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Agency By Estoppel ( Save as .pdf )
Published : April 14, 2010 | Author : rishabhgoenka
Category : Civil Laws | Total Views : 38847 | Rating :
rishabhgoenka
2nd Year, BA LLB, West Bengal National University of Juridical Sciences
The concept of agency by estoppel arises where one person acts in such a way that the other believes that a third person is authorised to act on his behalf and enters into a transaction with the third person, the person whose act induced him to do so, is liable for that agreement as if the third person acted on his behalf. It is based on the principle of natural justice and equity. Any agent acting outside the scope of his employment will bind the principal by his acts if such acts were perceived as others to be within the apparent authority of the agent in all those cases where the principle has induced the third party to believe that the acts were within the scope of his authority[1]. It is also necessary that the third party must have acted on that representation of the principal. However, this is the Indian position of law, according to which a pre-existing relationship of an agency is required for the doctrine of agency by estoppels to be applicable. According to the common law understanding of the agency by estoppel, existence of an agency is not a necessary condition. Only inducement of a belief of its existence is required. Art. 21 of the American Restatement on Agency, Third gives a broader view to the principle by adding that liability of principle would arise irrespective of the prior termination of agency. It however also affix that the principle will not be held liable if the third party had been served a notice of termination of agency before he entered into a transaction[2].
A subset of the doctrine of agency by estoppel is government estoppel. This doctrine estopps the government from denying the liability of the acts done by its agents. However, there exists many exceptions to the rule of agency by estoppel for government estoppels. For example, this doctrine is not applicable in the cases of apparent authority. Agent, only acting within the scope of his authority can bind the government. Likewise, there are also many other exceptions which are explained in the chapters to follow.
1: Apparent Authority & Agency by Estoppel
Apparent authority : -
Apparent authority – Where a person, by words or conduct, represents or permits it to be represented that another person has authority to act on his behalf, he is bound by the acts of hat other person with respect to anyone dealing with him as an agent on the faith of any such representation, to the same extent as if such other person had the authority that he was represented to have , even though he had no such actual authority[3].
Apparent authority rests on conduct or words of the principal which lead the third party to believe reasonably that the agent is acting with authority[4].The American Restatement (Second) on Agency defines apparent authority as the agent's power to affect the legal relationships of a principal "by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other's manifestations to such third persons[5]." If the authority exists, the third party has the same rights and obligations with reference to the principal as he would under actual authority[6]. Apparent authority reflects the concept that a principal is liable for someone's unauthorized acts if the principal is responsible for the third party's belief as to the authority[7]. However, the authority exists only with regard to those who in fact do believe that there is authority, and the belief must be reasonable[8].
Following are some case laws which elaborates on how the apparent authority is formed:
The Burnt Cotton Case[9]: In 1863, T sold 144 bales of cotton to A, P's agent, for 40 cents a pound. Before the cotton could be put on a boat, 90 bales were bur ned. P had instructed A to buy at an average price of 30 cents a pound and not vest ownership till delivery at Memphis, so A violated instructions. Must P pay for the burnt cotton?
The U.S. Supreme Court agreed that P must pay, in a unanimous in opinion by Justice Strong. A did have express authority to buy cotton for P, subject though he was to secret instructions on how he was to do it. It was impractical for T to delay and ask P if A had authority. Having the express authority to be a general agent, he had the apparent authority to pay the market price for typical terms of delivery.
The Lawyer Madnick Case[10]: Principal Rothman hired agent lawyer Madnick to represent him in a tort suit against third party Fillette. Pennsylvania law requires express authority for a lawyer to settle a case for his client. Madnick settled the Rothman's case without such authority, forged his signature, and cashed the $7,000 check for himself. Five years later, after Madnick had been disbarred and convicted of forgery unconnected with this case, Rothman sought to reopen his case. Can he-- and does the $7,000 count as being paid to Rothman?
