JAMIA MILLIA ISLAMIA

UNIVERSITY

A Project On

General principles of Contract

of agency

SUBMITTED TO: - Nida Zainab Naqvi

SUBJECT:- - Law of Contract

Made By: Azka Shahab

st
1 Year (2nd sem)
sB.A.LL.B. (Hons)
 General Principles of Contract of Agency

INTRODUCTION

In India, section 182 of the Contract Act 1872 defines “Agent is a person employed to do
any act for another or to represent another in dealing with third parties”. The principal has
to perform his/her own part of the agency in primarily two ways. The principal has to pay
or where necessary indemnify the agent for the services rendered or expenses incurred
respectively.1

The Indian Contract Act of 1872, Section 183 and 184 deals with the appointment of agent
and who may be called as agent. There may be different kinds of agents such as banker,
factor, advocate etc. According to the extent of authority there may be general, special,
universal agent. There are various rights which are given to agent and they can also be sued
on certain grounds. There are certain duties of agents such as execution of instructions,
exercise of skill and care, act in good faith etc. Likewise principal also has certain duties
such as payment of agent, indemnification of agent. Agents owes fiduciary duties to the
principal such as loyalty, confidentiality. Agent is authorized to create a contract between
his principal and third party. In India, Section 182 of the Contract Act 1872 defines “Agent
is a person employed to do any act for another in dealing with third parties”. An agent in
commercial law (also referred to as a manager) is a person who is authorized to act on
behalf of another (called the principal or client) to create a legal relationship with a third
party. The principal has to perform his/her own part of the agency in primarily two ways.
The principal has to pay or where necessary indemnify the agent for the services rendered
or expenses incurred respectively.

1 RK Bangia, Law of Contract II, Allahabad Law Agency, 15th edn, 2018.

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 General Principles of Contract of Agency

CREATION OF AGENCY

Following are the measures for creation of agency:

1) Express Agreement: When an agent acts within the scope of his authority, his acts bind
the principal as well as the third party. The agent derives this authority by the contract by
which he is employed as an agent. This contract may be express or implied. Section 186 2
of the Act says "the authority of an agent may be expressed or implied.” Section 187 further
says, "an authority said to be expressed when it is given by words spoken or written. An
authority is said to be implied when it is to be inferred from the circumstances of the case;
and things spoken or written, or the ordinary course of dealing, may be accounted for by
the circumstances of the case'', For example, A is residing in Delhi and he has an agriculture
farm at Bombay. A appoints B, by a deed called the power of attorney, as a caretaker of his
farm. In this way, the relationship of principal and agent has been created between A and
B by an express agreement (power of attorney).

2) Implied Agency: From Section 187, it can be seen that an agency may be implied when
it is to be inferred from the circumstances of the case, things spoken or written, or ordinary
course of dealing. For example, A has a car, but he cannot drive it. He allows his neighbour
B to drive it. B while driving the car with A meets with an accident and injures C. C can
sue A for damages because B is his implied agent. A and B are brothers. A lives in Delhi
and B lives in Kanpur, B has a flat in Delhi. A with B's knowledge let out his flat. A used
to realise the rent and remit the same to B who was accepting the same. Here A is the
implied agent of B though he has not been expressly appointed.

3) Agency by Ratification: By ratification, we mean, "where acts are done by one person
on behalf of another, but without his knowledge or authority, he may elect to ratify or
disown such acts. If he ratifies them, the same effects will follow as if they have been
performed by his authority", Ratification may be expressed or implied in the conduct of the
person on whose behalf the acts are done. For example, without A's authority, his brother
B lends his money to C. Later on, C pays the interest on the lended money and A accepts
the interest. A's conduct implies a ratification of the loan, and it may be presumed that his

2 The Indian Contract Act 1872, (Act 9 of 1872) sec. 186.

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(A's) brother B's conduct in lending the money is as valid as if it were done in pursuance
of his (A's) prior authority and this kind of agency is called 'agency by ratification'. The
effect of ratification is to make the agent's acts, done without prior authority as binding and
valid upon the principal as if they had the prior sanction of the principal. In fact, ratification
relates back to the date when the act was done by the agent and not to the date when the
principal ratified the act.

4) By operation of Law: In certain circumstances, the law treats one person as an agent of
another. It can be better understood by the example that when a partnership is formed,
every partner, by operation of law, automatically becomes the agent of other partners.

ESSENTIALS OF AGENCY

1. The principal should be competent to contract (Section 183):According to Section

183, “any person is who is of the age of majority according to the law to which he is
subject and who is of sound mind, may employ an agent.” The parties have to be
competent to contract. Since in an agency the agent creates a contractual relationship
between his principal and the third person, it is necessary that the principal and the third
person should be competent to contract. If a person is not competent to contract and,
therefore, is incapable of making a contract, he cannot make a contract through an agent
either. A person can do only such thing through an agent which he is himself personally
capable of doing. Therefore, if the principal is a minor or of unsound mind, he is
incapable of being bound through the acts of his agent. Although a minor himself cannot
appoint an agent, there is nothing in Section 183, which prohibits the guardian of a
minor from appointing an agent or him. 3

2. The agent may not be competent to contract (Section 184):

Section 184 makes the following provisions regarding the capacity of an agent. “As
between the principal and a third person, any person may become an agent, but no
person who is not of the age of majority and of sound mind can become an agent, so as

3 Avtar Singh, Indian Contract Act 1872, Eastern Book Company, 11th edn, 2017.

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to be responsible to his principal according to the provisions in that behalf herein

contained.”

