Contract of Agency

Definitions: - s. 182
An ‘agent’ is a person employed to do any act for another or to represent another in
dealings with the third person. The person for whom such act is done, or who is so
represented, is called the ‘principal’
 The section lays emphasis on the power vested in the agent to act on behalf of the
principal in his dealings with a 3rd person.

 The nature of the relationship between the principal and the agent may be numerous.
E.g. agent for sale, casual employee, a street peddler, etc.

 Across the judicial history, the question of what qualifies as a principal-agent

relationship has been raised before the courts. Common to most pronouncements;

 The principal-agent relationship isn’t established simply with the use of such
words in the contract between the parties.
 The true nature of relationship including the agent’s responsibilities, functions,
etc. must be assessed before adjudicating on the same.

Hire-purchase transactions

 It is a transaction involving 3 parties; the dealer (manufactures the goods), the

financer (provides money to the dealer) and the hirer (takes the goods and
pays the financer in installments).

 The dealer hands over the goods as directed by the financer. Now the question
before us is whether this constitutes an agency.

 The courts opined that to resolve this matter one must look into the
‘mercantile reality’ in the country. When customers come to the shop they
look up to the dealer to give them quality products. They are ignorant about
the existence of a financier.

 Hence financer being in the position of a hidden principal owes a great

responsibility towards the consumers to offer quality products through the
dealer, who acts as an agent.

Co-agents & Co-Principals

 When two agents are given authority jointly then, only when they act jointly
will the principal be bound by their actions.
  Where the agents are authorized joint and severally then any one of them may
be competent to act on behalf of the principal.

 Where a single agent acts on behalf of more than one principal in a single
transaction he may be held accountable for all of them jointly.

Essentials of Agency

1. The principal should be competent to contract

 For the appointment of an agent, the principal is required to enter into a

contract. This necessarily requires the principal to be competent to contract.
Therefore, minors, insane persons, etc are not competent to appoint agents.

 Adding to the same the courts have also reasoned that such individuals who
are required to appoint an agent cannot do so because they lack the sufficient
discretion to choose an appropriate person for the same, and are likely to
choose the wrong one.

 However, in certain special circumstances where a minor is allowed to

be a party to a contract, he is such instances may also qualify to
appoint an agent for himself.
 Also, nothing in the act prohibits a guardian of a minor from
appointing him an agent.

 Instances where the agency cannot be constituted;

 The act required to be performed is personal in character.

 The act required to be performed is associated with a public office.
 The act required to be performed is to an office with a fiduciary
obligation.

2. The agent need not be competent to contract

 In a contract of agency usually, the agent is an intermediary who gets out once
the relationship between the principal and the 3rd party has been established.
He incurs no personal liability.

 Therefore, he is not required by law to be competent to contract to act as an

agent in an agency.

 In case the agent is a minor, then he is not responsible to his principal.

3. Consideration not necessary for appointment

  As per s. 185 no consideration is necessary to create an agency. The agent is
remunerated by the way of commission.

 This also forms a crucial element in help distinguishing between an agent,

servant, and bailee.

Agent Servant Bailee

Has the authority to act on No such power is enjoyed by

Has no such power
behalf of the principal? the servant.

Directed by the principal on
what to do
Paid commission
Principal liable for agent’s act
done within the ‘scope of
employment’
May work for more than one
principal
Relationship subsists until the
completion of business (extend
to very long time)
Directed by the master on what
to do and how to do it
Usually paid wages/salary
Master liable for the servant’s
act done during the ‘course of
employment’
Usually works for only one
mater
A relationship exists for a short
period after which it is required
to be renewed
Do with the goods bailed the
task agreed upon in the contract
As a party to contract has a
consideration in it
Required to maintain goods
bailed with reasonable care &
caution
In a relationship with only one
bailor
The relationship ends as soon
as the goods are returned to the
bailor

Types of Agents
1. Factor

 An agent entrusted with the possession of the goods in order to sell them. A
mercantile agent whose ordinary course of business is to dispose of goods
entrusted in him by his principal.

2. Broker

 An agent appointed to negotiate and broker contracts for the sale of property
of the principal.