A lower court thought that in this case third party Fillette ought to have taken more care to check on Rothman's authority. The appellate court found this absurd and reversed, saying,
"The lower court suggested the following methods for an insurer to ascertain the attorney's authority prior to consummating settlement: (1) compare the signature on the release with the signature in the files; (2) require the release to be notarized; (3) request the claimant to personally execute the release in their presence; and/or, (4) obtain permission to contact the claimant in order to verify settlement. In our judgment these suggestions are impractical and of little utility for the objectives sought to be achieved[11]
Fillette could have undertaken all four of these checks on Madnick's authority, but at a significant cost, given the unlikelihood of encountering forgery from an attorney. Even in the modern age of telephone and fax, checking up is not cheap
In the beginning of this chapter, I have mentioned that "Apparent authority rests on conduct or words of the principal…". Foe example, if A tells B that C has authority, and then A cancels the authority without telling B, then C clearly has apparent authority but not actual authority. If C tells B that C has authority to act for A, when C in fact has never met A, then C does not have apparent authority. A maxim of agency law is that an agent cannot create his own authority. But what if A's conduct has led B to believe that C has authority while C actually does not possess any? It is here the lines between apparent authority and agency by estoppel becomes blurred. In the Burnt Cotton Case and the Lawyer Madnick Case, the agent is chiefly to blame for the false appearance of authority, but the principal put him in a position to create that false appearance. This is why the principal is held responsible. However, the doctrine of apparent authority validates the agent’s act as regards the third party; but it does not necessarily make it valid as regards the agent himself, who may be liable to his principal for breach of duty if the breach is not waived[12]
There is another concept namely apparent agency and a distinction needs to be drawn between apparent agency and apparent authority. The key difference between these theories is that a finding of apparent agency will in no way bind the principal--it is only a requisite step to finding authority when actual agency does not exist. The fact that apparent agency, and hence apparent authority along with it, is not found, does not mean that if actual agency existed apparent authority could not be found. Though a job title alone is almost never enough to lead to apparent authority[13], the mere existence of actual agency, by virtue of employment, is a substantial factor supporting the reasonableness of the third party's reliance--possibly leading to a finding of apparent authority[14].
A brief history of the doctrine of estoppel:
Doctrine of estoppel is the product of several centuries of judicial evolution[15]. Three species of the estoppel doctrine have evolved so far: estoppel by record, estoppel by deed and equitable estoppel, also referred to as estoppel in pais or estoppel by conduct[16]. The earliest incarnation of the estoppel doctrine was estoppel by record, which accorded conclusive effect to "matters recorded by the king's court, and authenticated by his seal." In the sixteenth century, under estoppel by deed, a party could be estopped to deny facts recited in a document which the party had signed under seal. Estoppel by record and by deed were based on a policy of according evidentiary weight to witnessed documents, and a policy favoring finality of judicial proceedings[17]. Not until the early nineteenth century did equitable estoppel, acquire its modern form which focuses on preventing harm to persons who have reasonably relied on the misleading conduct of others[18].
Black’s Law dictionary[19] gives a general definition of estoppel: a “party is prevented by his own acts from claiming a right to detriment of other party who was entitled to rely on such conduct and has acted accordingly.”
Estoppel is based on the ease with which someone could have prevented harm to himself. Having failed to prevent the harm, he is "estopped" from asserting what would otherwise be a valid claim.
Indian Contract Act of 1872, has the principle of agency by estoppel enshrined in its section 237 which says that -
When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority[20].
The principle of estoppel is related to the least-cost-avoider principle. For example, if A gets to know that B is dealing on his behalf with C and does not take any steps to clarify his position, A would be liable for the transaction performed by B on his behalf. Though, according to the general principles of contract law, since there is no privity between A and C, A shall not be held liable. However, since A is the least-cost-avoider as he can prevent the mistake more cheaply than C can, he is liable for the resulting harm. As stated, the common law generally does not impose liability for nonfeasance, only for malfeasance, as in the lack of a duty to rescue. It may be argued that law does not impose any liability to help others, its position for agency by estoppel can be justified by considering the difficulty in fixing limits for the party contracting with the agent and also that the purported principal is in the best position to prevent the harm, and it is usually not difficult to ascertain what it was reasonable for him to do[21]. Estoppel is a concept from the common law of tort and evidence, not contract. An other way of creating apparent authority can come from the principal telling the agent to misinform the third party of the agent's authority[22]. Further, an agent cannot bind a principal by tricking the third party into believing that the agent has authority[23]. These features make it even clearer that the driving idea is the least-cost-avoider principle, rather than contract theories.
