Sections 237 and 238 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The last two sections of the Act's agency chapter, and of the Act as it now stands, deal with what the principal is answerable for. Section 237 binds the principal to an agent's unauthorised acts if the principal, by words or conduct, induced third persons to believe that the acts were within the agent's authority. Section 238 says that misrepresentation or fraud by an agent in the course of business has the same effect on agreements as if the principal had committed it, but not where it is in matters outside the agent's authority.
Where an agent without authority has done acts or incurred obligations to third persons on behalf of his principal, the principal is bound if he has by his words or conduct induced such third persons to believe that they were within the scope of the agent's authority (s.237). Misrepresentation made, or frauds committed, by agents acting in the course of their business for their principals have the same effect on agreements made by such agents as if made by the principals; but those in matters which do not fall within their authority do not affect their principals (s.238). The Act's illustrations are printed under both sections.
Section 237: the principal who induces belief
"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."
Conditions:
- The agent acted without authority.
- The principal, by words or conduct, induced the third persons to believe that the acts were within the agent's authority.
Result: the principal is bound. The test looks to what the principal did, not just what the agent did.
The Act's illustrations (s.237).
(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.
In (a), A's act in consigning the goods for sale to B, with C unaware of the private limit, makes A bound. In (b), A's act in entrusting the instruments endorsed in blank, with the sale made against private orders, leaves the sale good. In each the third person did not know of the limit that the principal imposed in private.
This differs from section 227 and 228, where the agent exceeds authority and the principal's position is limited; see our article on sections 227 and 228. It also differs from ratification, where the principal elects after the event.
If you suspect a principal is bound by what his agent did, or you want to show you are not, a legal dispute resolution adviser can help you look at what was said and done.
Section 238: misrepresentation or fraud by an agent
"Misrepresentation made, or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals."
The section has a rule and a limit.
| Part | Words |
|---|---|
| Rule | Misrepresentation or fraud by agents "acting in the course of their business for their principals" has "the same effect on agreements made by such agents" as if made by the principals |
| Limit | Misrepresentation or fraud "in matters which do not fall within their authority" does not affect the principals |
The Act's illustrations (s.238).
(a) A, being B's agent for the sale of goods, induces C to buy them by a misrepresentation, which he was not authorized by B to make. The contract is voidable, as between B and C, at the option of C.
(b) A, the captain of B's ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended cosignor.
Illustration (a) shows the rule at work: the agent sold in the course of business; he made a misrepresentation he was not authorised to make; yet the contract is voidable at C's option as between B and C. Compare sections 18 and 19: misrepresentation can make a contract voidable. Our articles on section 18 and section 19 explain those provisions. Illustration (b) shows fraud in the captain's signing of bills of lading, which are void as between B and the pretended consignor.
A modern example (ours, not the Act's)
Kapoor Electronics gives its dealer, Vishal, a price list and a private instruction not to sell any laptop below the list price without approval. Kapoor has displayed Vishal's name as its "authorised dealer" in the shop and on its website. A customer, Sneha, who has seen no instruction, buys a laptop from Vishal below the list price. Under section 237, if Kapoor by its words or conduct induced Sneha to believe that the sale was within Vishal's authority, Kapoor is bound. The Act's illustration (a) is the model.
On section 238: Vishal, selling to another customer in the course of his business, falsely says the laptop has a warranty that it does not have. The misrepresentation, made by an agent acting in the course of his business, has the same effect on the agreement as if Kapoor had made it. As in illustration (a), the contract is voidable at the buyer's option as between Kapoor and the buyer. If instead Vishal lies about something that has nothing to do with his authority, for instance a loan on his own account, the limit applies and it does not affect Kapoor.
A note on the sections that follow
The source text ends with a heading for Chapter XI, "Of Partnership", stating that it was repealed by the Indian Partnership Act, 1932, section 73 and the Second Schedule, and it lists sections 239 to 266 as repealed. So there is no section 239 or later in force in the Act. If you need the law of partnership, the Indian Partnership Act, 1932 is the statute; see, for example, our article on sections 1 to 3 of the Indian Partnership Act, 1932.
What can the parties change?
Section 237 turns on the principal's own words or conduct, so he can avoid inducing belief that the agent has more authority than he does: by telling known third persons of limits, by not holding the agent out as having full powers, and by recalling signs or documents that suggest it. Section 238 is about the effect on agreements of misrepresentation and fraud. A contract cannot make fraud acceptable, and the sections do not mention contrary agreement; this article does not go beyond the text.
Practical points
- Principals: tell customers and suppliers about limits on your agents' authority, and do not give agents documents or titles that suggest more power than you intend.
- Third persons: the principal's words and conduct matter under section 237. Keep records of what you saw and were told.
- Agents: do not make statements you are not authorised to make; section 238 may make them your principal's problem, and yours.
- Disputes: a misrepresentation by an agent in the course of business may give the other party the option to avoid the contract (s.238 illustration (a)).
Need help with a dispute over an agent's acts or statements?
If a customer relied on your agent's statement, or you relied on someone else's agent, our legal dispute resolution service can help you review the facts and explain how sections 237 and 238 may apply. Other laws may also apply to your sector.
Key takeaways
- A principal is bound by an agent's unauthorised acts if he has by words or conduct induced third persons to believe they were within the agent's authority (s.237).
- The Act's illustrations: goods consigned with a private minimum price that the buyer did not know; negotiable instruments endorsed in blank and sold against private orders.
- Misrepresentation or fraud by an agent in the course of business has the same effect on agreements as if made by the principal (s.238).
- Misrepresentation or fraud in matters outside the agent's authority does not affect the principal.
- Sections 239 to 266 (partnership) are repealed and replaced by the Indian Partnership Act, 1932.
Read next
- Sections 234 to 236: pretended agent and exclusive liability
- Sections 227 and 228: principal bound when agent exceeds authority
- Agency: sections 182 to 238
Disclaimer: Based on the text of the Indian Contract Act, 1872 as consulted on 1 October 2026. Many questions under this Act turn on case law and on the wording of the particular contract, which this article does not cover. It is general information, not legal advice; check the official text and take advice before acting.