Dr.

Ram Manohar Lohiya National Law

University, Lucknow

Law Of Contract - II
Topic- Nature Of Principal Agent Relationship

Submitted By Submitted By
Antriksh Yadav Ms.Vegesna Visalakshi
Enrolment No. – 200101029 Associate Professor
B.A.LLB (2nd Sem)
 Table Of Contents

Declaration…………………………………………………..3
Acknowledgement…………………………………………..4
Introduction…………………………………………………5
Agency………………………………………………………6
Essentials Of Agency……………………………………….7
Creation Of Agency…………………………………………8
Agency In Husband Wife Relationship……………………..10
Landmark Cases…………………………………………….12
Conclusion…………………………………………………..14
 DECLARATION

I hereby declare that the project work entitled ‘The Nature Of

Agent Principal Relationship’ submitted to the Dr. Ram
Manohar Lohiya National Law University, Lucknow is a
record of original work done under the guidance of Ms.
Vegesna Visalakshi Associate Professor, Dr. Ram Manohar
Lohiya National Law University , Lucknow and this project
work submitted in the partial fulfilment of the requirements of
the award of the degree of B.A.LLB (Hons.) .
 ACKNOWLEDGEMENT

I would like to extend my sincere gratitude to all those who

have helped me in this topic of research . I extend my sincere
acknowledgment to my teacher and mentor Ms.Vegesna
Visalakshi who gave me this wonderful opportunity to make a
project on ‘The Nature Of Agent Principal Relationship’ . I
am deeply indebted to her helping me with her able guidance
and advice in choosing this particular topic . I further extend
my sincere thanks to Vice Chancellor, Dr. S.K. Bhatnagar Sir
for his encouragement and enthusiasm, my seniors for sharing
their valuable tips and my classmates for their constant
support .
Introduction

This article analyses in detail the contractual relationship

between the agent and the principle as mentioned in the
Chapter X of the Indian Contract Act, 1872. Agent is defined
in Section 182 of the Act . According to it , an “agent” is a
person employed to do any act , or to represent another in
dealings with the third persons . The person for whom such
act is done, or who is represented , is called the principal The
emphasis is on the power of the agent to represent his
principal in dealings with the third person . The relationship
of agent and principal 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 agent is
merely a connecting link between his principal and therefore
the third person. Section 226 states that contracts entered into
through an associate agent associated obligation arising from
the acts done by an agent , could also be implemented within
the same manner, and can have identical legal consequences,
as if the contract had been entered into and therefore the acts
done by the principal in the flesh. Within the case of
Chairman,L.I.C vs R.K.Bhaskar, it is well settled that agency
may be a legal idea that is utilised by the court once it
becomes necessary to clarify and resolve the issues created by
sure truth state of affairs. This article aims to define the
relationship of agent with that of the principal in different
circumstances with respect to legal provisions and relevant
cases. It illustrates the various modes of creation of the
agency and various types of agents .
Agency

Agency is defined as a relationship where one party, namely

the principal, who delegates some authority to another party,
namely agent to represent him or to act on his behalf, in
dealing with a third person , as to create a binding legal
relationship between the former and the third party .
The concept of “agency” was explained by the Madras High
Court in P. Krishna Bhatta vs Mundila Ganapathi Bhatta .
Ramaswami J noted that only when the agent acts as
representative of the other in business negotiations, that is to
say , in the creation, modification or termination of
contractual obligation, between that other and third person,
then only he is an agent of the other.
The test of determining the existence of agency relationship
has been explained by Dhawan J of the Allahabad High Court
. According to him , the use of words agency agreement and
agent by the parties in a contract does not necessarily establish
a relationship of agency in the legal sense. It has been held in
various decisions that the fact the parties have called their
relationship an agency is not conclusive, if the incidence of
this relationship , as disclosed by evidence does not justify a
finding of agency. Certain persons are referred to in common
parlance as ‘agents’ even though they may not really have the
have this power of changing their principal’s relationship with
third parties . Distributors and franchisees are normally
referred to as agents , though they may actually act as
principals dealing in their own name. Hence, the
determination of weather the relationship between the parties
is that of agency or of conceptually anything else (though
apparently similar) will depend upon the facts of each case .
Essentials of agency

• Principal Should Be Competent To Contract- An agency

being a Contract of Employment to bring principal into
legal relationship with the third party, the first and
foremost requisite is that the principal should be
competent to contract. According to Section 183 , Any
person 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. It means that a minor cannot appoint an
agent. The appointment of an agent involves a contract,
and a minor’s agreement is void. However, in Madanlal
Dhariwal vs Bherulal it was held that there is nothing in
the act which prohibits the guardian of minor from
appointing an agent for him.