The capacity of an agent could be looked from two angles. Firstly, the capacity of the
agent to act on behalf of the principal, so as to bind his principal and the third person.
Secondly, his capacity to bind himself by a contract between himself and his principal.

So far as the agent’s capacity to bind the principal and the third person is concerned, for
that any person may become an agent. It means that even if an agent is a minor or
otherwise incompetent to contract, he is capable of creating a valid contract between his
principal and the third person.

3. No consideration is necessary to create an agency (Section 185):

Section 185 provides that no consideration is necessary to create an agency. From the
very nature of the contract of agency, the principal agrees to be bound by the acts done
by the agent on his behalf and that serves as a sufficient detriment to the principal.
Moreover, the principal’s duty to indemnify the agent is also there. The law does not
require any consideration as such for the validity of a contract of agency.

KINDS OF AGENTS

Agents are classified in several ways. From the point of view of authority given to -
them, they can be divided into general agents and special agents. General agents have
the authority to act in all matters concerning a trade or profession, or of a particular
nature or to do some act in the ordinary course of his trade or profession. Special agents
have authority only to act in a particular transaction, for example, when an agent is
appointed to sell a car or sell a house. The authority of a special agent is limited to that
particular act only and his authority comes to an end when the work is over. We are
mainly concerned with mercantile agents who are explained below.

Broker: A broker is one who makes bargains for another, and receives commission
(brokerage) for so doing. He is an agent whose ordinary course of business is to

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negotiate and make contracts for the sale and purchase of goods etc., of which he has
neither possession nor control. He acts in the name of his principal.

Factor: A factor is a person who is entrusted with the possession of goods, and who
has the authority to buy, or sell or otherwise deal with the goods or merchandise, or to
raise money on their security. A factor, usually, sells goods in his own name, he has a
general lien on the goods.

Auctioneer: An auctioneer is an agent who is entrusted with the possession of goods

for sale: to the highest bidder at a public auction. He has the authority to deliver the
goods on receipt of the price. He can sue for the price in his own name. However, unlike
a factor, he has only a particular lien on the goods for his charges.

Del Credere Agent: A del credere agency is a type of principal-agent relationship

wherein the agent acts not only as a salesperson, or broker, for the principal, but also as
a guarantor of credit extended to the buyer. If the buyer is unable to pay the bill after
the transaction is completed, a del credere agent may become liable for that amount. A
del credere agent can most easily be understood as a combination of a salesperson and
an insurance firm. A key point to note is that a del credere agent only becomes liable to
pay the principal after the buyer defaults on payment. If the principal (seller) is unable
to collect for some other reason, such as a dispute over the goods delivered, the del
credere agent is not liable. Payment for the insurance services is made in the form of an
additional sales commission, known as a "del credere commission".

CASE LAWS

1. In Mohan Lal Jain v. Maharaja Shri Sawai4 :- The suit was filed by the appellant for
recovery of Rs. 23,998 as price of goods supplied in the year 1947 to the Ruler of Jaipur
State, (including interest) and damages suffered by the appellant due to the refusal of
the defendants to take delivery of some other goods similarly ordered. In addition to the
ex-Ruler of Jaipur, his Military Secretary and one Mohabat Singh, an employee of the
ex-Ruler, were also joined as defendants, on the plea that they had placed the orders as
agents of, the ex-Ruler. The suit was filed on February 28, 1951. the Supreme Court

4 Mohan Lal Jain v. Maharaja Shri Sawai, AIR 1962 SC 63.

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held that signing letters on behalf of the military secretary of an ex-ruler of a former
Princely State could not make the person, who signed the letters, agent.

2. In Ishaq Abdul Karim v. Madan Lal5:- The principal authorised the agent to take
delivery of goods and to sell them at any price he chooses. The court held that the agent
had also an implied authority to accept the price of goods in cash or otherwise.

3. Lakshmi Ratan Cotton Mills Co. v. J.K Jute Mills Co.6 :- The plaintiff's case was
that the plaintiff company had advanced a loan of Rs. 1,50,000/-to the defendant
company on the understanding that the loan advanced would carry interest 1% higher
than the current Bank rate, and would be repaid together with interest within six months.
Sri Gulab Chand Jain, one of the Directors of the defendant company, sent a letter on
24-12-1951 to Sir Padampat Singhania the governing Director of the plaintiff company
to advance the said loan. Sri Gulab Chand Jain also sent an advance receipt to the
plaintiff along with the above-noted letter. Thereupon the plaintiff advanced a sum of
Rs. 1,50,000. After the expiry of the stipulated period of six months, the defendant
failed to pay the loan in spite of reminders sent to it. Accordingly, the plaintiff filed the
present suit praying that a decree of Rs. 1,55,671714/- together with pendente lite and
future interest be passed and that the costs of the suit be also awarded in its favour.The
defendant denied that there was any transaction of loan between the parties as alleged
by the plaintiff In this case it was held that in order to bind the purported principal by
ratification it must be shown that the ratification has been made by him with a full and
complete knowledge of all material facts connected with the transaction to which it
relates.

5 Ishaq Abdul Karim v. Madan Lal, AIR 1965 All 34.

6 Lakshmi Ratan Cotton Mills v. JK Jute Mills Company, AIR 1957 All 311

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CONCLUSION

Contracts establishing a relationship of the agency between principles and agents are very
common in contract law. These creation of contract can be express or implied. An agency
is created when a person authorizes another person, that is, appoints them to do some
specific job or a number of them in specified areas of work. Establishment of a Principal-
Agent relationship confers rights and duties upon both the parties. There are various
examples of such a relationship like for example insurance agency, advertising agency,
travel agency, factors, brokers, del credere agents, etc.