Estoppel has two special features in contrast to other sources of liability. First, the third party's recovery is limited to the losses caused by the principal's failure to prevent the mistake, not expectation damages. Strictly speaking, the principal's failure does not make an invalid agreement into a contract; it just makes the principal liable for damages. If there is no reliance by the third party, no recovery is possible. Second, estoppel is a one-way street. The third party can obtain damages from the principal, but the principal cannot enforce the agreement against the third party (unless it is made valid by ratification). The onus of proving that the third party relied on principal’s conduct lies on the party alleging such conduct[24].
Under Indian law, unless the principal and agent is proved to exist between the parties, Sec. 237 cannot be applied[25]. Whereas under English law, a pre existing principal-agent relationship is not required for application of the principle of agency by estoppel.
Following cases will further elaborate on the concept of agency by estoppel.
The LIC case[26] :It was argued that LIC was liable on the basis of doctrine of apparent authority of the agent to collect premium from the policy holders. Though collection of premium amount is a general practice followed by LIC agents, it was found that LIC had not by any of its conduct induced the policy holders in believing that agents were authorised to collect premium. Also, there was no material on the record to support the argument of the plaintiff.
The Ram Chandran Case: A clerk of a society also functioned as a cashier. Later he was barred by the society to receive payments from members of the society. The clerk was held out as the agent of the society to act on its behalf in matters concerning receipt of money from the members. Thus the clerk was held to have am ostensible(apparent) authority and Sec. 237 was applicable.
Duty of the third party:
To determine the extent of authority of the agent, third party shall look into the power of attorney held by him[28]. In cases where the supposed agent only acts as a facilitator between the principal and the third party, in those cases it is the duty of the third party to determine that whether the agent has the authority to make transaction on behalf of the principal[29]
2: Government Estoppel
A brief History : Royal Perogative Doctrine
The doctrine of estoppel developed in common law in the context of the royal prerogative doctrine. The royal prerogative is the collection of "those rights and capacities which the sovereign enjoys alone in contradistinction to others and not those which he enjoys in common with any of his subjects[30]." The royal prerogative thus granted the sovereign numerous preferences in judicial proceedings in which the rights of the king conflicted with those of a subject. These preferences included the doctrine that "The King is not bound by estoppel.' On the other hand the King could take advantage of an estoppel, though, as between subjects, estoppel must be mutual[31]."
Later, the royal prerogative and the susceptibility of the king's court to political pressure resulted in these procedural advantages, but the executive was not omnipotent. The application of equitable remedies against the king was a feature of even the earliest development of equity. The maxim that the king is not bound by estoppel has been attacked as a fallacy[32]. Equitable estoppel had not come into existence at the time the royal prerogative barred application of estoppel to the king.
It is "well-settled that the Government may not be estopped on the same terms as any other litigant[33]." Grounds for limiting estoppel of the government (government estoppel) include: (1) sovereign immunity; (2) the separation of powers theory, under which certain judicial determinations of government liability are inappropriate; (3) lack of reasonable reliance by the person seeking estoppel due to the limited scope of governmental agents' authority; (4) the greater weight given to public interests over private interests to be vindicated by estoppel; (5) the desire to limit potentially vast liability; (6) protection of the free dissemination of government information; and (7) the fear that an estoppel rule might be used by government agents acting in collusion with private parties to defraud the government.
Practical application of government estoppel is explained with the help of following cases :
The Britania Case[34] : A government servant, Mr. Kahai entered into a contract with Britania on behalf of the Government. Under the terms of the contract, the state of Orissa was bound to pay back the Sales tax paid by the Co.. G K Das, J. Held that if an unauthorised provision is inserted in the contract , and no ratification is made by the Government, the government will not be bound by such an agreement.
