Module_5

MODULE 5

TREATMENT OF “DOCTRINE OF PRIVITY” IN INDIA

The doctrine of privity of contract is a combined result of these two words, i.e.
'Privity' and 'contract'. Consequently, the doctrine means something private or secret
about a contract or it means the privacy of a contract between the parties. The privacy
of contract signifies a privacy or secrecy to terms of the contract. It means that only
parties to the contract are bound to comply with the terms of the contract and third
party is not bound to fulfill the contractual obligations. This means that only parties to
a contract are entitled to enjoy benefits of a contract and no third party can claim the
benefits of a contract because he has no concern with the contract.

Although the Indian Contract Act 1872 deals with general principles of the law of
contract and certain specific contracts. It is to be, however, noted that the Indian
Contract Act does not explicitly contain a single provision relating to the doctrine of
privity of contract. Therefore, the position of the doctrine may be visualized in the
light of various provisions of the Contract Act. For instance, Section 2(h) of the
Indian Contract Act, 1872 defines the term 'contract' in the form of an agreement. It
states that "an agreement enforceable by law is a contract." In other words, a contract
is nothing but a valid agreement. The 'agreement' has been defined under section 2 (e)
of the Indian Contract Act, 1872. According to Section 2(e) "Every promise and every
set of promises forming the consideration for each other is an agreement." Thus, an
agreement is a precondition to the contract. The agreement may be divided into two
parts- 'promise' and 'consideration of the promise.' The term 'promise' has been
defined under section 2 (b) of the Contract Act. According to section 2(b), "a proposal
when accepted becomes a promise." Thus, finally, we find two terms – proposal and
acceptance. The 'proposal' has been defined under section 2(a) of the Contract Act and
the 'acceptance' under section 2 (b) of the Act. According to section 2(a), 'when a
person signifies to another his willingness to do or to abstain from doing anything,
with a view to obtaining the assent of that other to such act or abstinence, he is said to
make a proposal.' Section 2(b) of the Act says that 'when the person to whom the
proposal is made signifies his assent thereto, the proposal is said to be accepted.' It is
evident that only that person can accept the proposal to whom the proposal is

addressed. The proposal is generally regarded as a starting point of contract and on
the other hand, an acceptance as its concluding point.

5.1. THE DOCTRINE OF PRIVITY UNDER INDIAN CONTRACT LAW

Section 73 of the Indian Contract Act, 1872 that the party who suffers by breach of a
contract is entitled to receive damages from the other party to the contract. In view of
section 74 of the Act, it can be said that if a sum is named in the contract as the
amount to be paid in case of breach of a contract, the party complaining of breach is
entitled to receive a reasonable compensation not exceeding the amount so named, or
as the case may be, the penalty stipulated for. Section 75 of the Act provides that a
person who rightfully rescinds a contract is entitled to compensation for any damage
which he has sustained through non-fulfillment of the contract. It follows from
Section 73, 74 and 75 (which deal with consequences of breach of contract) that only
that person is entitled to sue for breach of the contract who is a party to the contract
and has suffered loss due to such breach. Consequently, a person who is not a party to
the contract i.e. a stranger cannot, therefore, bring an action for breach of the contract.

In Jamna Das v. Ram Autar and Ors1,the Privy Council rejected a stranger's claim to
enforce the contract against a contracting party.The Privy Council dismissed the
appeal with costs. It is, thus, clear that the mortgagee failed to recover benefit of
contract only because he was not a privity to the contract.The Privy Council, in Nanku
Prasad Singh v. Kamta Prasad Singh2 reaffirmed the privity rule and applied the rule
laid down in Tweddle v. Atkinson 3 in India. The defendants purchased certain
immovable property which was mortgaged to the plaintiff. The mortgagor (seller) also
sold them the right of redemption and for this purpose, the seller left that amount of
purchase money with the defendants which was equal to the plaintiff's debt. The
plaintiff sued the defendants for this money. The Privy Council held that no personal
liability was incurred by the purchasers, of the equity of redemption, to the plaintiff. It
is clear from this view of the Privy Council that a purchaser of equity of redemption,
who retained a portion of purchase money for paying off mortgage debt did not

1I.L.R. (1912) 34 All. 63; L.R. 39 I.A. 7
2A.I.R. (1923) P.C. 54
3(1861) 1 B & S. 393

thereby become personally liable to the mortgagee. The reason was that the
mortgagee was a stranger to the contract of sale and, therefore, he could not sue.