3. Del Credere Agent

 Unlike other agents who drop off the contract after brokering a relationship
between the principal and the 3rd party, a Del Credere agent undertakes greater
responsibility for the actions of the 3rd party for an additional commission.
  A higher reward is paid in return for their greater care in sales and the
assumption of greater responsibility.
 However, his liability is only secondary to that of the principal and he partly
plays the role of an insurer of the parties.

Case: VK Srinivas Shetty v. Premier Insurance Company

 The special agent had given wrong information to the insurer and hence the
plaintiff will get compensation.

Creation of an Agency
1. Express Appointment

 A person competent to contract may appoint an agent by express means –

written or oral.

 Since the agency is founded upon the consent of the principal and the agent
such consent may be express or implied through words or conduct.

 Where the appointment is made by a deed it is regarded as a power of

attorney.

 To constitute an agency the authorization pertaining to the same is required to

be given by the principal to the agent. Such authorization can also be implied
from the circumstances.

2. Implied Agencies

 They arise from the conduct, situation or relationship of parties.

 Where the actions of an individual leave another in a position where the latter
is understood to represent or act on behalf of the former.

 E.g. when the employer in an organization collects premiums from the

employees in order to forward them to the organization, then he is considered
to be the agent of the organization, even though the scheme explicitly
mentions that he is the collection agent of the employees.

3. Estoppel

 When through the actions of the principal an individual is put in a position

which any prudent 3rd party would presume to be the agency of the principal
and consequently enters into a transactional relationship with said individual
 then the principal cannot claim estoppel against the actions of the 3 rd party, in
relation to the transactions with the agent.

Husband and Wife

 Generally, when the wife resides with the husband, she possesses the implied
authority of the husband to buy the goods necessary for the household.
Conditions to be fulfilled:

1. The husband the wife must be living together.

2. They must reside in a domestic establishment.
3. The wife may run the credit of the husband only for household
necessities.

 In the instance where the wife lives apart from the husband, she may act as an
agent of necessity to ensure that she is provided for.

 It is also important to note that the husband is not an implied agent of the wife.

Agency of Necessity

 Generally, the authority of an agent is limited to certain acts. However, in certain

extraordinary circumstances, the agent may be required to take extraordinary
measures to preserve the interests of the principal. If the acts are performed prudently
then the principal may be bound to such actions.

 A common example of the same is when an injured person is rushed to a hospital by a

stranger. Then the injured person is bound to compensate the stranger for his
extraordinary services.

Conditions for application of the principal

1. Inability to communicate with the principal

 The agency of necessity arises when the agent is unable to contact the
principal.

 In normally the agent communicates with the principal and act in

accordance with his directions.

2. The act should be reasonably necessary

  The burden is upon the agent to show that the actions undertaken by
him were reasonably necessary for the light of the prevailing
circumstances.

3. Bona Fide in the interest of the Principal

It is also the burden upon the alleged agent to show before the court that his
actions were in the best intentions of the principal.

Duties of an Agent
Below mentioned are some of the duties adhered by agents across all contracts of the agency.
These may be modified contracted out in specific cases.

1. Duty to execute the mandate

 The foremost duty of the agent is to perform the work he is appointed

to do.

 Failing to do the same would result in an absolute liability towards the

principal, for any loss incurred by him

Case: Pannalal Jankidas v. Mahanlal

 The agent failed to fulfill the mandate of the principal and

hence will be liable for the loss incurred by him.

2. Duty to follow instructions or customs – s. 211

 The actions of the agent in regard to the agency are limited by the
directions of the principal.

 In case of absence of such instruction, the principal is required to

follow the custom that prevails in the business.

 If the agent acts the otherwise, then he is liable to compensate the

principal for the consequent loss incurred. In the event that a profit is
accrued through this deviation then the agent is bound to account for
the same.

 In case the principal give 2 different instructions on the same matter,

and the agent opts to follow one of them, then the principal cannot hold
the agent liable for now opting to follow the other.
  The agent is also duty bound to maintain secrecy and confidence about
any sensitive information about the conduct of the principal’s business.

 It is a compulsion under the law.

