School Of Law, Narsee Monjee Institute Of Management Studies-

Bangalore.

Project for Contracts II

Submitted by: Hari priya. G
B.A LLB
Semester III.
Submitted to: Mr. Pritam Ghosh
Assistant Professor of law
School of Law
NMIMS- Bengaluru.

Features, Merits, Demerits of Agency and application of agency in

Partnership.

If one party transfers some authority to another party, whereby the latter carries
out its acts in a more or less autonomous manner, the partnership between them
is called an agency on behalf of the first party. Agency can be express or
implied. The basic structure of rules and regulations that effectively regulate the
performance and creation of any type of contract, including the agency contract,
is established by Chapter X of the Indian Contract Act , 1872. A legal
relationship exists between two parties in agency contracts, whereby one party
acts on behalf of the other. The person acting on behalf of the other person is
called an agent, and the principal is called the person from whom the agent
receives authority to act. The law of agency is based on the Latin maxim “qui
facit per alium, facit per se,” which means, “he who acts through another is
deemed in law to do it himself”. The term agency is used to define the
arrangement that occurs when an individual has the power or ability to
determine legal relationships between a person who holds the role of principal
and third parties1.

An exquisitely organised list of contractual provisions covering the rights ,

duties and obligations of both the principal and agent inter se and those of third
parties is included in the Indian Contract Act , 1872 2. This sheds light on the
principal-agent relationship through various provisions set out in the Act for
them. Instead of his acts or deeds, the important and appropriate argument about
an agent is his power or authority to make the principal accountable to third
parties. It is possible to regard representational character and derivative
authority as distinguishing features of an entity3.

Section 182 of the Indian Contract Act 1872, defines the terms principal and
agent as follows:

An “agent” is a person employed to do any act for another, or to represent

another in dealing with third persons. The person for whom such act is done, or
who is so represented, is called the “principal”. The competent agent is legally
capable of acting for the principal vis-à-vis the third party.

1
Syed Abdul Khader v. Rami Reddy, AIR 1979 SC 553
2
Indian Contract Act,1872.
3
P. Krishna Bhatta v Mundila Ganapathi Bhatta, AIR 11955 Mad 648
The principal and agent relationship can only be formed by mutual consent. The
authority of an agent may, however, be expressed or implied 4. The implied
authority shall include the power to act on the basis of the customs and uses of
the trade, place or market in which it is engaged, and such uses and customs
shall be well recognised and fair. The simple fact of marriage does not make the
wife an agent of her husband's law, considering the relationship between a
husband and wife. Even for the sale of his wife's land, a husband has no
original, inherent or implied authority to act as an agent for his wife5.

Section 184 mentions about the competency to become an agent. “As between
the principal and third persons, any person may become an agent, but no person
who is not of the age of majority and sound mind can become an agent, so as to
be responsible to the principal according to the provisions in that behalf herein
contained.” Ordinarily, an agent incurs no personal liability while contracting
for his principal and, therefore necessarily need not be competent to contract.6

There are five ways in which an agency can be formed.

 Direct (express) contract : The standard form of creating an agency is by

direct appointment. When a person designates another person as his agent
in writing or voice, an agency is formed between the two.
 Implied Contract : When an agent is not directly appointed but his
appointment can be inferred from the circumstances, an agency by
implication is created.
 By Necessity: In a situation of necessity, one person can act on behalf of
another to save the person from any loss or damage, without expressly
being appointed as an agent. This creates an agency out of necessity.

Section 186 of Indian Contract Act, 1872

5
Jawaharlal Daima & Co v. Chinta Chittemma ,1989 1 An LT 335
6
Mohomedally Ebrahim Pirkhan v. Schiller, ILR (1889) 13 Bom 470.
  By Estoppel : Estoppel may also establish an agency. An estoppel agency
is founded in a situation where one person acts in such a way in front of a
third person to make others think that he is an approved agent on behalf
of someone.
 By Ratification : If that person subsequently ratifies an act of a person
who acted as the representative of another person (on his behalf) without
his knowledge, this establishes an agency through ratification between the
two.