It is be noted that in a similar case of Achuta Ram andOthers v. Jainandan Tewari
and Others4 the Patna High Court followed the principle laid down in Jamna Das v.
Ram Autar and Others5, and Nanku Prasad Singh.6 The Court in this case did not
allow mortgagees' claim to enforce the contract against the purchaser because
mortgagees were strangers to the contract.

Similarly, in SabbuChetti v. Arunachalam Chettiar 7 , the Madras High Court
recognized the doctrine of privity of contract and accordingly, a third party was not
allowed to enforce the contract in the case of a sale deed of the property that formed
the subject matter of the dispute. The Madras High Court held that the vendee was not
liable because the plaintiff was a stranger to the contract and no trust express or
implied was created by the sale deed in favor of the plaintiff. Their Lordships opined
that where a person transfers property to another and stipulates for the payment of
money to a third person, a suit to enforce that stipulation by third party would not
lie.It is, thus, evident from this judgment that the Court emphasized the privity rule.
But, at the same time it also accepted an exception to the doctrine of privity of
contract. The exception was that if a trust wascreated in favour of a stranger, he could
sue the contract.8

However, in National Petroleum Co. Ltd. v. PopatMulji9, the Bombay High Court
followed the doctrine of privity of contract and did not allow a stranger's suit. But, the
Court accepted the two exceptions trust and agency to the privity rule.The Court
opined that a person, who was not a party to a contract was not entitled to sue on the
contract except in the special cases i.e. a person in position of a cestui que trust or a
principal suing through an agent.

4A.I.R. (1926) Pat. 474. See also Jiban Krishana Mullick v. Nirupama Gupta and another, A.I.R.
(1926) Cal. 1009; and Krishna Lal Sahu and another v. Smt. Pramila Bala Dasi, A.I.R. (1928) Cal. 518
(nominee in insurance contract was held not entitled to sue)
5I.L.R (1912) 34 Alld. 63; L.R. 39 I.A. 7
6A.I.R. (1923) P.C. 54
7A.I.R. (1930) Mad. 382
8Ibid
9A.I.R (1936) Bom. 344

In Babu Ram Budhu Mal and Others v. Dhan Singh Bishan Singh and Others10 the
Punjab High Court rejected a stranger's claim on a contract. In this case, a landowner
mortgaged certain land to the plaintiffs for certain money. He also mortgaged some
portion of this mortgaged land to the defendants with direction that the defendants
would pay the plaintiffs' mortgage-money. The plaintiffs sued for this money.The
Court held that the plaintiffs were not entitled to sue. The Court said that theprivity
rule is subject to some exceptions. Where a charge is created on a specific immovable
property under marriage settlement or family arrangement or otherwise, or a trust is
created in favour of a stranger, the privity rule does not apply. In such cases he is
entitled to sue. The present case, however, did not create a trust. The Court further
observed that the decisions in Jamna Das v. Ram Autar Pandey11 and in Nanku
Prasad Singh v. Kamta Prasad Singh12 were conclusive that the reservation of part of
purchase money to pay a previous mortgage does not of itself create a trust in favour
of that previous mortgage nor could the prior mortgage make the purchaser,
personally, liable.13

M.C. Chacko v. The State Bank of Travancore14, is an important case wherein the
Supreme Court approved the doctrine of privity of contract and also defined probable
exceptions to it.It observed that it is settled law that a person not a party to a contract
cannot, subject to certain well recognised exceptions, enforce terms of the contract.
The recognised exceptions are only two : firstly, a beneficiary under a contract which
creates a trust in his favour can sue the contract act and secondly, a beneficiary under
a contact, which is a part of a family arrangement can sue.15It is clear form this
judgment that the Supreme Court finally settled the doctrine of privity of contract and
the two exceptions to it.16 The Supreme Court, in this case, approved the observation
of Rankin C.J. in the case of Krishana Lal Sadhu v. Pramila BalaDasi17, wherein he
had opined that “(It is erroneous to suppose that in India persons who are not parties