3. The duty of reasonable care and skill – s. 212

 Every agent is required to carry on the business of the principal with

reasonable care and skill.

 The standard of care varies from profession to profession.

 If the principal suffers any loss due to the lack of application of care
and skill on part of the agent then the latter is liable to compensate the
former.

 However, it must be kept in mind that the agent’s accountability is

limited only to direct consequences of his actions. The meaning and
scope of ‘direct consequences’ is explained in Pannalal Jankidas v.
Mahanlal.

4. Duty to avoid conflict of interest – s. 215

 In case the agent while carrying out the business of the principal acts
on his own account (pursuant to personal interest) without the consent
and knowledge of the principal then the principal may repudiate the
transaction.

 Moreover, the principal also has a right to any benefit that the agent
may have accrued from this deviation.

 It is so because the agent shares a fiduciary relationship with the

principal and hence must not act in any manner that jeopardizes both
their interests.

 The principal is required to show:

1. That a material fact has been disclosed from him

2. The dealing of the agent has been disadvantageous to him.

 In most instances, a mere conflict of interest is enough for the principal

to repudiate the transaction.

5. Duty not to make a secret profit.

  As mentioned earlier the duty of the agent towards the principal is
fiduciary in nature and that of absolute good faith.

 Secret profit refers to any gain made by the agent from the business of
the principal over and above the agreed upon remuneration.

 Knowledge acquired by the agent in the course of business doesn’t

qualify for the same as it doesn’t affect the business of the principal.

6. Duty to remit sums

 The agent is bound to remit all sums he has received on behalf of the
principal during the course of the agency.

 He may, however, deduct his lawful commission.

 The agent is bound to remit even proceeds from a void or illegal

transaction.

7. Duty to maintain accounts.

 It is necessary for the performance of the other duties of the agent. This
duty is owed towards the principal.

Case : Narandas Morardas Gajiwala v. S.P.A.M Pappama

 The court addressed the question whether the agent has a right
to sue the principal for accounts.
 The court identified that there exists no such statutory right
with the agent, however, in special circumstances, he may
proceed based on equity.

 The agent is bound to maintain the accounts of the business dutifully as

the agent is entrusted to bind the principal in a contract with a 3 rd party.
Being a participant, the principal is entitled to the records of the
transactions.

8. Duty not to delegate

 An agent is appointed because the principal has trust and confidence in

his integrity and competence.

 Hence as a general rule, the agent cannot further delegate the work that
has been delegated to him.
  Sub-agent – a person appointed by and acting under the control of the
original agent in the business of the agency.

Exceptions:

1. Nature of work

 Sometimes the nature of work of the agent mandates the

appointment of a sub-agent.

2. Trade Customs

 The ordinary customs of some trade require the appointment of

sub-agents and the delegation of work to them.

3. Ministerial Action

 The agent cannot delegate acts which he has taken to perform

personally.
 However, purely ministerial acts may be delegated.

4. Principal’s Consent

 The agent may appoint a sub-agent with the express consent of

the principal.
 The principal may also ratify his agent’s unauthorized
delegation.

Kinds of Delegation

1. Improper Delegation

 A delegation is regarded to be improper when it is not

authorized. The same may be ascertained when it is not within
any of the above-mentioned exceptions.

 The principal then is neither bound by the appointment nor

liable for the actions of the sub-agent.

 The agent may be held responsible to the principal for the

actions of the sub-agent.

2. Proper Delegation
  When the delegation is in accordance with the authorization of
the principal.

 The effects of such appointment are;

1. Principal represented by sub-agent

2. Agent’s responsibility for sub-agent (towards principal)
3. Sub-agent isn’t directly liable to the principal except
for fraud and misrepresentation.

Case 3: Summan Singh v. N.C. Bank of New York

 The sub-agent is not liable to the principal unless he is guilty

of fraud or wilful wrong.

 Generally, the authority of a sub-agent does not exceed that of

the agent. However, in case the exercise of such excessive
power is beneficial to the business it may be allowed.

Substituted Agent – s. 194-195

 When the agent has an express or implied authority of the principal to name an
individual to act for him, then such an individual is referred to as a substitute
agent.

