This article is written by Sakshi Bargaje, Government Law College, Mumbai, BA LLB,2026, during her internship at LeDroit India.
SCOPE OF ARTICLE
- 1. Introduction to Agency and Estoppel under the Indian Contract Act, 1872
- 2. Doctrine of Estoppel: Origins and Conceptual Basis
- 3. Agency by Estoppel: Definition, Legal Basis, and Section 237
- 4. Essential Elements Required to Establish Agency by Estoppel
- 5. Apparent Authority vs. Actual Authority
- 6. Landmark and Recent Case Laws
- 7. Applications in Contemporary Commercial Settings
- 8. Critical Analysis and Conclusion
ABSTRACT
Agency by estoppel is one of those legal doctrines that tends to get overlooked in textbooks, yet it quietly shapes the outcome of a surprising number of commercial disputes. Grounded in Section 237 of the Indian Contract Act, 1872, it stops a principal from walking away from transactions entered into by an unauthorised agent, provided the principal’s own conduct gave a third party reason to believe the authority existed.
This article looks at how the doctrine works, what a claimant needs to prove, how it sits alongside the concept of apparent authority, and where it shows up in banking, corporate, and digital commerce. Cases like Freeman & Lockyer, SBI v. Mula Sahakari Sakhar Karkhana, and domestic High Court decisions are examined to trace how courts have appliedand occasionally stretched the doctrine. The conclusion is straightforward: those who allow misleading impressions of authority to persist must take responsibility when innocent parties act on those impressions. Keywords: agency by estoppel, apparent authority, Indian Contract Act 1872, ostensible authority, third-party protection, principal-agent relationship.
Keywords: Agency by Estoppel, Apparent Authority, Indian Contract Act 1872, Ostensible Authority, Third-Party Protection, Principal-Agent Relationship
1. INTRODUCTION
Think about how most business transactions actually happen. A supplier receives a call from someone who says they are calling on behalf of a company. A bank customer deals with a branch manager who confidently commits the institution to a loan arrangement. A consumer buys a product from someone wearing the uniform and using the branding of a well-known company. In none of these situations does the third party stop to ask for a formal letter of authorisation. And why would they? The whole point of commerce is that it moves quickly and is based on reasonable trust.
But what happens when, after the deal is done, the so-called principal turns around and says that the person had no authority to act for me? This is exactly the situation that agency by estoppel is designed to address. The doctrine takes the principal’s own conduct, his words, his silence, his course of dealing, and uses them against him. If you allowed someone to appear as your agent, the law says, you cannot later disown their acts at the expense of someone who reasonably relied on that appearance.
The statutory home of this doctrine in India is Section 237 of the Indian Contract Act, 1872. But its roots go deeper, into equity, into the law of estoppel, and into a general principle that people should not be allowed to benefit from their own misleading conduct.
2. AGENCY UNDER THE INDIAN CONTRACT ACT, 1872
Chapter X of the Indian Contract Act covers agency across Sections 182 to 238. The basics are straightforward. Section 182 tells us that an agent is someone employed to act for another person, the principal, in dealings with third parties. Section 183 says any person of sound mind who has reached majority can appoint an agent. An agency can come about in several ways: express appointment, implication, necessity, ratification, or estoppel.
What makes agency by estoppel different from the others is that there is no actual authorisation at all. The agent never had real authority. The principal never intended to appoint this person. And yet, the law still holds the principal bound. The justification is simple: the principal’s conduct made it look like authority existed, a third party relied on that appearance, and it would be deeply unfair to let the principal escape the consequences now.
Section 237 captures this precisely: where a principal, by his words or conduct, induces a third party to believe that an agent’s act was within the scope of authority, the principal cannot later deny it. Note what the section does not require: it does not require any formal appointment, any written mandate, or even any conscious intention to create an agency. Conduct alone is enough.
3. THE DOCTRINE OF ESTOPPEL
The word estoppel comes from Old French,estoupail, meaning to plug or stop up. The legal concept is older than most people realise. Its early English formulation appeared in Pickard v. Sears (1837) 6 A&E 469, where the court said that if a person by his words or conduct causes another to believe something and that other person acts on it and changes his position, the first person cannot then contradict what he represented. Simple enough in theory. The complications arise in application.
