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Agency under Contracts

April 4, 2015
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Anonymous
Editor’s note: This paper analyses the role of an agent under the
Indian law on contracts. In contracts of agency, there exists a legal
relationship between two people where one person acts on behalf of
the other. The essence of the principal-agent relationship is that the
principal is too busy to do various jobs so he hires an agent to do the
same on his behalf. This relationship is based on the maxim “qui facit
per alium facit per se”. An agency can be created by express or
implied consent, conduct, necessity or by ratification of the agent’s
act by the principal. The paper distinguishes between agents and
servants, agents and sub-agents, and sub-agents and substituted
agents.
Introduction
The paper discusses the characteristics and the role of an agent under the Indian
Contract Act, 1872. A section of the paper also creates a distinction between
agency and dealership, as to how a dealer who may appear to be an agent is not
actually an agent. It tries to discuss the relationship between a principal, an agent, a
sub-agent and a servant. It also differentiates between the role and duties of an
agent, a servant, sub-agent and a substituted agent.  The central idea behind the
principal-agent relationship is that the principal is too busy to do various jobs so
he/she hires an agent to do the job on his or her behalf. The principal-agent
relationship is defined at a later stage in the paper.

In India, the agent and principle share a relationship that is contractual in nature,
and therefore it is governed by the terms and conditions of the contract between
them. Chapter X of the Indian Contract Act, 1872 provides the basic structure of
rules and regulations that basically govern the performance and formation of any
type of contract including the agency contract. In agency contracts, there exists a
legal relationship between two people whereby one person acts on behalf of the
other. The person acting on behalf of the other is called an agent, and the person
from whom the agent derives authority to act is called the principal. 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“[i]. Agent
and principal are defined under Section 182 of the Indian Contract Act, 1872.
According to the section “an agent is a person employed to do any act for another
or to represent another in dealings with third persons. The person for whom such
act is done, or who is so represented, is called the principal”.[ii] The competent
agent is legally capable of acting for the principal vis-à-vis the third party. Now
who can become an agent? Section 184 answers this question. According to this
section any person can become an agent i.e. there is no need to have a contractual
capacity to become an agent. Therefore, a minor can also act as an agent. But the
minor will not be responsible to his principal.[iii] Different types of commercial
agents have been identified under Indian law like brokers, auctioneers, del credere
agents, persons entrusted with money for obtaining sales and insurance agents.
Creation Of An Agency
 By express or implied contract- A principal may implicitly or expressly
employ an agent. The appointment may be expressed in writing or it may be
oral.
 By conduct of party or situation– E.g. estoppel- Whereby a person allows
another to act for him to such an extent that a third party reasonably believes
that an agency relationship exists between the two.
 By ratification- assent is given either to an act done by someone who had no
previous authority to act or to an act that exceeded the authority granted to
an agent.
 By Necessity- a person acts for another in an emergency situation without
express authority to do so.
Duties Of An Agent
1. Duty to execute mandate
2. Duty to follow instructions or customs
3. Duty of reasonable care and skill
4. Duty to avoid conflict of interest
5. Duty not to make secret profit
6. Duty to remit sums
 7. Duty to maintain accounts
8. Duty not to delegate
Rights Of An Agent
1. Right to remuneration– an agent is entitled to get an agreed remuneration as
per the contract. If nothing is mentioned in the contract about remuneration,
then he is entitled to a reasonable remuneration. But an agent is not entitled
for any remuneration if he is guilty of misconduct in the business of agency.
2. Right of retainer– an agent has the right to hold his principal’s money till the
time his claims, if any, of remuneration or advances are made or expenses
occurred during his ordinary course of business as agency are paid.
3. Right of lien– an agent has the right to hold back or retain goods or other
property of the principal received by him, till the time his dues or other
payments are made.
4. Right to indemnity– an agent has the right to indemnity extending to all
expenses and losses incurred while conducting his course of business as
agency.
5. Right to compensation– an agent has the right to be compensated for any
injury suffered by him due to the negligence of the principal or lack of skill.
Difference Between Agency And Dealership
In the law of agency, the relationship that matters the most between an agent and
the principal is the legal relationship. A person cannot become an agent of another
merely because he gives advice to the other. Any person acting on behalf of the
other cannot be an agent for another until there is an implied or explicit agreement
between them, which leads to a legal relationship between them. Also not all those
who describe themselves as agents will, in law, be considered as agents. The dealer
of a particular make of cars, e.g. Mercedes, may be called as an agent, but the
dealer in law is not an agent for the manufacturer. This is because, in practice, the
dealer purchases vehicles from the manufactures and sell them on the dealer’s own
account.

