Legal Aspects of Business

Special Contracts (The ICA, 1872)

Agency Contract (section 182-238)
 Learning Outcomes
• Understand the concept of agency.
• Apply the concepts of agency in various
situations.
• Analyze and appreciate the situational
differences in applying the aforementioned
concepts.
 Agency
• “An agent is a person employed to do any act for another or to
represent another to bring him into legal relations with a third
person. The person for whom' such act is done or who is so
represented is called the "principal“ (182).
• The contract which creates the relationship of ‘principal’ and
‘agent’ is called an ’agency’.
• Thus, where A appoints B to buy ten bags of sugar on his behalf, A
is the ‘principal’. B is the ‘agent’ the contract between the two is
‘agency’.
• If, in pursuance of the contract of agency, the ’agent’ purchases the
bags of sugar on credit from C, a wholesale dealer in sugar, then in
the eyes of law the principal and the wholesale dealer are brought
into direct contractual relations and the contract of purchase is
enforceable both by and against the ‘principal’.
 General Rules of Agency
• An agent is merely a connecting link between
principal and the third party.
• Whatever a person competent to contract
may do by himself, he may do through agency,
except for acts involving personal skills and
qualifications. (marriage)
• He who does through another, does by
himself (the acts of agent are, for all legal
purposes, the acts of principal) (226)
 Test of Agency
• Agency exists ‘whenever a person has the
authority to act on behalf of the other and to
create contractual relations between that
other and third persons.’

• When this kind of power is not enjoyed, the

relationship is not one of agency.
 Case 1
R is the wife of P. She purchased some
sarees on credit from Q. Q demanded
the amount from P. P refused. Q filed a
suit against P for the said amount.
Decide in the light of provisions of the
Indian Contract Act, 1872, whether Q
would succeed?
 Case analysis
Agency may be created by a legal
presumption, in a case of cohabitation by a
married woman (i.e. wife is considered as an
implied agent of her husband). If wife lives
with her husband, there is a legal
presumption that a wife has authority to
pledge her husband’s credit for necessaries.
But the legal presumption can be rebutted in
the following cases:
(i)Where the goods purchased on credit are
not necessaries.
(ii) Where the wife is given sufficient money
for purchasing necessaries.
 Cont…
(iii) Where the wife is forbidden from purchasing
anything on credit or contracting debts.

(iv) Where the trader has been expressly warned not to

give credit to his wife.

If the wife lives apart for no fault on her part, wife has
authority to pledge her husband’s credit for necessaries.
This legal presumption can be rebutted only in cases (iii)
and (iv).

Applying the above conditions in the given case ‘Q’ will

succeed. He can recover the said amount from ‘P’ if
sarees purchased by ‘R’ are necessaries for her.
 Are they different?
• Agent and Servant

• Agent and independent contractor

 Who may employ an agent?
• “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.”
(Sec. 183)
Who may be an agent?
“ as between principal and third persons any person
may be appointed as agent”.
Thus, a minor or a person of unsound mind can be
appointed as agent.
It is because the act of the agent is the act of the
principal and therefore the principal is liable to the
third parties for the acts of a minor agent.
 Kinds of Agent
Based on the extent of authority:
• General Agent
• Special Agent
• Universal Agent
Based on the nature of work performed:
• Mercantile Agent
o Factor
o Commission agent
o Del credere Agent
o Broker
• Non Mercantile Agent
 Creation of Agency
• Agency by Express Agreement

• Agency by Implied Agreement

I. Agency by estoppel;
II. Agency by holding out;
III. Agency by necessity;
 Agency by estoppel (237)
(Ostensible authority)

• T tells M in the presence and within the

hearing of N that he(T) is N’ s agent. N does
not contradict this statement and keeps quiet.
Later on M enters into a transaction with T
believing honestly that T is N’s agent. N is
bound by this transaction and he will be
estopped from denying the existence of the
agency, even though such an agency did not in
fact exist.
 Agency by Ratification (196)
• A subsequent adoption or acceptance of an
act originally done without instructions or
authority.
Example: A buys 5 bags of wheat on behalf of B.
B did not appoint a as his agent. B may upon
hearing of the transaction accept or reject it. If B
accepts it, the act is ratified and A becomes his
agent with retrospective effect.
 Essentials of Valid Ratification
• The agent should
 Extent of Agent’s Authority
• Actual Authority (187)

• Ostensible or apparent authority (188)

Example: A, employed by B, residing in London, to recover at
Mumbai a debt due to B. A may give a valid discharge for the
same.

