Business Management · Trusts and agency

Authority, Duties and Liability of Agent and Principal

Updated 11 October 2026

An agent acts for a principal and can bind the principal only within authority. Authority is actual (express or implied) or apparent (what a third party reasonably believes). The agent owes duties of care, obedience, loyalty and accounting. The principal is liable for authorised acts and must indemnify the agent. Agency ends by act of parties or by law.

Understand Authority, Duties and Liability of Agent and Principal

An agency is a relationship where one person, the agent, acts for another, the principal, in dealings with third parties. The aim is simple. The agent's act, within authority, is treated as the principal's own act. This is why agency matters in financial services: brokers, insurance agents and advisers all deal on behalf of others.

Start with authority, because liability follows from it. Actual authority is what the principal really gave. It is express if stated in words or in writing. It is implied if it is needed to carry out the express task or follows from the usual practice of the trade. Apparent (ostensible) authority arises when the principal, by words or conduct, leads a third party to believe the agent has authority, and the third party relies on it. The principal is then bound even if the agent had no actual authority. The doctrine rests on estoppel (s.115 of the Indian Evidence Act, 1872). Section 237 of the Indian Contract Act, 1872 is the statutory basis for holding out. Under s.237, the principal is bound by the acts of a person who has no authority, or who exceeds it, where the principal by words or conduct induced third persons to believe such acts were within the agent's authority and the third persons acted on that belief. Section 237 covers only acts the principal induced third persons to believe were authorised. It is not the whole of apparent authority. The principal cannot deny what they led others to believe.

Next, duties. The agent must follow the principal's instructions, or act in the principal's best interest if there are none. The agent must use reasonable skill and diligence, act in good faith, avoid conflict between own interest and the principal's, make no secret profit, keep accounts and hand over what is received, and not delegate without permission, unless custom allows or the nature of the work requires it. The principal must pay the agreed or reasonable remuneration, indemnify the agent for lawful acts done in the agency, and compensate for loss caused by the principal's neglect.

Then liability to third parties. If the agent acts within authority for a disclosed principal, the principal is liable and the agent normally is not. If the principal is undisclosed, the agent is presumed to be personally liable (s.230). Once the principal is discovered, the third party may also sue the principal (s.231). The principal's position is subject to the rights between the agent and the third party, including set-off against the agent. Section 230 presumes that the agent is personally liable in three cases: a contract for the sale or purchase of goods for a merchant resident abroad, an undisclosed principal, and a principal who, though disclosed, cannot be sued. This is only a presumption, and a contrary intention can rebut it. If the agent has no authority, the principal can still ratify the act. Ratification needs three things. The agent must have purported to act for an identified principal, and that principal must have been competent when the act was done. The principal must know the material facts. The whole act must be adopted. Ratification may be express or implied (s.197). It works back to the time of the act, but under s.200 it cannot be used to subject a third person to damages, or to terminate any right or interest of a third person acquired before ratification. An agent who acts without authority may be liable to the third party for loss caused.

Finally, termination. Agency ends by agreement, revocation by the principal, renunciation by the agent, completion of the business, expiry of the period, death or unsoundness of mind of either party, or the principal being adjudged insolvent (s.201). The principal may revoke the authority at any time before it has been exercised so as to bind the principal (s.203). Reasonable notice is required, and damages may be due if it is not given (s.206). Two limits apply. Once the agent has partly exercised the authority, revocation is barred only as to the acts already done and the obligations already incurred (s.204). It is not barred wholly. Where the agent has an interest in the subject matter of the agency, the principal cannot terminate it to the prejudice of that interest unless there is an express contract allowing it (s.202).