Conditions that need to be satisfied for ratification to be effective.

(a) The agent must expressly contract as agent for a principal who is in
existence and competent to contract.

(b) The principal must be competent to contract not only at the time the
agent acts but also when he ratifies the agent’s act.

(c) The principal at the time of ratification has full knowledge of the material
facts and must ratify the whole contract, within a reasonable time.

(d) Ratification cannot be made so as to subject a third-party to damages, or

terminate any right or interest of a third person.

(e) Only lawful acts can be ratified.

Authority of an Agent.

Agents are distinguished as general or special agents in terms of authority. The

former phrase involves brokers, factors, associates, and all persons engaged in
an undertaking to fill a role of a commonly accepted nature, the degree of
authority being evident from the nature of the job or role; the latter denotes an
agent designated, restricted by jobs, for a specific occasion or intention. For any
specific cause or intent that is not within the usual course of his business or
career, a special agent has only the power to perform that particular act. Each
agent has the implied power to act on the basis of the customs and uses of a
particular market or trade7.The custom or use of trade must not be illegal or
unfair and shall not cause the agent to change his personal set-off. Although a
custom to that effect was alleged, an agent was not permitted to set-off his
private debts to the underwriters against that capital 8. An agent has authority in
an emergency to do all such actions that will render security of his principal
form loss as would be done by a prudent person in similar circumstances9.

Duties of an Agent.

The agent's first and foremost duty is to carry out the mandate through his
principal. The agent is obliged to conduct the proceedings in accordance with
the direction of his principal and to comply with the principal's authority 10.The
agent shall act in compliance with the customs of trade in the absence of orders,
instructions or directions and shall be liable to refund the loss or benefit made
when he acts otherwise11. Moreover, with the proper application of fair ability
and due diligence, every agent is bound to perform his duties 12.The level of care
and ability which an agent has to bestow depends upon the nature of his
profession13. In cases of difficulty the agent 's obligation is to use all due caution
in dealing with the principal and in trying to obtain his instruction or orders.
The agent is obligated to pay all amounts paid on his account to his principal

7
Mahmud-Un-Nissa v. Barkat Ullah, AIR 1927 All 44

8
Blackburn v. Mason , (1893) 9 TLR 286 (CA)
9
Section 189 of Indian Contract Act,1872
10
Section 211 of Indian Contract Act,1872
11
Pannalal Jankidas v. Mohanlal, AIR 1951 SC 144,147
12
Section 212 of Indian Contract Act,1872
13
Pandurang v. Jairamdas Pandurang, AIR 1925 Nag 166
with the right to deduct his lawful charges 14. If an agent collects money on
behalf of his principal in an unlawful and invalid contract, the agent must
account for the money earned by the principal and does not establish the
illegality of the contract as an excuse for the withholding payment, which the
other negotiating party has waived by paying the sum unlawfully15. An agent is
bound to provide his principal on demand with proper accounts 16. The
provisions of the Contract Act were not exhaustive in relation to the
establishment of a lawsuit by the agent against the principal 17. An agent's right
to sue the principal for accounts is an equitable right that exists in special
conditions, one being where the principal is in control of all the accounts.

Rights of the Agent.

Moving over to the rights of agents, each agent shall be entitled to fair
remuneration for his negotiated remuneration or, if no agreement is reached, to
reasonable remuneration18.If a person is proved to be a broker, he is entitled to
his commission; and even if he fails to prove the agreed commission rate, as
such a commission, a reasonable amount should be awarded to him 19. The agent
has the right to retain the money of his principal until his demands, if any, are
paid in relation to his remuneration or advances made or expenses incurred in
performing the agency 's business. In the special case of the solicitor, it is well-
settled that a judgement he has obtained through his work or his money for his
client should stand, as far as possible, as security for his costs, and he is entitled
to pass through his hands20.In addition to the above right of retainer, the agent
also has the right to retain goods, papers and other property, immovable or
14
Section 218 of Indian Contract Act,1872
15
Bhola Nath v. Mul Chand, ILR (1901-03) 25 All 639
16
Section 213 of Indian Contract Act,1872
17
Narandas Morardas Gajjiwala v. S.P.A.M Papammal, AIR 1967 SC 333
18
Hindustan Antibiotics Ltd v. Kohli Medical Stores, 1997 AIHC 2630 (MP)
19
Khursheed Alam v. Asa Ram, AIR 1933 Lah 784
20
Section 217 of Indian Contract Act,1872
movable, of the principal received by him, until the amount due to himself for
commission, disbursements and services in respect of the same has been paid or
accounted for to him21.

