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Drafting, Pleadings and Appearances · Commercial Contract Management

Contracts Made by Agents Under Section 231 of the Contract Act

Updated 11 October 2026 · Fact-checked

Under Section 231, if an agent contracts with a person who neither knows nor suspects that he is an agent, the principal may require performance. The other party has the same rights against the principal as he would have had against the agent. If the principal discloses himself before completion, the other party may refuse in limited cases.

Understand Contracts Made by Agents (Section 231)

An agent normally acts for a principal, and the contract binds the principal. Usually the third party knows this. Sometimes the third party does not know there is a principal at all. He thinks he is dealing with the agent as the real party. This is the undisclosed principal situation.

Section 231 protects both sides. The principal can step in and require performance of the contract. The third party is not made worse off. He has, against the principal, the same rights he would have had against the agent if the agent had been principal.

The protection applies only if the third party neither knows nor has reason to suspect that the other person is an agent. If he knew or had reason to suspect, the section does not apply on its terms.

There is a second limit. If the principal discloses himself before the contract is completed, the third party may refuse to fulfil the contract. He must show that, had he known who the principal was, or known that the agent was not a principal, he would not have entered into the contract. This guards the third party's choice of whom to deal with.

Read Section 231 with two neighbours. Section 232 says the principal gets performance only subject to the rights and obligations between the agent and the third party, such as a set-off of the agent's debt. Section 230 presumes a contract that the agent is personally bound or can enforce where he does not disclose the principal's name. In drafting, you must therefore decide and state who is bound, who can sue, and what is disclosed.

Key rules to remember

Section 231, first paragraph
Agent contracts + third party neither knows nor has reason to suspect agency → principal may require performance; third party has against principal the same rights he would have had against the agent
Both conditions on the third party's state of mind matter: no knowledge and no reason to suspect.
Section 231, second paragraph
Principal discloses himself before contract is completed → third party may refuse if he shows he would not have contracted had he known the principal, or that the agent was not a principal
The burden is on the third party to show he would not have entered the contract. Timing is before completion.
Section 232
Principal's performance is subject to the rights and obligations subsisting between agent and third party
Illustration: the agent owes ₹500 to B and sells rice worth ₹1,000 to B. The principal cannot compel B to take the rice without allowing set-off of the ₹500.
Section 230 presumption
Agent not personally bound or entitled unless contrary contract; presumed where (1) goods for merchant resident abroad, (2) principal's name not disclosed, (3) principal cannot be sued
Read with Section 231 when the principal is undisclosed. Answer on who can sue and be sued turns on this.
Section 238
Agent's misrepresentation or fraud in the course of business has the same effect as the principal's; outside authority, it does not affect the principal
Useful when the third party was misled by the agent.

How to solve Contracts Made by Agents (Section 231) questions

Use this order for any problem on an agent contracting for an undisclosed principal.

  1. 1Identify the agent, the principal and the third party, and the contract made.
  2. 2Check what the third party knew. Did he know, or have reason to suspect, that the other person was an agent? If yes, Section 231 does not apply on its terms.
  3. 3If no, state that the principal may require performance and that the third party has the same rights against the principal as he would have had against the agent.
  4. 4Check whether the principal disclosed himself before the contract was completed. If yes, ask whether the third party can show he would not have contracted had he known the principal or that the agent was not a principal.
  5. 5Apply Section 232: look for dues between agent and third party and allow set-off.
  6. 6Apply Section 230 if the question asks about the agent's personal liability or right to sue; the non-disclosure of the principal's name raises the presumption.
  7. 7Conclude clearly on who can sue whom, and add the drafting point: a clause on disclosure, authority and liability.

Quickest way: Four-question check

When to use it: When you have little time and the question is a short fact-based problem.

  1. Did the third party know or suspect agency? If yes, say Section 231 does not apply.
  2. If no, principal can enforce; third party has same rights against principal as against agent.
  3. Did the principal reveal himself before completion? If yes, test the third party's right to refuse.
  4. Any agent-third party debt? Allow set-off under Section 232. Then conclude.