Key rules to remember

Actual authority: Actual authority = express authority + implied authority; Express is stated. Implied is incidental to the task, or from trade usage or the course of dealing.
Apparent authority test: Representation by principal + reliance by third party + no actual authority → principal still bound; The representation must come from the principal, not from the agent alone.
Agent's core duties: Obedience + care and skill + loyalty (no conflict, no secret profit) + accounting; Add: no delegation without permission, and good faith.
Principal's core obligations: Remuneration + indemnity for lawful acts + compensation for principal's neglect; No indemnity for criminal acts or for the agent's own default.
Ratification conditions: Agent purported to act for an identified principal + principal competent when the act was done + principal knows material facts + whole act ratified; Ratification may be express or implied (s.197). It relates back to the date of the act. Under s.200 it cannot be used to subject a third person to damages, or to terminate any right or interest of a third person acquired before ratification.
Termination routes: Agreement | revocation | renunciation | completion | expiry | death or unsound mind | principal's insolvency; Revocation after partial exercise (s.204) is barred only as to acts done and obligations already incurred. Where the agent has an interest in the subject matter, termination to the prejudice of that interest is barred unless there is an express contract (s.202).

How to solve Authority, Duties and Liability of Agent and Principal questions

Use the same order for any agency scenario question. It stops you jumping to a conclusion before checking authority.

1Identify the principal, agent and third party. Say whether the principal is disclosed or undisclosed.
2Ask what authority the agent had in fact: express first, then implied from the task, trade usage or past dealings.
3If actual authority is missing, test for apparent authority: did the principal represent it, and did the third party rely on it reasonably?
4If neither exists, check whether the principal can ratify, and whether ratification conditions are met.
5Decide who is liable to the third party: principal, agent, or both. Give the reason in one line.
6Check the agent's duties for any breach: care, obedience, conflict, secret profit, accounting, delegation.
7Check the principal's obligations: pay, indemnity, compensation.
8If the question mentions ending the relationship, apply the termination rules and any limits on revocation. Then state a clear conclusion.

Quickest way: Authority first, then liability

When to use it: Use this for MCQs and for short scenario parts where you have only a few minutes.

Underline who gave what instruction or signal to whom.
Ask: actual authority? If yes, the principal is bound.
If no, ask: did the principal's own conduct make it look like authority? If yes, bound by apparent authority.
If still no, look for ratification. Otherwise the agent is personally exposed.
For duties questions, match the facts to one label: conflict, secret profit, no care, disobedience, no accounts.

Common mistakes in Authority, Duties and Liability of Agent and Principal

Treating apparent authority as created by the agent's own statements.
Students focus on what the agent said to the third party.
Fix: The representation must come from the principal, by words or conduct. An agent cannot create their own apparent authority.
Saying the principal is never bound when the agent exceeded instructions.
Students stop at actual authority.
Fix: Always test apparent authority and ratification before concluding the principal is not liable.
Missing the secret profit rule when the agent also did the job well.
Students think good results excuse the profit.
Fix: A secret profit or undisclosed commission breaches loyalty whatever the outcome. The principal can claim it and may refuse to pay remuneration.
Ignoring the limits on the principal's right to revoke.
Students remember that the principal can revoke at any time (s.203) and forget the limits.
Fix: The principal may revoke at any time before the authority is exercised so as to bind the principal (s.203), with reasonable notice (s.206). Then apply the limits. Once authority has been partly exercised, revocation is barred only as to acts already done and obligations already incurred (s.204). Where the agent has an interest in the subject matter, the principal cannot terminate to the prejudice of that interest unless there is an express contract (s.202).
Assuming the agent is always personally liable on contracts they make.
Students confuse the agent's role with that of a party.
Fix: For a disclosed principal and authorised acts, the agent is normally not liable. State the exceptions only if the facts support them.
Applying ratification to part of an act or to an act not done on the principal's behalf.
Students learn ratification as a general cure.
Fix: Check that the agent purported to act for an identified principal who was competent at the time, that the principal knew the material facts, and that the whole act is adopted.

Worked examples

Example 1

Meera appoints Ravi as her agent to sell her flat at not less than ₹60,00,000. Ravi sells it to Sunil for ₹55,00,000 and does not tell Meera of the price. Sunil did not know of the limit. Discuss whether Meera is bound, and Ravi's position.