10A.I.R. (1957) Punjab 169
11I.L.R. (1912) 34 All, 63; L.R. 39 I.A. 7
12A.I.R. (1923) P.C. 54
13See also Chhangamal Harpal Das v. Dominion of India, A.I.R. (1957) Bom. 276. (In this case a mere
consignee was not allowed to sue for damage to goods.)
14A.I.R. (1970) S.C. 504
15A.I.R. (1970) S.C. 504, para 9 at 507
16 Ibid
17A.I.R. (1928) Cal. 518

to acontract can be permitted to sue thereupon”18 The judgment in M.C. Chacko was
the subject of much deliberation by the Apex Court in the P.R. Subramaniam Iyer v.
Lakshmi Ammal19case, wherein they affirmed the principle laid down in the former
case, in addition to receiving approvals from several High Court verdicts which have
followed the same strand of legal reasoning that was laid down.20

The Privy Council also tackled the issue of privity of contract in the case of Nawab
Khwaja Muhammad Khan v. Nawab Hussaini Begum21, where the Lordships held that
although the defendant was not a party to the agreement, she was clearly entitled to
proceed in equity in order to enforce her claim.22 This decision was followed shortly
after by the verdict rendered in Deb Narayan Dutt v Chunni Lal Ghosh23 where the
Court allowed the suit on part of the plaintiff since they believed that he was, under
the specific circumstances of the case matrix, a ‘cestui que trust’, and the contract was
for his benefit.In this case the defendants borrowed Rs. 300 from the plaintiff. As a
security to this debt they executed a registered bond and also deposited with the
plaintiff a pattah of immovable property to create a charge. After sometime they
transferred their whole property to defendant No. 5 solely. The contract (transfer
deed) contained a clause that the defendant No. 5 would pay off plaintiff's debt out of
consideration money (of Rs. 2000). But the defendant No. 5 did not pay off the debt.
Hence, the plaintiff brought this suit. His suit was dismissed by the lower court.
Against the judgment of lower court the plaintiff made an appeal to the High Court.
The appeal was allowed and the defendant was held liable. The Court held that for
the above mentioned reasons, the plaintiff could sue even when there was no contract
between the defendant and the plaintiff.

The Court also recognized and enforced a third party’s claim on a contract in the case
of Khirod Bihari Dutt v. Man Govind24, adjudicating that where a contract requires a
party to pay certain sum of money to a stranger, and the party liable to pay, makes an

18 Ibid, at p. 522
19(1973) 2 S.C.C. 54. See SAIL & others v. Salem Stainless Steel Supplier & others, A.I.R. (1994) S.C.
1414
20Narayani Devi v. T.C. Corporation Ltd. A.I.R. (1973) Cal. 401; Smt. Manni Devi v. Ramayan Singh.
A.I.R. (1985) Pat. 35; FatechandMurlidhar and etc. v. Maharashtra Electricity Board nagpur and etc.
A.I.R. (1985) Bom. 71; M.S. Kesari Engineering works v. Bank of India, A.I.R. (1991) Pat. 194
21(1910) 37 I.A. 152
22Ibid
23I.L.R. (1913) 41 Cal. 137
24A.I.R. (1934) Cal. 682

acknowledgement of such sum to the stranger, he is bound to pay to the stranger. This
was not without a rider, as the Court also opined that unless a trust was created in
favour of a third party or the defendant seemed an agent of third party, the claim of
third party could not be enforced. The court, further, said that the facts of the case
constituted a trust or agency. A similar line of reasoning was elucidated by the
Madras High Court in several cases where they enforced a stranger’s claim on a
contract.25 The legal right of a third party beneficiary to enforce his claim on a
contract to receive contractual benefit promised to him was accorded further
recognition in the Privy Council’s judgment inRana Uma Nath Baksh Singh v. Jang
Bahadur26, reaffirming the same in a later judgment.27

This reasoning was maintained by the Courts of India even post-independence, which
was bolstered by the fact that they held that when the plaintiff was a beneficiary under
a compromise agreement, it could be said that a trust was created in her favour,
entitling her to specific performance of the agreement.28

