P authorises his agent A only to sell P's car for a minimum price of Rs. 3 lakh. A sells the car to T for Rs. 2 lakh. T is unaware of the restriction. P wants to take the car back from T. Under the law of agency and the doctrine of apparent authority, what is P's legal position?
- A
P can always recover the car since A exceeded actual authority
- B
The principal is bound where a good-faith third party relies on apparent authority.
- C
P can recover the car but must pay T compensation
- D
T must return the car since he paid below market value
View answer and explanation
Correct answer: B. The principal is bound where a good-faith third party relies on apparent authority.
This is a fundamental agency law problem. A's ACTUAL authority was limited: minimum Rs. 3 lakh. But A had APPARENT AUTHORITY arising from P's act of entrusting A with the car and the authority to sell. T, as a third party dealing with A in good faith without notice of the restriction, was entitled to rely on A's apparent authority. Under Section 237 ICA (by analogy) and general agency principles: a principal who creates an apparent authority by placing the agent in a position to deal cannot deny that authority against innocent third parties. T gets good title under the doctrine of apparent authority. P's remedy is against A for breach of the instruction (Section 212 ICA: agent liable for loss from want of proper diligence; A must account for the Rs. 1 lakh shortfall). This protects the security of commercial transactions.
Source note: ICA 1872 / Apparent Authority Doctrine