No privity of contract exists between the manufacturer and the buyer. This
example highlights the difference between agency and dealership. An agent
markets his principal’s products for a fixed commission, which can be determined
according to the contracts. But, a dealer buys the product of a company directly
from its manufacturer on its own name. So, rather than matching up the principal
and the third party, the dealer acts as a principal and buys or sells stock for the
dealer’s own inventory. An agent acts as an intermediary and receives a
commission for its services. But, a dealer acts on behalf of the firm rather than
acting as an intermediary. As mentioned in the above car example, no contract
exists between the dealer and the manufacturer, thus, there is no legal relationship,
which is the most important thing in the law of agency.
The description of an agent looks quite similar to that of a servant or a bailee but
their duties, role and liabilities are entirely different. The Supreme Court has
clearly underlined the distinctions between an agent and a servant in the
case Lakshminarayan Ram Gopal & Sons v. Hyderabad Government.[iv]
The table draws a distinction between an agent and a servant:

Agent
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.
Servant
A servant does not have the authority to
create contractual obligations between the
principal and a third party.
The master can direct a servant as to what
has to be done and also how it should be
done
A servant gets his salary or wages.
A servant usually works under one master at
a given point of time.
A servant cannot create any such legal
relations

Section 191 of the Indian Contract Act, 1872 defines sub-agent. According to this
section “a sub-agent is a person employed by, and acting under the control of, the
original agent in the business of the agency.”[v] The appointment of an agent may
be done properly or improperly, which determines the relationship between the
principal and the sub-agent.
Thus there are two types of delegation–

1. Proper delegation– This comes under section 192 of the Indian Contract
Act, 1872. This is when an agent having the authority to do so, appoints a
sub-agent.
2. Improper delegation– This comes under section193 of the Indian Contract
Act, 1872. This is when an agent without any authority appoints a sub-agent.
The table shows a distinction between an agent and a sub-agent:

Agent Sub-agent
An agent is appointed by a principal and is A sub-agent is appointed by an agent and as such
 under his control.
An agent acts under the principal.
A privity of contract exists between a
principal and an agent.
An agent can ask for remuneration from
the principal.
is under the control of the agent.
A sub-agent acts under an agent.
No privity of contract exists between a principal
and a sub-agent.
A sub-agent cannot ask for remuneration from the
principal.

Sections 194 and 195 talk about substituted agents. When an agent having the
authority to do so, names another person to act for the principal in the business of
the agency, then such a person is called a substituted agent and not a sub-agent.
Thus a contractual relation comes in existence between the principal and the
substitute agent and therefore the substituted agent is directly liable to the principal
to perform his duties.
The distinction between a sub-agent and a substituted agent is important because
an agent is liable in relation to the acts of a sub-agent, but an agent carries no
liability to the principal for the acts of the substituted agent.

The table shows a distinction between a sub-agent and a substituted agent:

Sub-agent Substituted agent

An agent appoints a sub-agent and therefore a
sub-agent is under the control of an agent.
A sub-agent acts under the agent.
A sub-agent cannot be held liable by the
principal, except in case of fraud.
A sub-agent is not entitled to any remuneration
from the principal.
No contract exists between a sub-agent and the
principal.
An agent is liable for the acts of the sub-agent.
A substituted agent is only named by the agent but
is under the control of the principal.
A substituted agent acts independently for his
principal.
A substituted agent can be held liable by his
principal.
A substituted agent can ask for his remuneration
from his principal.
A contractual relationship exists between the
substituted agent and the principal.
An agent is not liable for the acts of substituted
agent.

Formatted on 19th March 2019.

Footnotes
[i] Agency | LII / Legal Information Institute,
http://www.law.cornell.edu/wex/agency (last visited Nov 22, 2012)
[ii] Section 182, Indian Contract Act, 1872
[iii] Foreman v Great Western Rly Co, (1878) 38 LT 851.
[iv] AIR 1954 SC 364
[v] Section 191, Indian Contract Act, 1872