In recent judgments, the Courts have expanded the reach of this legal principle,
having held that not only are insurance companies liable to pay compensation in
respect of third party risk29, but the deceased would be entitled to a claim even if he
was to be construed as a third party to the agreement.30 This was further extended to
occupants of private vehicles, who would be third parties in the eyes of the law, the
crux being that death or bodily injury to such persons would entitle them to claim
compensation from insurers even without any additional premium by owners of
private vehicles.31

The doctrine of privity is still applicable in India. Although, the Indian Contract Act,
1872 does not contain any specific provision which deals with the doctrine of privity
of contract, the doctrine is implicit in several provisions32 of the Contract Act. It is
also clear from the judicial decisions that the doctrine of privity of contract was

25MuddalaVenkatareddi Naidu v. Dharwada Venkata VarahVarsimha, A.I.R. (1935) Mad. 115;& V.
RamaswamiAyyar&Ors v. S.S. Krishnas and Sons &Ors, A.I.R. (1935) Mad. 904
26A.I.R. (1938) P.C. 245
27Mst Dan Duer v. MstSarla Devi, AIR (1947) P.C. 8
28Veramma v Appaya, AIR (1957) AP 965
29 New India Assurance Company Ltd. V. Nandram Prajapati, 2008 TAC 443 (MP)
30Seeniwasan v. Peter Jabaraj, AIR 2008 SC 2052
31 National Insurance Co at Godhra v. Shabbir Mohammad Kunj
32Mainly, Sections 2(a) to 2(i), 10, 37, 38, 73, and 192 of the Indian Contract Act 1872

approved by Privy Council. 33 Most of the Indian High Courts also followed the
decisions of the Privy Council and did not enforce a stranger's claim to a contract. The
opinion of the High Court is divided on the point. But, the Supreme Court, finally,
established the doctrine of privity of contract.34However, the Supreme Court has held
that the doctrine of privity of contract has two exceptions. First, a beneficiary under a
contract which creates a trust can sue the contract and secondly, a beneficiary under a
contract involving a family arrangement can enforce the contract. It is to be noted that
these exceptions to the privity rule were also accepted by the Privy Council35 in India
before independence. But, it was the leading case of M.C. Chacko v. State Bank of
Travancore36 where the doctrine of privity of contract and exception to the doctrine
were finally settled by the Supreme Court.

Moving forward, it is apparent that the doctrine of privity of contract itself is subject
to a few exceptions that the Courts have evolved over the years through their case
laws. These exceptions can be summarized as being as follows:

(I) Benefit Aspect of the Contract – First Exception
(II) Burden Aspect of the Contract – Second Exception
(III) The Doctrine of Privity under the Law of Agency – Third Exception
(IV) Assignment of Contractual Rights – Fourth Exception
(V) Assignment of Contractual Liabilities – Fifth Exception

Over the course of the next few sub-sections of this module, we will tackle the five
exceptions to the doctrine of privity and their relevant positions under Indian law. The
last two exceptions will form the last module, dealing with assignment of contractual
rights and liabilities.

5.2. THE BENEFIT ASPECT OF THE CONTRACT

The case laws regarding this exception to the doctrine of privity exhibit a change from
the pre-Independence period jurisprudence on this subject.

33Jamna Das v. Ram Autar, L.R. 39 I. A. 7; Nanku Prasad Singh v. Kamta Prasad Singh, A.I.R. (1923)
P.C. 54
34M.C. Chacko v. State Bank of Travancore, A.I.R. (1970) S.C. 504
35Khawaja Muhammad Khan v. Husaini Begum, (1910) 37 I.A. 52; Rana Uma Nath Baksh Singh v.
Jang Bahadur, A.I.R. (1938) P.C. 245
36A.I.R. (1970) S.C. 504

