Contract Act | Limits Of Agent's Authority : Supreme Court Explains Law Of Agency

The Supreme Court has held that an agent's implied authority cannot extend to enlarging a risk or dispensing with a statutory precondition which the principal itself is not permitted to assume. The observation was made while hearing an appeal filed against an order passed by the National Consumer Disputes Redressal Commission (NCDRC), wherein the Commission had directed the appellant to pay the amount assessed by its own surveyor towards a fire loss claim.

A bench of Justice Sanjay Karol and Justice Nongmeikapam Kotiswar Singh allowed the appeals filed by the New India Assurance Company against the judgment of the National Consumer Disputes Redressal Commission (NCDRC), wherein the Commission had directed the appellant to pay the amount towards a fire loss claim.

The respondent had availed a Marine Cargo Annual Turnover Policy from the appellant for an expected turnover of Rs 1200 Crores, with premium payable in two equal instalments. A fire broke out at a Container Freight Station where the respondent had stored 41,481 cotton bales. Appellant's own surveyor had accessed the loss to be of Rs. 22,01,29,271.

However, the respondent's turnover had crossed the insured amount of Rs 1200 Crore, and stood at Rs 1724.12 Crores on the date of fire. No additional premium had been paid at that stage. More than a month after the fire incident, the respondent paid an additional premium of Rs 86,86,125; following an email sent by a Relationship Manager of the appellant seeking release of “another instalment based on the current turnover” to “regularise the turnover”. The claim was later repudiated by the appellant.

The NCDRC had ruled in favour of the respondent, relying on the email sent by the Divisional Manager of the appellant, which stated that after payment of second instalment, “all the transits are covered till the expiry of policy even if it crosses Rs 1200 crores.” As per the NCDRC, this assurance meant that the coverage continued irrespective of turnover exceeding the insured sum.

The bench delivered the judgment separately, yet, concurringly. Justice Sanjay Karol held that Section 64VB of the Insurance Act creates “a statutory embargo on an insurer assuming risk if the premium has not been paid to them, either prior to such assumption or within the stipulated time period in which it is guaranteed to be paid.” He further held that under Section 64VB(2), “the risk cannot be assumed earlier than the date on which the premium has been paid.”

In a separate concurring judgment, Justice Nongmeikapam Kotiswar Singh examined the principal-agent relationship under the Indian Contract Act, 1872 in detail, to test whether the officer's email could bind the insurer. Referring to Section 182 of the Contract Act that defines “agent” and “principal”, and Sections 186 and 187 that deal with express and implied authority, Justice Singh noted that implied authority “may be inferred from the circumstances, the things spoken or written, or the ordinary course of dealing.”

Examining Section 188, Justice Singh ruled that a Divisional Manager entrusted with administering a policy may ordinarily correspond with the insured and call for premium, but “that does not establish authority to create a new risk, enlarge the sum insured or enlarge the scope of liability of the insurer or dispense with a statutory precondition for attachment of risk.”

The concurring opinion traced the distinction between actual and apparent authority through Sections 226 and 237 of the Act. Section 226 provides that acts done by an agent within authority bind the principal as if done by the principal in person. Section 237, embodying the doctrine of holding out/agency by estoppel, provides that where an agent acts without authority, the principal is bound only if his conduct induced such third persons to believe that such acts and obligations were within the scope of the agent's authority.

Relying on Harshad J Shah v LIC of India, it was reiterated that actual authority flows from the principal's manifestation to the agent, while apparent authority flows from the principal's manifestation to the third party, and that an agent “cannot create such authority by his own assertion and the representation must be traceable to the words, conduct, course of dealing or organisational position conferred by the principal.”

The judgment also cited Delhi Electric Supply Undertaking v Basanti Devi to explain that an internal restriction on an agent's authority, if never communicated to the third party, cannot by itself defeat an established case of ostensible authority.

Reliance was also placed on State of Orissa v United India Insurance Co Ltd, wherein a Branch Manager's incorporation of a guarantee outside the scope of the policy was held not binding on the insurer, holding that “a managerial designation does not, by itself, confer authority to add an undertaking which lies outside the policy and outside the authority held out by the insurer.”

Section 227 of the Act was invoked to hold that the email could be treated as a valid clarification only insofar as it concerned payment of instalments and operation of policy within the sum lawfully insured, but “cannot, however, merely by reason of the same communication, be treated as an independent undertaking of unlimited or retrospectively enlarged cover.”

On the question of ratification under Section 196 of the Contract Act, Justice Singh held that the endorsement enhancing the sum insured was “inconsistent with an intention to ratify, retrospectively, an assurance that additional cover had already been attached” before the fire incident. “Ratification may cure an absence of authority, but it cannot be employed to defeat a mandatory statutory requirement governing the assumption of insurance risk”, it was observed.

“The principle qui facit per alium facit per se applies to acts within the agent's authority, however, it does not enable an agent to confer upon the Principal a liability which the agent was neither authorised nor legally competent to assume on its behalf”, Justice Singh observed.

Accordingly, the appeals were allowed, setting aside the NCDRC order.

Case Title: The New India Assurance Company Limited & Ors. v M/S Louis Dreyfus Commodities India Pvt. Ltd.

Coram: Justice Sanjay Karol and Justice Nongmeikapam Kotiswar SinghAppearances:

For Appellant: Mr Salil Paul, Adv

For Respondent: Mr Joy Basu, Adv