Features of Agency.

 An agent is authorized to act on behalf of his principal and create

contractual obligations between the principal and a third party.
 The principal has the authority to direct the agent as to what he has to do
but he cannot direct how it is to be done.
 An agent is paid in terms of commission
 An agent can work for different principals at the same time
 The agent offers and accepts new proposals from the third party on behalf
of his principal and thus new legal relations are created in law of agency.
 The principal delegates authority to the agent to do things on his/her
behalf. Hence it reduces workload on the principal.

Merits and Demerits of Agency.

The agent is an autonomous legal body and has a long-term and stable
association with the commissioning party. The independence of the sales
representatives is not the same for the sales agents as for the manufacturer's
direct sales companies, nor is it a manufacturer's subsidiary or a holding firm
with separate , independent accounting interests. Agents are only allowed to sell
, but they do not own the products. This is the biggest distinction between a
sales representative system and a buying system. Under a purchase-out scheme
a business entity purchases a product from a seller and sells it and thereby owns
and risks selling the product. The mechanism of the sales agency, the agent, has
instructed the agent to sell the goods and is not owned by the product. Brokers
are therefore more ready to follow the strategy of the agency. The Agency act is

21
Section 221 of Indian Contract Act,1872
an effective agent exclusively for agents under the jurisdiction of the principal
act, otherwise it is an illegitimate agent. The consumer shall bear the legal
consequence of the act of the agent. The agent represents the will of the
commissioner to pass his rights and responsibilities to the principal via the
contract with the agency. The agent does not carry on the rights and interests
resulting from the actions of the agent and may not pay for after-sales. He does
not at the same time take over the duty resulting from the act of the agent. If the
consumer can not obtain the products on time or there is harm to the products
and issues with product quality, the consumer can only seek compensation from
the entrusted manufacturer.

Agency in Partnership.

Mutual agency is a civil relationship where each partner has the power to
approve and is willing to enter into business contracts with the partner. This
means that any partner in a relationship is an individual in the company and the
organisation to take decisions that commit or bind the company, in their
entirety, to enter into a business agreement with a third party. Only partners
working within the context of normal activities and transactions have a shared
agency. A dealer's clothing partners with the agency, for example, would not be
in a position to enter into an arrangement with the other partners to buy an
investment property because it was out of ordinary business operations. In
comparison, one of the retail partners will buy products from a retailer and pay
the partnership. This transaction is part of the company's normal operations.

Conclusion.

All of these above are of great importance to the rights , duties and authorities
of the agency agent. One agent plays a crucial role in the agency, so the
behaviour of the organisation has a significant degree of liability. The Indian
Contract Act of 1872 correctly performs the success process. Agency behaviour
under the provisions set out in order to protect and maintain the agent 's
interests. From the ancient times, the agent 's fundamental interests were
secured with a true sense of morality and justice, in countries such as the UK &
the USA. Agent should take on his duties in the most honest and committed
manner possible and should seek to protect and defend his principal's interest
and only then will his rights be taken advantage of. The agent must preserve his
position and should not participate in illegal business operations. Agency is an
essential and unavoidable type of contract that preserves or preserves its social
significance. It should be remembered that an agent always has a broad
discretion, but is legally bound to obey and honour the lawful commands and
orders of the principal with extreme honesty and devotion. A individual who
does not only perform his duties on behalf of his master but also holds him
accountable to a third party for the acts of his master in the form of his duties.