In the case of Harshad J. Shah v. LIC of India, the Supreme Court dealt very closely with the issue of apparent/ostensible authority of an agent. While considering the question whether an LIC agent carried the apparent authority to collect premium cheques from policy-bearers, the Court examined the LIC of India (Agents) Regulations, 1972 and clauses in the appointment letters of agents in order to determine their scope of functioning on behalf of LIC. The case came up before the Apex court as an appeal against the decision of the National Consumer Disputes Redressal Commission, which in turn, had rejected the decision of the State Consumer Disputes Redressal Commission, where the claim had originated.
The Law of Agency
An agency is a relationship between two parties – a principal and an agent – where the first party delegates to the second party, authority to perform actions as if the first party was performing it themselves. Thus, in simple words, a contract of agency creates a legal relationship through which one person acts on behalf of the other. The person performing actions on behalf of another is known as agent whereas the party on whose behest the agent works, or derives authority to act, is referred to as the principal.
The laws of agency are based upon the Latin maxim, “Qui facit per alium facit per se”, which literally translates into “he who does an act through another, does the act himself”. This means that when one person authorises another to act or represent him/her, it is as good as that person acting him/her self. Primarily used in the domain of the law of torts for defining vicarious liability of an employer, this maxim also forms the bedrock of the laws of agency, as the principal is also responsible for the acts done through his/her agent.
In the Indian Contract Act, 1872, Chapter X deals with the laws of agency. The relationship between the agent and principal is contractual, i.e., it is governed by the conditions laid down in the contract. The two foundational principles of contracts of agency are as follows:
- An agent may be delegated authority to do any act which the principal can perform for him/her self, except in contract which is dependent upon or involves personal services, such as marriage or singing. This is because authority for performance of personal services cannot be delegated to an agent as the terms of the contract require performance by the principal.
- The acts done by an agent with authority from the principal are considered as acts done by the principal him/her self.
The Supreme Court of India, through an observation in the case Syed Abdul Khader v. Rami Reddy, held that “the expression agency is used to connote the relation which exists between a person occupying the position of principal and third parties.” An agent acts on behalf of the principal, under the principal’s authority, and the principal can be held liable for acts performed by agent with such authority. An agent can be employed by anyone of the age of majority and of sound mind. Similarly, a person of unsound mind or not of the age of majority cannot be employed as an agent. This is because the agent has to be responsible to the principal.
The extent of an agent’s authority is explained in section(s) 186 to 189. Section 187 defines express and implied authority of an agent. When authority is presented through spoken/written words, it is express. On the other hand, when authority has to be inferred from circumstances of the case, it is implied. An agency can be created in many ways: by express appointment, by conduct of parties, by necessity and by subsequent ratification of an unauthorised act. An agency can be created only through the will of the principal and consent of both principal and agent, either expressly or by implication from conduct.
Section 237 of the Indian Contract Act reads as follows: “Liability of principal inducing belief that agent’s unauthorized acts were authorized.—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.”
This particular provision of the Act deals with the concept of apparent authority of an agent. The authority of an agent can be of two sorts – first, actual and second, apparent. In the former, there is an actual relationship between the agent and his/her principal where authority has been given to the agent to act on his/her behalf either expressly or impliedly. In the case of the latter, there is only a semblance or appearance of authority between the principal and agent. Here, the principal manifests to a third party that the agent has authority to act on his/her behalf. Based on this manifestation of authority, the principal induces the third party to enter into transactions with the agent, whereas the agent does not actually have the authority required for such acts.
The doctrine of apparent authority provides that when a third party is induced into believing, and acting upon such belief by the principal, that an agent has authority to do some act, the principal will be bound by and liable for the acts performed by the agent. This doctrine is based upon the principles of equity. The principle of estoppel comes into the picture as effectively, the principal is estopped from denying his/her liability for the acts performed by the agent. Authority usually runs from the principal to the agent, with no role of the third-party. However, in apparent authority, the principal manifests authority of the agent to the third-party where no such authority actually exists. There is merely an appearance of legitimate authority lying with the agent.
In the case of Valapad Co-operative Stores Limited v. Srinivasa Iyer it was held that, “The term ‘ostensible authority’ denotes no authority at all. It is a phrase conveniently used to describe the position which arises when one person has clothed another, or allowed him to assume an appearance of authority to act on his behalf, without actually giving him any authority either express or implied, by which appearance of authority a third party is misled into believing that a real authority exists.”
Decision of The Court
The facts of the case are as follows: Jaswantrai G. Shah had bought four insurance policies, each worth Rs. 25,000, on 6th March, 1986 through a general agent, Chaturbhuj H. Shah, of Life Insurance Corporation of India (LIC). The premium to these policies, which fell due on 6th March, 1987, was not deposited by the holder on time. The abovementioned general agent of LIC obtained cheques towards premium of all the policies on 6th June, 1987 from the holder. However, this premium was deposited by the agent with LIC only on the 10th of August, while the holder of the policies passed away on 9th August, 1987 due to a fatal accident. The claim submitted to LIC by the widow of the deceased was repudiated on the grounds of non-payment of the premium even in the grace period.