 The substitute agent becomes a direct agent of the principal thereby

maintaining the direct privity of contract.

 The agent is not responsible for the actions of the substitute agent; however,
he may be held liable to responsibly name a substitute.

 He is required to exercise this power with prudence.

Remedies of Principal for breach of duty

The principal has the following remedies in case of breach of duty by his agent

1. To ask for an account of the business of the principal and also demand any secret
profits gained by the agent.

2. Seek damages for deviation from the terms of agency and also for want of skill and
care.

3. To avoid the claim for commission and indemnity by arguing that the agent had
acted on his own account.
Rights of Agent

1. Right to Remuneration. – s. 219

 The agent is entitled to the remuneration from the principal, agreed upon in the
terms of agency.

 In case no such amount was fixed then reasonable remuneration is to be

provided.

 In the absence of a contract to the contrary, payment for performance of any

act of the agent is not due until the completion of such an act.

 If the agent’s services are only remotely connected with the transaction then
no remuneration is earned.

 In case the agent engages in a misconduct then he is not entitled to

remuneration to that extent.

1. Additionally, the principal is entitled to sue the agent for any loss
incurred due to the dishonest acts of the agent.

2. The right of Retainer. – s. 217

 The agent has the right to retain the principal’s money until his claims for
remuneration are satisfied.

 The agent is entitled to withhold only that much money that he has at hand and
is not entitled to an equitable lien.

 However, an advocate is entitled to an equitable lien on the proceeds of his

actions.

3. The right of Lien. – s. 221

 The agent has the right to retain goods, papers and other property of the
principal received by him until the commission due is paid.

 The conditions for this right are:

1. The agent should be lawfully entitled to receive the sum of money from
the principal as commission.
 2. The property over which lien is to be exercised must belong to the
principal and must have been acquired by the agent in the course of
business.
3. The agent only has a particular lien and cannot demand the lien of any
additional property.

 Loss of Lien takes place when;

1. The possession of the property is lost.

2. The agent waives of his right.
3. The property is subject to a contract to the contrary.

4. Right to indemnity – s. 222-223

 All the losses and expenses incurred by the agent in the normal course of
business is required to be compensated by the principal. The agent is required
to be damnified to make any claim.

 If the actions of the agent in accordance with the instruction of the principal
are injurious to a 3rd party then the agent is entitled to claim indemnity from
the principal against the same.

5. Right to compensation. – s. 225

 The principal owes a duty of care towards the agent not to expose him to
unreasonable harms.

 If so exposed to compensate for the same.

Agents Authority

 The agent is bound to act within the scope of his authority for which the principal can
be held liable.

Actual Authority – it is the authority conferred on the agent by the principal. It may be
express or implied.

 Where a 3rd party is aware of the limitation on the agent’s authority or could have
discovered it on reasonable examination then he would be bound by it.

 The extent of agent’s authority depends on - s. 188

 1. The nature of the act he is appointed to do
2. Things which are incidental to the business or are usually carried out
3. The customs of trade.

 Authority of Special Agents:

1. Factor – authority to sell goods in own name. to fix selling price and receive
payment

2. Broker – authority to sell the goods in own name. if he discloses the name of
the principal he won’t receive payment.

3. Auctioneer – does not have authority to sell by private contract. Cannot sell
credit or accept any mode of payment other than cash.

 Apparent/Ostensible Authority – when the agent is allowed to assume such

authority that he doesn’t actually possess. It is, however, a real authority.

 Emergency Authority of Agent – the authority possessed by an agent of necessity in

case of an emergency situation that binds the principal. Here the agent is unable to
communicate with the principal so as to decide a course of action. Hence the course
adopted at the will of the agent must be prudent and done in good faith keeping in
mind the interests of the principal.

 When the agent exceeds the authority set forth, then the principal isn’t liable for the
action beyond such authority.

Wrongful Acts of the Agent – s. 238

 To make the principal liable for the wrongful acts of the agent vicariously, it must be
done within the ‘course of business’. If found to be within the course of business then
the principal will be liable for both the authorized and unauthorized acts of the agent
during that period.