Three elements sit at the core of any estoppel: there must be a representation, the other party must have relied on it, and that reliance must have caused them some detriment. Take away any one of these three and the estoppel fails. In Indian law, this is codified in Section 115 of the Evidence Act, 1872,a person who, by declaration, act, or omission, has caused another to believe something and act on it cannot deny that thing in legal proceedings.
When this is applied to an agency, the ‘thing’ being represented is the existence of an authorised agency. The principal, through some act, word, or omission, creates that impression. A third party deals based on it. And when things go wrong, and the principal tries to disclaim responsibility, the doctrine steps in and says: no, you made this situation possible, and you must bear the consequences.
4. ESSENTIAL ELEMENTS OF AGENCY BY ESTOPPEL
4.1 The Representation Must Come from the Principal
This is perhaps the most important and most misunderstood aspect of the doctrine. The estoppel must be grounded in something the principal himself said or did, not just something the agent said about himself. In Armagas Ltd v. Mundogas S.A. [1986] A.C. 717, the House of Lords made this very clear: an agent cannot manufacture his own apparent authority simply by claiming to have it. The representation must come from the person sought to be estopped, the principal. This sounds obvious, but gets overlooked remarkably often in practice.
4.2 The Third Party Must Actually and Reasonably Believe
A third party who simply does not bother to inquire when the circumstances clearly call for it,cannot later claim they were misled. In Laxmi Narayan v. State of Bihar AIR 1955 Pat 70, the court was clear that Section 237 protects honest and prudent reliance, not wilful blindness. The belief must be the kind of reasonable person in those circumstances would form,not an unreasonably optimistic reading of facts that should have prompted caution.
4.3 Reliance: Something Must Have Changed
The third party must have done something, entered a contract, paid money, delivered goods, extended credit, because of the belief the principal’s conduct created. A mere belief without any consequential act does not ground an estoppel. The whole point of the doctrine is to undo injustice caused by changed positions; if nothing changed, there is no injustice to undo.
4.4 Detriment and No Notice of Limitation
The third party must stand to lose something if the estoppel is not applied. And crucially, they must not have known,or been in a position where they should have known, about the actual limits on the agent’s authority. A principal who publicly communicates the boundaries of his agent’s mandate, or whose organisational structure makes those limits ascertainable with reasonable diligence, cannot be caught by an estoppel when a third party ignores those publicly available signals.
5. APPARENT AUTHORITY VERSUS ACTUAL AUTHORITY
These two concepts are regularly conflated, and it matters enormously that they are not. Actual authority is what the principal has genuinely given the agent, express or implied, but real. It governs the internal relationship. Apparent authority is what the agent looks like he has, from the outside, based on how the principal has presented things. It governs the external relationship with third parties.
The classic articulation of this comes from Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, where Diplock LJ explained that apparent authority arises from a representation by the principal to the third party that the agent has authority, and the company in that case was bound because it had allowed a director to act as managing director without ever formally appointing him to that role. Indian courts have followed this reasoning, holding that companies cannot hide behind internal resolutions that restrict an officer’s authority when no notice of those restrictions was ever given to the outside world.
The practical upshot is this: if a company places someone in a position that, by ordinary commercial understanding, carries certain authority say a branch manager or a contracts director, it cannot later say that internal limits on that authority should have been obvious to outsiders. The position itself is the representation.
6. CASE LAWS
Landmark Decisions
In State Bank of India v. Mula Sahakari Sakhar Karkhana AIR 2006 SC 2205, the Supreme Court dealt with a situation where a bank officer had issued guarantees on several earlier occasions and the bank had never once said anything about it. When a similar guarantee caused a loss, the bank tried to deny liability. The Court said no, you sat quietly through all of this, you never objected, and a third party reasonably relied on the impression your silence created. The bank was bound.