Show the solution

Parties: Meera is principal, Ravi is agent, Sunil is third party. Meera is disclosed.
Actual authority: express authority was to sell at ₹60,00,000 or more. A sale at ₹55,00,000 is outside it.
Apparent authority: if Meera led Sunil to believe Ravi could sell on her behalf, for example by letting him show the flat or handle negotiations, and the price limit was not communicated to Sunil, she may be bound. The basis is estoppel (s.115 Indian Evidence Act) and s.237 of the Indian Contract Act. Under s.237 a principal is bound where, by words or conduct, she induced the third party to believe the acts were within the agent's authority and he acted on that belief. Sunil did not know of the limit, so his reliance is reasonable.
Ratification: alternatively, Meera may adopt the sale, but she is not obliged to. If she does, she must accept the whole sale.
Ravi's position: he breached the duty of obedience by acting outside her instructions on price. He also failed in his duty to render accounts to Meera, because he did not tell her the price. Meera can claim for any loss from him.
Conclusion: Meera is likely bound to Sunil if apparent authority is shown, and then has a claim against Ravi.

Answer: Meera is probably bound through apparent authority, if her conduct held Ravi out as able to sell and Sunil relied on it without knowing the limit. Ravi acted outside actual authority, breaching the duty of obedience and the duty to render accounts, and is liable to Meera for her loss.

Example 2

An insurance broker, acting as agent for a client, receives a commission from the insurer without telling the client. Name the duty breached and the client's remedies.

Show the solution

Identify the relationship: the broker is the agent, the client is the principal.
The agent must avoid conflict of interest and must not make a secret profit. This is part of the duty of loyalty.
Here, an undisclosed commission is a secret profit. The client did not give informed consent.
Remedies: the client can claim the amount of the commission, can refuse or recover remuneration, and can end the agency. If loss resulted, damages can also be claimed.
Conclusion: the breach does not depend on whether the client suffered loss.

Answer: The broker breached the duty of loyalty by taking a secret profit. The client may recover the commission, resist or recover remuneration, terminate the agency and claim damages for any loss.

Exam tips

Write the authority analysis in order: express, implied, apparent, ratification. Examiners award marks for the sequence.
In scenario questions, name the principal, agent and third party at the start. It stops confusion and earns easy marks.
Use the exact label for each duty breached: obedience, care and skill, loyalty, secret profit, accounting. Do not write only 'bad faith'.
For MCQs, watch for options that say the principal is 'never' or 'always' liable. Agency rules have conditions, so such options are usually wrong.
State a clear conclusion in the last line of each written answer. Then say who can claim against whom.

Practice questions from Trusts and agency

Authority, Duties and Liability of Agent and Principal: frequently asked questions

What is the difference between actual and apparent authority?

Actual authority is what the principal really gave the agent, expressly or by implication. Apparent authority arises from the principal's conduct that leads a third party to believe the agent is authorised. The principal can be bound by apparent authority even if actual authority is missing.

When is a principal liable for the acts of an agent?

A principal is liable for acts within the agent's actual or apparent authority, and for acts the principal later ratifies. Outside these, the principal is generally not bound. The agent may then be personally liable to the third party.

Can a principal revoke an agent's authority at any time?

Generally yes. The principal may revoke at any time before the authority is exercised so as to bind the principal (s.203), but reasonable notice is required and damages may be due if none is given (s.206). Once the agent has partly exercised the authority, revocation is barred only as to acts already done and obligations already incurred (s.204). Where the agent has an interest in the subject matter, the principal cannot terminate to the prejudice of that interest unless there is an express contract (s.202).

How does agency end under the Indian Contract Act?

It ends by agreement, revocation by the principal, renunciation by the agent, completion of the business, expiry of the period, death or unsound mind of either party, or the principal being adjudged insolvent. Check the limits on revocation for any scenario.