Rights and Liabilities of Undisclosed Principal

1. Where the Principal’s name is disclosed – s. 226

 If the identity of the principal is disclosed to the 3rd party then it has the same
legal consequence as if the principal had himself entered into the agreement of
the agency.
  The principal may sue and be sued by the 3rd party.

 The agent can neither sue nor be sued.

2. Where the Principal is unnamed

 If the agent doesn’t disclose to the 3rd party the name of principal but discloses
his representative character then the contract will be that of the principal
unless made to the contrary (making agent liable).

3. Where the principal’s identity is undisclosed.

 If neither the identity of the principal nor the representative character of the
agent is disclosed to the 3rd party, then it implies that the agent has contracted
under his name and is bound by it.

 As an undisclosed party, the principal has the right to intervene in the

transaction. He may not do so if there are express terms in the contract
prohibiting the same.

 3rd parties have the same rights against the principal as they would have had
against the agent if he were the principal.

 The 3rd party may repudiate the contract if the principal reveals himself before
the completion of the contract if such party can show that the identity of the
principal was material to the formation of the contract. If he had known the
identity of the real principal he wouldn’t have entered into a contract in the
first place.

Personal Liability of Agent

 Generally, the agent can neither be bound not enforce the contracts on behalf of the
principal unless a contract is made to the contrary in the following scenarios;

1. The contract is made by an agent for the sale or purchase of goods for a
merchant residing abroad;

2. Where the agent does not disclose the name of the principal

3. Non-existent or Incompetent Principal E.g. minor, company, etc.

4. Pretended Agent without ratification

5. Breach of Warrant of Authority (where agent exceeds the authority he has)

Ratification

 When a person does an act on behalf of another without the assent of the same and
consequently the latter chooses to adopt it.

 It may be express or implied

Requirements for Ratification

1. On Behalf of Another

 The act in question must have been done on behalf of the principal.
 The identity of the principal isn’t required to be disclosed. A description of
him shall suffice.
 If the agent acts on his own account and makes no allusion of the agency then
the same cannot be ratified.

2. Competence of Principal

 It is necessary that on the day the contract was made between the agent and
the 3rd party, the undisclosed principal is competent to contract.

3. What acts can be ratified? S. 200

a) Lawful Acts
b) Acts which become injurious to others after ratification – cannot be
ratified.
c) Acts did on behalf of the government – state liability only till the extent of
authorization.
d) Knowledge of Facts – principal must have full knowledge of the facts
e) Whole transaction – transactions can be ratified only as a whole
f) Reasonable Time – ratification must come within a reasonable time.

 The effect of ratification is;

 The principal-agent relationship is established
 The relationship between principal and 3rd party is established.

Determination of Agency – s. 201

1. By Revocation – s. 203

 The principal may revoke the authority given to the agent any time before
such authority has been exercised.
  Such revocation may be express or implied – s. 207.
 Revocation applies prospectively to future acts and obligations – s.204.
 A reasonable notice has to be given to the agent – s.206. Any damage the
agent a suffers due to such revocation must be compensated by the principal.
 The power of attorney given to the agent would be revoked after giving him
due to compensation.
 When the agent has an interest in the subject-matter of the agency then it
becomes irrevocable - s.202. such interest must have been created at the time
of creation of the agency.

2. Renunciation by Agent – s. 206

 The agent may renounce the business in the same manner as revocation by the
principal.

3. Completion of Business – s. 201

 The agency is automatically complete by operation of law when its business is

complete.

4. Death or Insanity – s. 201

 The agency is determined automatically on the death or insanity of the agent

or principal. Winding up a company will have the same effect.
 The acts done before the death of agent would still be binding on the principal.

5. Principal’s insolvency – s. 201

6. On expiry of time – s. 201

Effects of Termination - s. 208

 The authority of agent comes to an end when he comes to know of termination
 With regards to the 3rd person, the agency terminates when they come to know of it. It
is applicable even when the agency is terminated by the death of the principal.
s. 209 - charges the agent with the duty to protect the interest of the principal on the latter’s
death or insanity
s. 210 – The termination of an agent’s authority leads to the termination of all the sub-agents
authority under him.