The Russell & Co. Case : It was observed that when a particular statute requires a specified act to be done in a specifi ed manner, then, to be valid and binding, it must be done in that manner, and any violation of the provision of the statute will lead to the act being unenforceable at law. Government is responsible for only those acts of its servants which are done within the scope of its authority or in cases where he exceeds the authority, when Government, in fact or in law, directly or by implication, ratifies the excess. Any act or contract entered into by a government agent in excess of his authority, to that extent the act or the contract shall be held void[35].
In 1859, one Russell, along with co-venturers Waddell and Majors (Russell & Co.), contracted with the United States Army to sell and deliver provisions to the Army's garrison in Utah. Most of the contracts required the Army to pay for the supplies only upon delivery, in conformity with a statute which prohibited the government's making advance payments for goods and services. Russell was unable to raise the cash necessary to fund the expedition. To cure this difficulty Russell *242 secured Secretary of War John B. Floyd's acceptances on a series of bills of exchange drawn by Russell & Co., payable in ten months to Russell & Co.'s own order. The drafts were to be paid out of the amount the Army would owe upon performance of the contract. The effect of the notes and the acceptances was to secure for Russell the credit of the United States, thus permitting Russell to negotiate the bills of exchange, raise the money and perform the contract[36]
Over five million dollars were raised in this manner and some four million dollars' worth of these drafts were redeemed by Russell, apparently out of the money earned on the contract. However, after the United States had fully paid the contract price, notes worth over one million dollars remained outstanding. Russell & Co. was presumably without funds to redeem the outstanding notes, and the holders applied to the federal government for payment on the strength of Floyd's acceptances[37]
The Court held the United States not liable on the acceptances. The Secretary had acted in contravention of an express statutory limitation of authority, and hence was without even apparent authority to accept the drafts[38]
Agency by estoppel is a concept prevalent from many centuries. However, the modern concept of estoppel is based on principles of equity according to which a person is liable for the loss caused to another because of a representation made by him. Howevr, the person is only liable for the loss caused and not the loss of expected benefits. It works on the least cost avoider principle. Since the principal can easily correct the mistaken third party, it is his obligation to explain made known his agent’s (whether real or apparent) scope of authority. It has been observed that the scope of Indian law is narrower with respect to Common law in cases relating to agency by estoppel. Since the principle of agency by estoppel is an equitable principle, there is also an obligation on the third party to reasonably try to determine the actual authority of the agent before entering into a contract.
Government estoppel is a sub set of agency by estoppel where government is stopped from denying its liability. However, the concept of apparent authority cannot be applied in case of government estoppel. Only in case of government agents’ acting within the scope of their authority can bind the government to a contract. Thus government estoppel is an estoppel by deed.
[1] Bhadbhade, N., “Pollock and Mulla: Indian Contract and Specific Relief Act” vol. 2, Lexis Nexis Butterworths, 2002, p. 2345
[2] Restatement, Third § 3.11
[3] Pickering v. Busk (1812) 15 East. 38 as cited in F. M. B. Reynolds, Bowstead and Reynolds on Agency, 18th edn., Sweet and Maxwell, London, 2006 p.306
[4] Apparent authority can be either apparent express authority or apparent implied authority
[5] The American Restatement (Second) on Agency, § 8
[7] Steven A. Fishman, Inherent Agency Powers--Should Enterprise Liability Apply to Agents' Unauthorized Contracts?, 19 Rutgers L.J. 1, 7 (1987).
[8] Supra note 3, cmt. a
[9] Butler v. Maples, 76 U.S. 766 (1869) as cited in Eric Ramusen, Agency Law and Contract Formation, American Law and Economics Review available at http://www.law.harvard.edu/programs/olin_center/papers/pdf/323.pdf (last visited Nov. 16, 2008 at 5.50pm)
[10] Rothman v. Fillette, 503 Pa. 259 (1983).