In Mukund Lal v. Union of India AIR 1989 SC 616, the Supreme Court took the principle further into public law, holding that the government too can be held to representations made by its officers,at least where those officers acted within the apparent scope of their authority and the third party had no reason to suspect otherwise. This was a significant expansion of the doctrine and remains good law.
The English decision in Keighley, Maxsted & Co. v. Durant [1901] AC 240 is frequently cited in Indian courts for the proposition that apparent authority cannot be self-created by the agent,a point that sounds basic but turns out to be decisive in many disputes where the agent has gone around claiming authority that was never in fact granted.
Recent Trends
A Delhi High Court decision from 2023 involving a media distribution dispute found a company bound by its regional representative’s agreements; the company had never objected to any of the dozens of arrangements this person had finalised on its behalf over several years. That history of inaction was treated as the representation. More broadly, consumer courts and lower tribunals have started applying the Section 237 framework to e-commerce platforms, asking whether presenting a seller as ‘verified’ or ‘certified’ is a representation capable of grounding an estoppel when consumers are harmed. The law here is still developing, but the trajectory is clear.
7. CONTEMPORARY COMMERCIAL APPLICATIONS
Corporate India throws up agency by estoppel disputes with some regularity. The doctrine sits alongside the Indoor Management Rule,which tells outsiders they can assume a company’s internal procedures have been followed,to create a fairly robust protection for third parties who deal with company officers. Together, the two principles mean that a company’s internal irregularities are generally the company’s problem, not the problem of the person who dealt with it in good faith.
In banking, the pattern is well-established. A branch manager commits the bank to a credit facility beyond his delegated limits. The borrower has no idea there are any such limits. The bank tries to void the arrangement. Courts, in case after case, have refused to allow this,particularly where the officer’s conduct over time has been consistent and the bank has done nothing to signal any problem with it.
Franchise relationships present a slightly different issue. A franchisor creates the entire commercial environment,the branding, the uniform, the marketing, the promises. The franchisee steps into that environment and deals with consumers who quite reasonably think they are dealing with the main brand. Courts in several jurisdictions have held the franchisor liable for the franchisee’s defaults in these circumstances, even where the franchise agreement says in clear terms that no agency exists. What matters, the courts say, is not what the contract says internally; it is what the consumer could reasonably be expected to believe.
8. CRITICAL ANALYSIS AND CONCLUSION
The doctrine is not without its difficulties. In large organisations, pinning down a ‘representation’ that clearly emanates from the principal can be genuinely hard. Decisions get made through layers of management, emails, and informal approvals,and it is not always obvious what exactly the organisation has communicated to the outside world. Courts have tried to deal with this by looking at the cumulative effect of conduct rather than searching for a single clear statement, which is sensible, but it does introduce some uncertainty.
There is also the question of third-party due diligence. The doctrine should not become a charter for people who simply fail to ask obvious questions. Some degree of inquiry is reasonable to expect,and courts do expect it. The line between ‘reasonable reliance’ and ‘wilful blindness’ is not always crisp, and how courts draw it in any particular case can feel somewhat impressionistic.
The public law dimension adds another layer of complexity. While Mukund Lal extended the doctrine to government action, subsequent decisions have pulled back significantly, recognising that constitutional provisions and statutory schemes cannot be overridden by estoppel. The government cannot be held to representations that would require it to act outside its legal powers,a limitation that makes sense in principle but can leave third parties in an awkward position when they have genuinely relied on official representations.
And then there is the digital question. When a platform’s algorithm labels a seller ‘official’ or ‘verified’, is that a representation from the platform,or just a label generated by a system? Courts have not yet given a clear answer. But the question matters, because if the answer is yes, platform liability for third-party defaults could expand dramatically.
None of these complications undermines the basic soundness of the doctrine. At its core, agency by estoppel rests on a principle that is hard to argue against: if you created an impression of authority, through what you said, what you did, or what you allowed to happen, you cannot walk away from the consequences when someone acts on that impression honestly and reasonably. Section 237 of the Indian Contract Act, 1872, puts this in statutory form. A century of case law has worked out the details. The doctrine will only grow more important as commercial life becomes faster, more informal, and more dependent on appearances rather than formalities.