Common mistakes in Contracts Made by Agents (Section 231)

  • Applying Section 231 when the third party knew the other party was an agent.

    Students see an agent and principal and jump to the section.

    Fix: Always test the third party's knowledge or reason to suspect first.

  • Saying the third party can always refuse once the principal is revealed.

    Students remember the refusal right but forget its conditions.

    Fix: State that he must show he would not have entered the contract had he known, and that disclosure was before completion.

  • Forgetting set-off under Section 232.

    The section is read in isolation.

    Fix: Treat the principal's right as subject to rights between agent and third party; cite the rice illustration.

  • Saying the principal gets better rights than the agent would have had.

    Students think the principal stands apart from the agent.

    Fix: Say the principal takes the contract subject to the equities between the agent and the third party.

  • Ignoring the drafting part of the question.

    Students treat the paper as pure law.

    Fix: Add clauses on disclosure of agency, authority, who is bound, and notice of the principal's identity.

Worked examples

Example 1

Meera, acting for Kapoor Textiles Ltd without saying so, sells 500 bales of cloth to Rohan, who has no reason to suspect that she is an agent. Rohan refuses to pay, saying he dealt only with Meera. Advise Kapoor Textiles Ltd.

Show the solution
  1. Provision: Section 231. Agent contracts with a person who neither knows nor has reason to suspect agency; the principal may require performance.
  2. Facts: Rohan had no knowledge or reason to suspect that Meera was an agent.
  3. Application: Kapoor Textiles Ltd may require performance of the contract, and Rohan has the same rights against it as he would have had against Meera as principal.
  4. Check: no disclosure before completion is stated, and no debt from Meera to Rohan is mentioned, so no refusal or set-off arises.
  5. Conclusion and drafting point: the company can enforce. In future, the agency agreement should say whether the agent will disclose the principal.

Answer: Kapoor Textiles Ltd may require Rohan to perform. Rohan cannot defeat the claim merely because he dealt with Meera alone.

Example 2

Anil, as agent of Shah Traders, sells rice worth ₹1,000 to Bhavna, who does not know of the agency. Anil owes Bhavna ₹500. Shah Traders sues Bhavna for the price. Advise.

Show the solution
  1. Provision: Sections 231 and 232. The principal may require performance, but only subject to rights and obligations between the agent and the third party.
  2. Facts: Bhavna had no knowledge or reason to suspect agency. Anil owes her ₹500.
  3. Application: Shah Traders can enforce the sale, but Bhavna can set off the ₹500 that Anil owes her.
  4. Calculation: ₹1,000 − ₹500 = ₹500.
  5. Conclusion: Shah Traders can recover ₹500 from Bhavna, not ₹1,000.

Answer: Shah Traders can claim the price, but Bhavna is entitled to set off Anil's debt of ₹500, so the amount recoverable is ₹500.

Exam tips

  • Begin with the third party's knowledge. Every Section 231 problem turns on it.
  • Quote the conditions of the refusal right: before completion, and proof that he would not have contracted.
  • Link Section 231 with Sections 230 and 232 in the answer. Examiners reward the connection.
  • Close with a short drafting note: disclosure clause, authority clause, liability clause.
  • Use headings: provision, facts, application, conclusion.

Practice questions from Commercial Contract Management

Contracts Made by Agents (Section 231) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Contracts Made by Agents (Section 231): frequently asked questions

What is an undisclosed principal under Section 231?

It is a principal whose agent makes a contract with a third party who neither knows nor has reason to suspect that the agent is an agent. The principal may require performance of the contract.

Can the third party refuse once the principal reveals himself?

Only if the principal discloses himself before the contract is completed and the third party can show he would not have entered the contract had he known who the principal was, or that the agent was not a principal.

What rights does the third party have against the undisclosed principal?

The same rights as he would have had against the agent if the agent had been principal. Section 232 adds that the principal's performance is subject to rights between the agent and the third party, such as set-off.

What should an agency agreement say about disclosure?

It should state whether the agent may act without naming the principal, the agent's authority, who is bound and who can sue, and what notice is given if the principal is later named.