In N. DevrajeUrs v.Ramakrishniah37, the plaintiff constructed a house for a lady. She
sold the house to the defendant without paying the plaintiff the construction cost. She
left a part of purchase-money with the defendant with a direction that the defendant,
though made a part payment but did not pay the whole sum. The plaintiff sued for
remaining part of the money. The Court held that the plaintiff was entitled to recover
the amount. However,in the case ofBabu Ram Budhu Mai v. Phan Singh Bishan
Singh38 the Punjab High Court rejected a stranger's claim on a contract. In this case,
the Court observed that the privity rule is subject to some exceptions. Where a charge
is created on a specific immovable property under marriage settlement or family
arrangement or otherwise, or a trust is created in favour of a stranger the privity rule
does not apply. In such cases he is entitled to sue.The judges further observed that
decisions in Jamna Das v. Ram Autar Pandey39 and in Nanku Prasad Singh v. Kamta
Prasad Singh40 were conclusive that the reservation of part of purchase money to pay
a previous mortgage does not of itself create a trust in favour of that previous
mortgage nor could the prior mortgage make the purchaser personally liable.41But the
Court took a different view in the case of Veramma v. Appaya42, where a stranger's
action was again allowed by the Andhra Pradesh High Court. In M.C. Chacko v. The
State Bank of Travancore43, the Supreme Court approved the doctrine of privity of
contract and also defined probable exceptions to it.It observed that it is settled law
that a person not a party to a contract cannot, subject to certain well recognized
exceptions, enforce terms of the contract. The recognized exceptions are only two:
firstly, a beneficiary under a contract which creates a trust in his favour can sue the
contract act and secondly, a beneficiary under a contract, which is a part of family
arrangement can sue.44 Currently, the law laid down under M.C. Chacko case seems
to be well-settled, with a fair number of High Courts following the jurisprudence, as
enunciated earlier.

5.3. THE BURDEN ASPECT OF CONTRACT

37 AIR (1952) Mysore 111
38AIR (1957) Punjab 169
39ILR (1912) 34 All. 63; LR 39 IA 7
40AIR (1923) PC 54
41See also Chhangamal Harpal Das v. Dominion of India, AIR (1957) Bom.276(In this case a mere
consignee wasnot allowed to sue for damage to goods.)
42AIR (1957) AP 965
43AIR (1970) SC 504
44AIR (1970) SC 504, para 9

The 'burden of contract' is the second aspect of the doctrine of privity of contract.45
The expression of 'burden of contract' signifies the obligation or liability created by a
contract. The contract creates right in one party and corresponding duty in other party.
The duty or liability so created may also be called as burden of that party upon whom
it is imposed with his consent.It is to be noted that as a general rule the parties to a
contract cannot impose contractual burden upon a third party without his consent. The
reason is very simple – since the third party has not given his consent to the contract,
therefore, it would be unjust to impose contractual burden upon him. However, there
are certain cases, where contractual liabilities can be imposed upon a stranger, which
will be discussed in the following part of the module.

Trusts Act: The beneficiary under a trust enjoys certain privileges and rights. But. at
the same time he has certain liabilities too under the Trust Act.The first part of
Section 33 of the Indian Trusts Act, provides that a person other than a trustee who
has gained an advantage from a breach of a trust must indemnify the trustee to the
extent of the amount actually received by such person under the breach of trust; and
where he is beneficiary the trustee has a charge on his interest for such amount. This
section, thus, lays down two principles of law: Firstly, it makes it clear that any one
who receives advantage from breach of a trust is liable to compensate the trustee. This
is the general principle. Secondly, it emphasizes the beneficiary's liability in case of
such breach. It provides that if the beneficiary receives any benefit from such breach,
he is liable to compensate the trustee. The trustee in such case will have a charge on
beneficiary's interest.The beneficiary is. thus, a stranger to the trust even then he is
held liable to the trustee.

Partnership Act: The question may naturally arise as to who is a stranger to a
partnership. There are two categories of strangers as regards to a partnership. The first
category includes those persons who have not given their consent to the partnership.
The second category may be inferred from Section l8 of the Partnership Act. This
section providesthat 'subject to provisions of this Act, a partner is the agent of. the
firm for purpose of business of the firm.' Consequently, the firm on which behalf a
partner makes contract with another person can be treated as a principal. The principal

45 John N Adams, Deryck Beyleveld and Roger Brownsword, Privity of Contract: The Benefits and the
Burdens of Law Reform, The Modern Law Review 60(2) (1997) 238-264 <available at:
https://www.jstor.org/stable/1097322>

(i.e. the firm) is a stranger as regards to contract made between acting partner and
third person. Similarly, other partners may be regarded as stranger to the contract
which is entered into between the acting partner and third person.