• Agent need not to be competent- The capacity of an

agent could be looked at from two angles:
➢ Firstly, the capacity of an agent to act on behalf of
the principal, so as to bind his principal and third
person – As far as this is concerned, any person may
become an agent . It means that even if an agent is
minor or otherwise incompetent to contract , he is
capable of creating a valid contract between his
principal and the third person . In this context, the
agent is only a connecting link between the
principal and the third party.
➢ Secondly, agent’s capacity to bind himself by a
contract between himself and his principal so far as
the agent’s capacity to bind himself to the principal
is concerned it is not necessary that the agent should
also be competent to contract. But in such cases, the
 agent will himself be not responsible for his acts to
the principal.

• No consideration is necessary to create an agency –

Section 185 of Indian Contract Act provides that no
consideration is necessary to create an agency. Generally
an agent is remunerated by way of commission for
services rendered, but no consideration is immediately
necessary at the time of appointment.

Creation Of Agency

The relationship of principal and agent may be created in any

of the following ways:

• Acts Done with principal’s Actual authority –

Section 186 of the Indian contract act, 1872 states that
the agents authority may be expressed or implied.
Further, section 187 of the said act illustrates the
meaning of express and implied authority. In order to
create an agency, the use of word agent or agency
agreement is not necessary . The relationship of principal
and agent can only be established by consent of both of
them. They will be held to have consented if they have
agreed to what amounts in law to such a relationship,
even if they do not recognise it themselves and even if
they have professed to this claim it. But the consent must
have been given by each of them, either expressly or by
implication from words and conduct.

➢ Express authority- An authority is said to be

expressed when it is given by words spoken or
written. In , the court held an oral appointment is
 also valid even doe the contract which he is
authorised to make have to be in writing.
➢ Implied authority - It arises from the conduct,
situation or relation between the parties. “The
ordinary course of affairs” must be regarded to
ascertain the extent of an authority not defined by
principal.

• Agent’s authority in an emergency – The rule contained

in Section 189 is known as the rule relating to “authority
of necessity”. The prior rules lay down duty or
restrictions on the powers or authority of an agent. But in
cases of emergency, whose rules became inapplicable.
This section may apply where in an emergency it is not
possible to communicate with the principal. This section,
therefore, lays down a very sensible and sound rule of
acting prudently as it were a personal case of the agent
himself. In Sims and Co vs Midland Railway Company ,
a quantity of butter was consigned with the defendant
railway company. It was delayed in transit owing to a
strike . The goods being perishable, the company sold
them. The sale was held binding on the owner , the
company’s action was justified by necessities of the case
and it was also not possible to get instructions from the
owner.

• Principal bound by estoppel- Slade J stated that

“Apparent authority was really a form of estoppels”. The
principal represents to the third party by words or
conduct that the agent has authority, and so the principal
is later estopped from denying that authority. This was
defined in Hely-Hutchinson v Brayhead as the authority
of an agent as it appears to others. Sometimes, the agent
 is neither vested by express or implied authority by the
principal to act on his behalf, but the principal through
his acts and conduct creates an impression in the mind of
the third party that the agent has the authority to act on
his behalf. In such a case , the principal is liable towards
the third persons for the acts done by the agent , on the
ground of the application of the law of estoppel. The
basis of action is what appears to the third person to be
authority , i.e, apparent or ostensible authority conferred
on the agent. However, no act done by an agent that was
unauthorised by the principal will be binding on the
latter. In Ram Pertab Vs Marshall, the Privy Council
observed that the principal observed that the principal
was liable upon a contract entered into by his agent in
excess of his authority, the evidence showing that the
contracting party might honestly and reasonable have
believed in existence of authority to the extent apparent
to him

Agency in Husband – Wife Relationship

An agency in husband and wife relationship is a special and

important case of implied authority. A wife living with her
husband has the implied authority of husband to buy articles
of household necessities. She is entitled to receive goods and
services which may be required for domestic use or which
may be of her husband , herself or the children. If such goods
or services are necessary, according to the condition of life of
the family, the husband becomes bound to pay for them.