• Authority in emergency (189)

Example: Consignment of fruits getting spoiled.
 Delegation of Authority
• Section 190- “an agent can not lawfully employ another to perform
acts which he has expressly or impliedly undertaken to perform
personally, unless by the ordinary custom of trade a sub-agent may,
or from the nature of agency, a sub-agent must be employed.”
Exceptions
• Where the principal has expressly permitted delegation
• Where the principal has impliedly permitted delegation
• Where it is customary to appoint a sub-agent (stock exchange clerk for each clientele)

• Where the nature of agency makes it necessary to do so

• Where the acts to be done are purely ministerial (Clerical and routine)
• Where unforeseen emergencies arise rendering appointment of the
sub-agent.
 Sub-Agent (191-192)
“ A sub-agent is a person employed by, and
acting under the control of, the original agent in
the business of agency” (191)

• Substituted Agent (194-195)

 Duties of Agent
• Duty to follow principal’s directions or customs (211)
• Duty to carry out the work with reasonable skill and
diligence (212)
• Duty to render accounts (213)
• Duty to communicate (214)
• Duty not to deal on his own account (215-216)
• Duty not to make any profit out of his agency except
his remuneration (217-218)
• Duty on termination of agency by principal’s death or
insanity (209)
• Duty not to delegate authority (190)
 Case 2
P appoints A as his agent to sell his estate. A, on
looking over the estate before selling it, finds the
existence of a good quality Granite-Mine on the
estate, which is unknown to P. A buys the estate
himself after informing P that he (A) wishes to
buy the estate for himself but conceals the
existence of Granite-Mine. P allows A to buy the
estate, in ignorance of the existence of Mine.
State giving reasons in brief the rights of P, the
principal, against A, the agent. What would be
your answer if A had informed P about the
existence of Mine before he purchased the estate,
but after two months, he sold the estate at a
profit of Rs. 1 lakh?
 Case Analysis
• Section 215 - If an agent deals on his own
account in the business of the agency, without
obtaining the consent of his principal and without
acquainting him with all material circumstances,
then the principal may repudiate the transaction.
• Section 216 - If an agent, without the knowledge
of his principal, acts on his own account in the
business of the agency, then the principal may
claim any benefit which may have accrued to the
agent from such a transaction.
 Cont…
• Hence in the first instance, though P had given his consent
to A permitting the latter to act on his own account in the
business of agency, P may still repudiate the sale as the
existence of the mine, a material circumstance, had not
been disclosed to him.

• In the second instance, P had knowledge that A was acting

on his own account and also that the mine was in
existence; hence P cannot repudiate the transaction under
Section 215. Also, under Section 216, he cannot claim any
benefit from A as he had knowledge that A was acting on
his own account in the business of the agency.
 Rights of Agent
• Right to receive remuneration (219-220)
• Right of retainer (217)
• Right of lien (221)
• Right to be indemnified against consequences of
lawful acts (222)
• Right to indemnified against the consequences of
acts done in good faith (223)
• Right to compensation (225)
• Right of stoppage of goods in transit.
 Principal’s liability for the acts of the
Agent
• When agent acts within the scope of his actual
and apparent authority (189)
• When agent exceeds his actual as well as
apparent authority (227)
• Liability for agent’s misrepresentation or fraud
(238)
• Notice given to agent as notice to principal (229)
• Liability based on the doctrine of estoppel (237)
 Personal Liability of Agent to Third
Party (227-230)
• Where the agent expressly agrees
• Where the agent acts for a foreign principal
• Where the agent acts for an undisclosed principal
• Where the agent acts for a principal who can not
be sued
• Where the agent exceeds his authority
• Where there is trade usage or custom
• Where agent’s authority is coupled with interest
 Termination of Agency
By the act of the parties
• Agreement

• Revocation by the principal

• Renunciation by the Agent

 Termination by the Operation of Law
• Completion of the business of agency
• Expiry of time
• Death of the principal or agent (201, 209)
• Insanity of the principal or the agent (201, 209)
• Insolvency of the principal (201)
• Destruction of the subject matter
• Dissolution of the company
• Principal or agent becomes alien enemy
 Irrevocable Agency
• Where the agency is coupled with interest
(202) e.g. loan recovery through house rent by the agent

• When Revocation would cause the agent

personal loss
• When the authority has been partly exercised
by the agent
 References
• Sheth, Tejpal (2012).Legal Aspects of Business.
Pearson Education.
• Adam, Alix (2015). Law for Business Students.
Pearson Education.
• Kuchhal, M.C. (2009). Business Law. Vikas
Publishing House.