The general rule is that the firm is liable for acts done by a partner on firm's behalf
within the scope of his implied authority. Clause (1) of Section 19 of the Partnership
Act provides that 'subject to provisions of Section 22, the act of a partner which is
done to carry on in the usual way, the business of the kind carried on by the firm
binds the firm.' An implied authority depends upon the nature of the business of firm.
For acts which are to be covered within implied authority, following essentials are
needed: (1) the act must be done in relation to partnership business; (2) The act must
be done for carrying on the business of the firm in the usual way; and (3) the act must
be done by the partner on behalf of the firm i.e. in firm's name and not in the name of
a partner.In Devji v. Magan Lal& Others46, the Supreme Court has held that where a
partner takes a lease of premises(sublease of colliery) in his name, he cannot be
regarded as having acted on behalf of the firm.

Section 26 of the Partnership Act deals with the liability of the firm for torts
committed by a partner. The firm is bound for wrongful act of a partner provided that
(1) it has been done in the ordinary course of the business of the firm i.e., it is
committed within implied authority of the partner, or (2) with the authority (express)
of his co-partners. The firm is liable for both negligent and intentional tort.47

Section 27 of the Partnership Act provides that a firm is liable for mis-application of
money or property received from a third party.What is required is that the partner
must be guilty of committing wrong of misuse of money or property. If such wrong is
committed by a partner it is the firm which is liable to compensate the person
wronged.Thus, the combined effect of the principles embodied under Sections 19, 26
and 27 of the Partnership Act is that the firm is liable for acts and wrongs of
itspartners done within the scope of express or implied authority of the partners.

The partners are made jointly and severally liable for the act of the firm by Section 25
of the Act. This section provides that every partner is liable jointly with all other

46 AIR (1965) SC 139
47Hurruck Chand v Govind Lal, (1906) 10 Cal W.N. 1083

partners and also severally for acts of the firm done while he is a partner. When a
partner does an act on behalf of the firm, the act is considered the act of the firm and
not only of the acting partner. It means even those partners are held liable under this
section who have not made the contract directly.All such partners who have not given
their consent to the contract are liable although in one sense they are stranger to the
contract. Additionally, Section 45 imposes a contractual burden on those who have
not, indeed, entered into the contract with the third person. The privity rule is
accordingly defeated by the provisions of this section. This reasoning applies even to
those partners who have retired from the partnership, with the Court enforcing a strict
requirement that in order to absolve the retired partner from further liability the
requirement of proper notice is necessary. In absence of such notice he cannot escape
the liability.48

Negotiable Instruments Act: There are certain provisionsunder the Negotiable
Instruments Act which provide that contractual liabilities can be imposed on a
stranger to a contract, in the cases mentioned below:

(i) Liability of drawee of a cheque49
(ii) Liability of prior party to holder in due course50
(iii) Holder deriving title from holder in due course51

5.4. THE EXCEPTION OF THE LAW OF AGENCY

Although, there is no specific provision in the Indian Contract Act, which defines the
term 'agency', but agency is implicit under section 182 of the Act, on the basis of
which an 'agency' may be defined as a contract by which an agent is employed by a
principal to act on behalf of the principal or to represent the principal in dealings with
the outside world. In other words, the relation of agency arises when one person (the
agent) has authority to act on behalf of another (the principal). The relationship has its
origin in contract.52 The Principal in such a principal-agent relationship can be said to
have certain rights and duties against third parties, which will be elucidated in the
forthcoming parts of this text:

48C Assiamma v State Bank of Mysore &Ors, AIR (1990) Ker 157
49JagjivanMauji v.MessrsRanchhod Das Medhji, AIR (1954) SC 554
50Section 36 of the Negotiable Instruments Act, 1881
51Sections 8& 53 of the Negotiable Instruments Act, 1881
52 Syed Abdul Khader v. Rami Reddi, AIR (1979) SC 553 at 557