Therefore, a complaint was instituted in the State Consumer Disputes Redressal Commission claiming an amount of Rs. 4,32,000. It was argued by the complainants that since the premium was paid to an agent of LIC, it can be inferred reasonably that the premium was in fact paid to LIC itself. LIC, however, countered that premium collected by a general agent cannot be said to have been received by LIC. The Commission opined that the practice of agents collecting premium from policy-holders directly despite departmental instructions not to, shows the negligent attitude of LIC towards its customers. Further, this practice had been going on for a long period of time with the knowledge of the LIC administration who did not actively pursue steps to keep a check on the activities of its agents.
An appeal at this stage was preferred to the National Commission by both sets of parties. The Commission dismissed the appeal of the claimants and held that the agent was not acting in his capacity of an agent of LIC when he collected the premium amounts from the policy holder. Thus, the question that lay before the Supreme Court was whether the payment of premium made by the policy holder to a general agent can be inferred as a payment made to LIC and discharge the liability of the policy holder. The case made by the claimants before the Supreme Court was that the policy could not be treated as having been lapsed as by depositing the premium with the general agent, they effectively made the payment of the premium to LIC. On the other hand, LIC argued that the general agent was not authorised to collect the premium from policy holders. Hence, LIC contended, that they did not receive the payment of the premiums until 10th August, 1987, by which time the policy had lapsed and could not be revived as the holder had died the previous day.
Regulation 8 of the Life Insurance Corporation of India (Agents) Regulations, 1972 pertains to the functions of agents. Clause 4 of this Regulation expressly rejects the notion that the regulations confer authority upon an agent to collect any money on behalf of the Corporation. Further, Clause 3 lists out various functions that an agent is entrusted with in relation to existing policy-holders, such as: (i) advising and offering necessary expertise to a policy holder to effect nomination or assignment of the policy; (ii) endeavouring to ensure that the premium of the policy is remitted to the Corporation within the period of grace; (iii) endeavour to prevent the lapsing of any policy; (iv) rendering assistance to claimants in filling up claim forms and complying with requirements. In none of these functions is it specified that an agent is required to collect premium amount from policy holders on behalf of the Corporation.
LIC also placed on record a condition enclosed in the appointment letter of the general agent which mandates that the agent is “…not authorised to collect money, accept risks or bind the Corporation in any way other than to collect deposit towards first premium…” Thus, on the basis of the above provisions, LIC submitted that it had, in no way whatsoever, authorised the agent to collect premium money on its behalf.
The claimants proceeded with the argument that the practice of general agents of the Corporation had been continuing for a long period of time. As a large number of policy holders resided at places where they did not have easy access to LIC offices and hence could not directly deposit their premiums, the practice of agents collecting the premiums and depositing it with LIC had been prevailing as a measure of convenience. It was submitted that the restrictions imposed upon agents in the letters of appointments and other regulations must be disregarded as agents receive their commission on the amount of premium collected which shows that they do have the authority to collect the premium on behalf of the Corporation.
Under Section 237, the advocates for the claimants also contended before the Court that the long-standing practice, coupled with the leeway given by the Corporation to the agents acting in this manner, gave rise to an appearance of authority in the minds of policy-holders that the agents were authorised by the Corporation to collect the premiums. The very fact that LIC knew the fact that its agents were acting in this manner and yet did not take any disciplinary action against them shows its negligent attitude towards the policy-holders and proves that LIC, through its conduct, induced the appearance of authority in the minds of the policy holders.
The Supreme Court adopted an extremely positivist approach in this case and interpreted the LIC Regulations and other terms of work to imply that the agent had no express authority to collect the premium amounts from policy-holders. The Court ruled that the doctrine of apparent authority as provided under Section 237 cannot be applied in this case as LIC had provided for this very situation in its Regulations. It accepted the submission of LIC that mere issuance of receipt of the premium amount is not enough to induce the policy holder into believing that the general agent was functioning within his authority.
After considering the arguments of both the sides which have been elucidated above, the Supreme Court dismissed the appeal, stating that no ground had been made out for interfering with the decision of the National Commission. However, taking a humanitarian view of the tragedy faced by the claimants, the Court ordered LIC to refund the entire premium amount on the four policies to the claimants, along with interest on this amount at 15%. LIC was also directed to pay costs of Rs. 10,000 to the claimants in lieu of the fact that their claim had originally succeeded before the State Commission and the appeals involved a substantial question of law which had to be interpreted by the Supreme Court.
This judgement has faced sound criticism from various quarters for being too positivistic in approach and failing to interpret the letter of the law in light of the accompanying circumstances. Had the Court paid due consideration to the fact that LIC’s negligence towards its policy-holders had created an appearance of authority, the decision would definitely been different.
 1997 (5) SCC 64.
 http://www.duhaime.org/LegalDictionary/Q/QuiFacitPerAliumFacitPerSe.aspx (last visited on 00:58 25-06-19).
 (1979) 2 SCC 601.
 Section 183, The Indian Contract Act, 1872.
 Section 184, The Indian Contract Act, 1872.
 Section 237, The Indian Contract Act, 1872.
 AIR 1964 Ker 176.