Chapter X - Agency
Section 237
Section 237: Authority belief induced by the principal
A principal can be bound by unauthorised agency acts where the principal’s own words or conduct induced belief that they were authorised.
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This article is for general information. Refer to the Indian Contract Act, 1872 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
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.
Illustrations
(a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract.
(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private orders from A. The sale is good.
Rule and business relevance
The induction must come from the principal’s words or conduct and concern acts or obligations undertaken on the principal’s behalf. Private restrictions do not automatically protect a principal against the illustrated third-party reliance.
Limits and related provisions
An agent’s unsupported claim alone is not the principal’s inducement described here. Identify the principal’s actual representation and the counterparty’s belief.
Hypothetical business example
Hypothetical example: A principal entrusts goods for sale while privately limiting price; an unaware buyer relies on the apparent selling authority. The statutory illustration addresses the principal’s resulting position.
Practical decision flow
Identify the unauthorised act on the principal’s behalf.
Trace the principal’s words or conduct inducing authority belief.
Record the counterparty’s knowledge and reliance circumstances.
Check the applicable legal framework
This guide explains the central provision. Applicable State amendments, the agreement, transaction date and other governing laws can affect its application. Check the current legal framework before relying on it for a commercial decision.
Practical checklist
Do
- Identify the unauthorised act on the principal’s behalf.
- Trace the principal’s words or conduct inducing authority belief.
- Record the counterparty’s knowledge and reliance circumstances.
Avoid
- An agent’s unsupported claim alone is not the principal’s inducement described here. Identify the principal’s actual representation and the counterparty’s belief.
Glossary
- Apparent authority
- The authority belief induced by the principal in the setting described.
- Private restriction
- An internal limit whose effect on third persons depends on the applicable rules.
Frequently asked questions
Is the agent’s assertion alone enough under this provision?
The section requires inducement by the principal’s words or conduct.
Can a private instruction always defeat the third-party contract?
No. The illustrations show circumstances where the principal remains bound.
What must the belief concern?
That the acts or obligations were within the agent’s authority.
Need help applying this provision to your situation?
Contact BizeneedLast updated 10 October 2026