(I) Rights of Principal when Agent acts within actual authority:The
principal has a statutory right to acquire benefit of a contract entered into
by his agent with third party. According to section 226 of the Contract Act
the principal can enforce the contract against third party. But, normally,
the principal can require performance of only such contracts which have
been made by the agent acting during course of his agency i.e. within the
authority actually conferred on him by the principal.53 Such an authority of
the agent may be given either expressly or impliedly.54It is well settled that
an agent having an authority to do an act has also the authority to do every
lawful thing which is necessary in order to do such authorized act.55 When,
therefore, an agent enters into a contract with third party and the contract
falls within actual authority of the agent, it is the principal who is entitled
to enforce the contract against third party. Thus, in Indore-Malwa United
Mills Ltd, v. C.I.T. Bombay 56 , the Supreme Court held that if by an
agreement the debtor is authorised to pay the debt by a cheque and to send
the cheque by post to the creditor, the post office is the agent of the
creditor to receive the cheque and the creditor is deemed to receive
payment as soon as the cheque is posted to him.57However, section 226 of
the Contract Act permits enforcement of contracts as they stand (i.e.with
their initial terms) and not their substitution by fresh contracts with
different terms. In Indo Allied Industries Ltd, v. Punjab National Bank
Ltd.58, the court held that in the absence of an express contract to the
contrary, there is an implied contract, with a customer who opens an
account with a Bank, which carries with it the duty of the bank to pay the
customer only at the branch where the account is kept subject to
instructions to transfer the amount elsewhere. If the obligation to transfer
is frustrated by local legislation or governmental action of the country
where the account is kept, the remaining implied obligation to pay at the
branch or office where the account is kept cannot be substituted

53 Section 182, Indian Contract Act, 1872
54 Section 186 and 187, Indian Contract Act, 1872
55 Section 188, Indian Contract Act, 1872
56AIR (1966) SC 1466
57AIR (1966) SC 1466 at p. 1469
58AIR (1970) All. 108

automatically by an unconditional obligation of the principal to pay
elsewhere by resorting to section 226 of the Contract Act.59 Furthermore,
the principal can also enforce the contract made by sub-agent who is duly
appointed by the agent.60
(II) Rights of Principal when agent exceeds authority or acts without
authority: Where an agent, exceeding his authority, has done something
lawful for his principal, the principal may acquire right by such act
provided he ratifies the act. But, if he does not ratify such act, he cannot
claim any benefit arising out of the act.61 The same section states that,
where a person, without being an agent of another, does a lawful act for
such another person without his authority, if the person, for whom the act
has been done, ratifies the act, an agency by ratification comes into
existence. In the case of Harikishen Singh v. National Bank of India Ltd.62
it was held that if the goods are given to agent by the principal with the
direction to send them at certain place, he can sell the goods if ar.
emergency occurs (i.e. when goods start perishing or they can perish
before reaching the destination). If the agent in such emergency sells the
goods on credit, the principal is entitled to sue the purchaser. But, the
agent must prove that (i) there was in fact an emergency, (ii) the principal
could not be informed, and (iii) he acted bonafide to save the principal
from loss.
(III) Rights of an Undisclosed Principal: A principal may be undisclosed in
two cases. Firstly, where the agent conceals the very fact of existence of
agency and contracts in his own name and not on behalf of the principal.
Secondly, where the agent, though discloses agency, conceals his
principal's name.63 It is pertinent to note that the principal can also enforce
the contract even though the agent has not disclosed him.In Maganbhai v.
Chetan Lal64, the agent entered into a contract with third person without
disclosing his principal. The court held that the principal could enforce the