[12] F. M. B. Reynolds, Bowstead and Reynolds on Agency, 18th edn., Sweet and Maxwell, London, 2006, p.375
[13] Ripani v. Liberty Loan Corp., 157 Cal. Rptr. 272, 277-78 (Cal. Ct. App. 1979) (considering job title effective but not sufficient evidence by itself to make finding of ostensible authority)
[14] Aaron Lipson, “WHOSE FOOL IS IT ANYWAY: UPDATING APPARENT AUTHORITY FOR TODAY'S BUSINESS WORLD” 33 Ga. L. Rev. 1219
[15] FREDERICK POLLOCK & FREDERICK W. MAITLAND, THE HISTORY OF ENGLISH LAW 189-90 (Cambridge, England, University Press, 2d ed. 1895) as cited in Frederick S. Kuhlman, GOVERNMENT ESTOPPEL: THE SEARCH FOR CONSTITUTIONAL LIMITS, 25 Loy. L.A. L. Rev. 229
[16] WILLIAM S. HOLDSWORTH, A HISTORY OF ENGLISH LAW 145-47 (1926). as cited in Frederick S. Kuhlman, GOVERNMENT ESTOPPEL: THE SEARCH FOR CONSTITUTIONAL LIMITS, 25 Loy. L.A. L. Rev. 229
[18] Pickard v. Sears, 112 Eng. Rep. 179, 181 (1837) ("[W]here one by his words or conduct wilfully causes another to believe the existence of a certain state of things, and induces him to act on that belief, so as to alter his own previous position, the former is concluded from averring against the latter a different state of things as existing at the same time . . . . ") as cited in Frederick S. Kuhlman, GOVERNMENT ESTOPPEL: THE SEARCH FOR CONSTITUTIONAL LIMITS, 25 Loy. L.A. L. Rev. 229
[19] Black, Henry. 1990. Black’s Law Dictionary, 6th ed. St. Paul, MN: West.
[20] Indian Contract Act, 1872, § 237
[21] Restatement, '8Bc, which notes that nonfeasance also estops a landowner who fails to prevent someone else who believes himself the owner from making improvements on it (Restatement of Restitution, 40, 43) or a landowner who fails to prevent someone else from selling his land to a bona fide purchaser (Restatement of Torts, '894, (2)).
[22] Restatement (Third) of Agency § 3.03 cmt. b. "A principal may also create apparent authority by actually or apparently authorizing an agent to make representations to third parties concerning the agent's own authority or position, even though the agent's representations by themselves would be insufficient."
[23] Hallock, 474 N.E.2d at 1181 ("The agent cannot by his own acts imbue himself with apparent authority."); Restatement (Third) of Agency § 2.03 cmt. c ("An agent's success in misleading the third party as to the existence of actual authority does not in itself make the principal accountable").
[24] Rohtas Industries Ltd. v. Maharajah of Kasimbazar China Clay Mines, ILR (1951) 1 Cal 420
[25] Benares Bank Ltd., Agra v. Prem & Co., AIR 1937 All 255
[26] Harshat J. Shah v. LIC ,
[27] Ram Chandran v. Registrar, Co-operative Societies, AIR 1963 Mad 105 at p.106
[28] Jumna Das v. Eckford, ILR 9 Cal 1
[29] K S Dugar v. Corporated Engineers Ltd., AIR 1963 Cal 464 at pp. 465-66
[30] BLACK'S LAW DICTIONARY 1330 (6th ed. 1990).
[31] General v. Collom, 2 K.B. 193, 204 (1916) ("No estoppel binds the crown. . . . I know of no authority for the proposition as applied to estoppel in pais.") as cited in Frederick S. Kuhlman, GOVERNMENT ESTOPPEL: THE SEARCH FOR CONSTITUTIONAL LIMITS, 25 Loy. L.A. L. Rev. 229
[32] F.E. Ferrer, A Prerogative Fallacy--"That the Crown is not Bound by Estoppel", 49 LAW Q. REV. 511, 514-15 (1933)
[33] GOVERNMENT ESTOPPEL: THE SEARCH FOR CONSTITUTIONAL LIMITS, 25 Loy. L.A. L. Rev. 229
[34] Britania Buildings and Iron Co. Ltd. v. State of Orissa, AIR 1962 Ori 117
[36] Floyd, 74 U.S. (7 Wall.) at 675.
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