Section 238 Contract Act: Effect, on agreement, of misrepresentation of fraud by agent

Section 238 of Indian Contract Act: Effect, on agreement, of misrepresentation of fraud by agent

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals.

Statutory Defined Terms in this Section: (Click any term for official legal definition)

Agreement Sec 2(e) Contract Sec 2(h) Fraud Sec 17 Misrepresentation Sec 18

Legal Commentary & Landmark Judgments: Section 238

Misrepresentations 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 themselves; but misrepresentations made, or frauds committed, by agents, in matters which do not fall within their authority, do not affect their principals.

Core Legal Standard: This statutory rule enforces vicarious contractual liability upon commercial principals.
Substantive Scope & Reach: If an agent commits fraud or makes fraudulent misrepresentations within the actual or ostensible scope of their employment—such as an investment manager forging financial statements or a sales agent misrepresenting asset titles—the principal is legally bound, and the defrauded third party may rescind the agreement and sue the principal for damages.

Only acts committed entirely outside the agent's authority and for personal frolics exempt the principal from liability.

Key Landmark Precedents:

Lloyd v. Grace, Smith & Co. [1912] AC 716: The House of Lords established that a principal is liable for the fraud of an agent committed in the course of the principal's business, even if the fraud was committed solely for the agent's own private benefit.
State Bank of India v. Shyama Devi (1978) 3 SCC 399: The Supreme Court held that a bank is not liable under Section 238 for embezzlement by an employee where the customer handed cash and cheques to the employee privately in a personal capacity rather than across the official bank counter.

Legal Commentary:

Section 238 is the primary statutory vehicle for imposing civil liability on corporations, banks, and enterprises for fraudulent representations made by their marketing executives, loan officers, and sales representatives during business transactions.

Section 238: Effect, on agreement, of misrepresentation of fraud by agent

Section 238 of Indian Contract Act: Effect, on agreement, of misrepresentation of fraud by agent

Legal Commentary & Landmark Judgments: Section 238