A wife’s implied authority to bind her husband by her credit

purchases is ,however, subject to some important limitations.
Firstly, it is necessary that the husband and wife should be
living together. If the wife is living apart from the husband
without his fault and if she has been left unprovided for , she
may become an agent of necessity of her husband to pledge
his credit to the extent to which a reasonable maintenance
makes it necessary, but she will not be an implied agent.
Secondly, they must be living together in a domestic
establishment of their own . In Debenham vs Mellon , it was
held that the mere fact of marriage does not make the wife an
agent of of her husband, nor the fact of living together is
sufficient. There must be a domestic establishment of which
the wife is the incharge. Thirdly, the wife can run her husband
into debt only for necessaries. The word “necessaries” is no
doubt not free from ambiguity. In Robert Simpson Co Ltd v
Rugglas , it has been held to include articles suited to the style
in which the husband chooses to live , because the husband
conducting himself in the manner of a wealthy man no doubt
expects his wife to conduct herself in manner of wealthy
man’s wife . But the wife cannot embark upon the purchases
of things beyond the station in which they live as held in
Seymore v Kingscote . Lastly, the husband will not be liable if
he makes a reasonable allowance to his wife for her needs . In
Girdhari Lal v W.Crawford the Allahabad High Court held
that the husband will not be liable even if the facts of
allowance is not known to the seller.
Landmark Cases

Narandas Morardas Gaziwala & Ors vs S. P. Am.Papammal&

Anr.

Narandas Morardas Gaziwala and Ors., was a partnership firm

based in Surat that dealt in lace and silver thread, had relations
with another firm, Krishna and Company, who functioned as
their Agents for selling their goods on commission basis
throughout the three districts of Madras. On the firm's
breakup, Murugesa Chettiar, one of the partners, took over all
of the firm's assets and obligations. Krishna & Co. got
indebted in 1951 as a result of their activities. On April 1,
1951, Murugesa Chettiar (plaintiff) signed a promissory note
in the amount of Rs. 7,500/- in favour of Narandas Morardas
Gaziwala, the amount determined to be due and payable by
Krishna & Co. The plaintiff filed a claim at Kancheepuram's
District Munsif's Court, requesting that accounts be rendered
from April 1, 1951 until the date of the action in order to
determine the amount owing and payable to him. At response,
the Surat business filed a lawsuit against the plaintiff in the
Court of Subordinate Judge, Chingleput, trying to collect the
money owed under the promissory note. By agreement of the
parties, the cases were tried simultaneously. The major issue
was Is it possible for the plaintiff, as an Agent, to sue the
defendant-Surat business for accounts?
However, the Supreme Court held that The Indian Contract
Act gives no mechanism for an Agent to sue the Principal for
the account's rendition. The legislation is not exhaustive, and
the Agent's ability to sue the Principal for accounting is an
equitable right that arises in unusual situations, rather than a
statutory right.
State of Madras v. Jayalakshmi Rice Mill Contractors Co. and
Ors.

The Food Procurement Order allowed licensees (rice millers

in the East Godavari, West Godavari, and Krishna districts) to
purchase rice and paddy from producers and sell it in the
market at Government-set rates. It was requested that the
difference between the prices at which they were acquired and
the prices at which they were instructed to be sold be paid to
the government. The different millers paid over the difference
in accordance with the Government's instruction, then filed
proceedings to reclaim those monies, claiming that they alone
were entitled to the price difference and that the Government
had no right to collect it from them. One of the several issues
involved was whether the plaintiffs, in relation to the selling
of paddy and rice, Government Agents? The Andhra Pradesh
High Court stated that Unlike an Agent, the plaintiffs did not
represent the Government in their operations, but only served
as a conduit for the purchase and sale of goods and were
subject to the direction and control of the Government
Commission. However, this is insufficient to establish agency.
They weren't even buyers or sellers, since it was a case of a
person possessing a licence to do an act in accordance with
the terms of the licence.
Conclusion

Contracts that establish a relationship between the agent and

principal are very important and these can be expressed or
implied. Establishment of a Principal-Agent relationship
confers rights and duties upon both the parties. In modern
times with the growth of the business organisation, the
contracting agency plays an important role in the devolution
of the authority by the principal to the agent. Various
judgements and the chapter X of the Indian Contract Act have
illustrated in detail the various intricacies of the contract of
agency, the rights , duties and liabilities of the principal and
agent. The establishment of a Principal-Agent relationship
gives both parties rights and responsibilities. Therefore, there
has been a growing demand for legal representation as
company units are involved in distant transactions (through
the employment of factors or commercial Agents) or are
increasing in size (as in the case of the firm, the house, and
the corporation).
Bibliography

• Indiankanoon.com
• Casemine.com
• Contract II by Dr.R.K. Bangia
• Contact and Special relief by Avtar Singh