59 AIR (1970) All. 108 at 113
60Sections 192 and 226 of the Indian Contract Act, 1872
61 Section 196, Indian Contract Act, 1872
62AIR (1940) L 412
63 Floyd R Mechen, The Liability of an Undisclosed Principal, I, Harvard L R 23(7) 513-530
<available at: >https://www.jstor.org/stable/1325286?seq=1#metadata_info_tab_contents>
64 AIR (1968) Raj. 81

contract even when the third person neither knew nor had reason to believe
that the person with whom he entered into contract was an agent.
Additionally, a principal may be partially undisclosed when the agent
discloses his character (that he is acting as agent) but does not disclose
name of his principal. In such cases, Section 230(2) of the Act states that
the agent can sue and be sued, unless this presumption is rebutted.65
(IV) Duty of Principal when Agent’s authority is actual: Section 226 states
that a principal is liable to a third party with whom the agent makes
contracts, regardless of whether the actual authority is express or
implied.Further, the principal is bound not only by an agent's act but also
by the acts done by a sub-agent.66 But it is imperative that the sub-agent
must be appointed properly by the agent for his acts to be binding.67
(V) Duty of Principal when agent exceeds authority or contracts without
authority:If the agent exceeds his authority or does something without
authority he would be personally liable. But, there are certain cases when
the principal can be held liable. When an unforeseen emergency arises,
Section 189 of the Act enables an agent toexceed his authority and do all
such acts, to save his principal from loss which a person of ordinary
prudence would have done in his own case in similar circumstances.68
(VI) Duty of Principal in Agency by Estoppel:An 'apparent' or 'ostensible'
authority of an agent is one which appears to others. Such authority arises
where an agency is created by estoppel. An 'agency by estoppel' cannot be
created unless following three conditions are present: (a) a representation,
(b) a reliance on the representation, and (c) an alteration of position (by
maker i4s of representation) resulting from reliance. This principle has
been recognized by incorporating Section 237 of the Contract Act.The
principal is liable to third person under agency of estoppel. He cannot
defend merely on the ground that he by word or conduct did not intend to
confer actual authority on the agent to make contract on his behalf. It was
held in Kunj Kishore v. W.K. Porter 69 , it was held that in cases of

65 Section 230, Indian Contract Act, 1872
66 Section 192, Indian Contract Act, 1872
67 Amrit Lal v. Bhagwandas, AIR (1939) Bom. 435
68Firm Roop Ram Bhagwan Das v Nanak Ram Chhaju Ram, AIR (1927) L 493, at p. 494
69 AIR (1914) All. 238

ostensible authority, the principal is liable in cases where (a) agent has
exceeded the authority; and (b) the contracting third party has no notice of
such authority being exceeded.In Ram Pertap v. Marshall 70 ,the Privy
Council held that the right of a third party against the principal on the
contract of his agent, though made in excess of the agent's actual authority,
can be enforced if the contracting party has been led into an honest belief
that the agent was having an authority to make the contract. However, for
such a principle to be applicable, it is necessary for there to be agency
between principal and agent under Section 237.71
(VII) Duty of Principal for Misrepresentation or Fraud:Section 238 of the
Indian Contract Act says that 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 committed by the principals; but
misrepresentation made or frauds committed by agents in matters which
do not fall within their authority do not affect principals. This can be
understood as a two-pronged principle (with the Section laying down both
of them), the first being that the principal is liable for misrepresentation
made or fraud committed by his agent. But, it is necessary that the
misrepresentation must have been made or fraud must have been
committed within agent's authority. 72 Secondly, section 238 of the
Contract Act lays down that when misrepresentation made or fraud
committed by the agent does not fall within his authority, the principal is
not liable.73

The agent's responsibility is to make contracts with third persons on behalf of the
principal and not on his own account. The agent signs the contract made with third
person showing that he is singing on his principal's behalf. However, the principal can
be regarded as a stranger to the contract entered into between the agent and the third
party only in two cases: (1) where the contract is made by a sub-agent] and (2) where

70 ILR (1899) 26 Cal 701 (PC) at:
71Benaras Bank Ltd v. Prem & Co, AIR (1937) all. 255
72 Agent’s Authority: Judicial Interpretation, Manupatra <available

http://docs.manupatra.in/newsline/articles/Upload/FA398636-A18A-4B4A-AD0B-

67DF42E894B4.pdf>
73 State Bank of India v. Smt. Shyama Devi, AIR (1978) SC 1263; (1978) 3 SCC 399

he is undisclosed. In these two cases he can sue and be sued by the third party,
although he is a stranger to the contract.