scope of his employment as station master, and the railway company was held not to be liable for the fraud of the station master11. The principal is liable for the fraud of his agent acting within the scope of his authority whether the fraud is committed for the benefit of the principal or for the benefit of the agent. There is no difference in the liability of a master for wrongs whether for fraud or any other wrong committed by a servant in the course of
10 11

Dutt on contract, HK Saharay, 10th Edition, Eastern Law House, New Delhi
Hukumchand v. B.N. Ry., 45 IC 856.

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his employment and it is a question of fact in each case whether it was committed in the course of the employment. Where a sales agent appointed by the respondent bought from the appellant cloth on credit and also borrowed some money for meeting octroi duty and transportation expenses and misappropriated it, in an action brought by the appellant against the respondent, the respondents plea that the agent acted beyond the scope of his authority would not be acceptable and the respondent would be held liable on the ground that the appellant had no reason to believe that the agent was not acting within the scope of his authority12. In an action in deceit it is necessary to prove that one of them (Principal and Agent) was dishonest. In Armstrong v. Strain13, Delvin, J., observed: You cannot add an innocent state of mind to an innocent state of mind and get a result of dishonest state of mind. In this case the defendant engaged a firm of estate agents to sell his bungalow which was in a poor condition and had been underpinned a number of times to save it from falling down. The defendant knew it. An agent named Skinner of the firm of estate employed by the defendant who did not know this made a representation that the bungalow was in good condition and any building society would easily lend 1200 for it. The plaintiffs purchased the bungalow on the said representation. On discovering the fact regarding real condition of the bungalow, the plaintiff brought an action against the defendant. The defendant was held not liable. The court held that the defendant had neither authorised Skinner to make the said representation nor fraud was intended by the defendant or his agent. But the position will be different where an agent makes false representation knowingly while acting within the scope of his authority. Thus where fraud is committed by responsible officers of a corporate body knowingly by representing false facts the corporate body will be held liable and even if the motive of the person indulging in deceit is laudable he cannot escape from the consequences of his action14.

12 13 14

AIR 1967 All 382. (1951) 1 TRR 856, 872.

R.C. Thakkar (M/s.) v. M/s. Bombay Housing Board, AIR 1973 Guj 34, 52; the court relied on S. Pearson & Son Ltd. v. Lord Mayor & Co. of Dublin, 1907 AC 351, 354 and London County Freehold and Leasehold Properties Ltd. v. Berkley Property and Investment Co. Ltd., (1936) 2 All ER 1339.

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7. LIABILITY OF AGENT AND MASTER

Any agent, including, a public agent, who commits a wrongful act in the course of his employment, is personally liable to any third person who suffers loss or damage thereby notwithstanding that the act was expressly authorized or ratified by the principal, unless it was thereby deprived of this wrongful character it is immaterial that the agent did the act innocently and without knowledge that it was wrongful, except in cases where actual malice is essential to constitute the wrong15. The authorities make it plain that while prima facie a principal is not to be made criminally responsible for the acts of his servants, yet the Legislature may prohibit an act or enforce a duty in such words as to make the prohibition or the duty absolute, in which case the principal is liable if the act is in fact done by the servants . The master is not liable where his servant for his own private ends does an unlawful act which the master did not authorize . The general rule of law is that a master is not criminally responsible for the acts of his agent unless he expressly commands or co-operates with them. In criminal cases they must answer for their own acts and stand or fall by their own behavior. But there are exceptions to this general rule .Thus in some cases criminal liability is imposed by statute upon the master as regard the acts or omission of his servants .Licence cases form a class by themselves in which the master is generally held responsible .Statutes passed for the benefit of public health and sanitation are construed in the same way as Licensing Acts16 . In Attorney General v Siddon17 the rule is thus stated whatever a servant does in the course of his employment with which he is entrusted , and as a part of it , is the masters act . This rule which is of general application so far as civil liability goes is applicable to certain criminal proceedings also. Thus, a licensed vendor is liable on his servant selling opium in the course of his employment to a person below 14. So also the master is liable for sale by his servant , acting under the general scope of his employment , of ammunition and military stores without previously ascertaining that the buyer was legally authorized to possess the same.
15 16 17

Halsbury, Vol. I, section 470, pp. 224, 225.

Emperor v Zawar ILR 45 All 541. (1830)1 Cr& J 220 (225)

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A bank is liable for fraudulent misappropriation by his agent on crossed cheque. If the offence is prohibited in itself knowledge on the part of the licensee (the principal) is immaterial18. An agents stealing the goods of the principal and selling them cannot confer a good title on the purchaser even though he bought them honestly19.If a particular state of mind is not of the essence of an offence , the master may be criminally liable for the act of his servant done in the course of his employment. Thus ,the master is not criminally responsible for the acts of his agent unless he expressly commands or personally co-operates in them or criminal responsibility is expressly imposed by statute or contract20.

18 19 20

Emray v Nolloth (1903) 2 KB 264. Farquharshan v King (1902) AC 325

Fakira Sambhaji v. Emp., 1926 Nag 73: 87 IC 918; see also Bishambhar v. Emp., 1925 Oudh 676: 87 IC 962; Maung Nwe v. Maung Po, 1937 Rang 117: 169 IC 293.

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8.CONCLUSION
Section 238 of The Indian Contract Act, 1872 deals with the effect on agreement, of fraud and misrepresentation done by agent. It states that when the fraud or misrepresentation is done by agent while acting under the course of his business then the same will be construed to have been done by the principal and so the Principal will be held liable for any of the consequences accruing henceforth. But where the Fraud and Misrepresentation done by agent falls beyond his scope and authority then for such act Principal will not be held Liable instead Agent himself will be held liable.. Thus, Misrepresentations or fraud by the agent made while acting within the scope of authority affect the principal, and render him liable to the third party for such misrepresentation or fraud ; but not where these are committed by the agent outside the scope of his authority.

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9.BIBLIOGRAPHY

Books
1. Contract II R.K. Bangia, Allahabad law Agency , 6th Edition 2009 2. Contract II along with Specific Relief Act ,11th Edition, S.K Kapoor ,Central law agency , Allahabad 3. Contarct-II Cases and Materials V Kesava Rao , Lexisnexis butterworths 4. Dutt on contract, HK Saharay, 10th Edition, Eastern Law House, New Delhi 5. Ansons law of contract, J Beatson, 28th Edition , Oxford University Press New Delhi 6. Contract and Specific Relief, Avtar singh, 10th Edition, Eastern book company 7. Chitty on Contracts ,30th Edition, Sweet & Maxwell Websites 1. www.lawyersnjurists.com 2. www.dateyvs.com 3. law.freeadvice.com 4. www.sjecnotes.weebly.com

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