Agency-The Indian Contract Act 1872 Notes

 

Introduction

In contract law, agency refers to a relationship where one party (the agent) is authorized to act on behalf of another party (the principal) to create legal relations with a third party. The Indian Contract Act, 1872 governs the relationship between the principal and the agent under Chapter X (Sections 182 to 238). The law of agency is fundamental in business transactions, allowing principals to appoint agents to conduct business, make contracts, or deal with third parties on their behalf. Understanding the contract of agency is essential for law students and professionals alike, as it facilitates the smooth execution of various commercial and legal activities.

This article will cover the modes of creation of agency, the types of agents in contract law, and the legal framework governing the agency under Indian Contract Act, 1872.

What is Agency in Indian Contract Act, 1872?

As per Section 182 of the Indian Contract Act, an agent is defined as a person employed to do any act for another or to represent another in dealings with third persons. The principal, in turn, is the person for whom the agent acts. The essence of the agency relationship lies in the authorization given to the agent to represent the principal in transactions with third parties.

• Meaning of ‘agent’ (agency)
  An ‘agent’ is a person employed to –
  • Do any act for another; or
  • Represent another in dealings with third persons.

• Meaning of ‘principal’
  ‘Principal’ is the person –
  • For whom an act is done by the agent; or
  • Who is represented by the agent in respect of dealing with third persons.

• Test of agency
  Where a person has the capacity to –
  • Create contractual relations between the principal and a third party;
  • Bind the principal by his own acts, there exists a relationship of agency.

Nature of Agency

The nature of agency involves a fiduciary relationship, where the agent acts in the best interest of the principal. The principal is bound by the acts of the agent, provided those acts fall within the scope of the agent’s authority. The agent does not assume personal liability for the contract entered into on behalf of the principal unless explicitly agreed otherwise.

Example:
A, a principal, authorizes B, an agent, to purchase raw materials from a supplier. B enters into a contract with C (the supplier) on behalf of A. The contract binds A and C, while B acts merely as an intermediary.

Modes of Creation of Agency

The agency in contract law can be created in various ways, as outlined in the Indian Contract Act. These are referred to as the modes of creation of agency:

1. Agency by Express Agreement:
   An agency is most commonly created by an express contract where the principal explicitly appoints the agent. This appointment may be in writing or verbal, depending on the requirements of the specific transaction.

   Example: A hires B as his agent to sell property through a written contract.

2. Agency by Implied Agreement:
   An agency may also be created by implication, based on the conduct or situation of the parties, even if there is no express agreement. This is known as agency by implied agreement.

   Example: A consigns goods to B for sale, and B accepts them. The agency is implied by the conduct of the parties.

3. Agency by Necessity:
   An agent may be appointed by necessity in emergency situations where the agent must act to protect the interests of the principal. In such cases, the agency is created by law.

   Example: A truck driver (acting as an agent) decides to sell perishable goods because of an unforeseen delay, to prevent loss to the principal.

4. Agency by Ratification:
   If a person acts without authority or beyond the scope of their authority, but the principal later approves or ratifies those acts, an agency is created retrospectively.

   Example: A, without B’s consent, buys goods on B’s behalf. If B ratifies the purchase, an agency is created.

5. Agency by Estoppel:
   If a principal leads a third party to believe that another person is their agent, and the third party deals with that person based on this belief, the principal is estopped (prevented) from denying the existence of the agency.

   Example: A allows B to act on his behalf in several transactions, leading C to believe that B is A’s agent. A cannot later deny the existence of the agency when C sues A for B’s actions.

Salient Features of Agency (Sec. 183, 184, 185 and 226)

An agency is a legal relationship where one party (the agent) is authorized to act on behalf of another (the principal) in dealings with third parties. The Indian Contract Act, 1872 governs this relationship through various provisions, including Sections 183, 184, 185, and 226, which outline the essential features of agency.

1. Competence of the Principal (Section 183)

Section 183 states that the principal must be competent to contract. This means that a person employing an agent must be of legal age (18 years or older) and of sound mind, as defined under Section 11 of the Act.

• Key Point: Only individuals who are legally capable of entering into contracts can appoint an agent.

Example: A 16-year-old cannot appoint an agent, as they are not of the legal age to enter into a contract under Indian law.

2. Competence of the Agent (Section 184)

Section 184 specifies that any person, including minors and persons of unsound mind, can act as an agent. This is because the acts of the agent are considered those of the principal, and the principal is the one who bears the responsibility.

• Key Point: While the agent does not need to be competent to contract, the principal remains liable for the agent’s actions, provided the agent acts within the scope of their authority.

Example: A minor can be appointed as an agent to buy goods on behalf of an adult, and the adult principal is bound by the minor’s actions.

3. Consideration Not Necessary (Section 185)

Section 185 of the Indian Contract Act clarifies that no consideration is required to create an agency. The relationship between the agent and the principal can be established without any payment or benefit to the agent.

• Key Point: Unlike other contracts, agency contracts do not require consideration to be valid.

Example: A may appoint B as their agent to negotiate a business deal without offering any compensation. B’s acceptance of the appointment is sufficient to establish the agency relationship.

4. Principal Liable for Acts of Agent (Section 226)

Section 226 of the Indian Contract Act states that the principal is liable for the acts of the agent done within the scope of the agent’s authority. The agent’s acts, when performed as authorized, bind the principal as if the principal had performed them themselves.

• Key Point: The principal is responsible for all lawful actions performed by the agent within the agent’s scope of authority.

Example: If A appoints B as an agent to buy materials, and B enters into a contract with C, the contract is legally binding on A, even though A did not directly deal with C.

Who may employ an agent?

Any person may employ an agent if –

• He is of the age of majority; and
• He is of sound mind.

Who can be an agent?

• Any person may become an agent.
• Even a minor or a person of unsound mind can become an agent

Liability of agent

• Generally an agent is liable to the principal
• An agent is not liable to the principal if he is a minor or is of unsound mind.

Requirement of consideration
No consideration is necessary for creating an agency.

MODES OF CREATION OF AGANCY (Sec.187, 189, 196, 214 and 237)

• Express agreement
  • A person may employ another person as his agent by entering into an express agreement with him.
  • The agreement may be either oral or written.

• Implied agreement
  Agency by estoppel
  • If – a person makes a representation (by his words or conduct) to a third person that a certain person is his agent; and
  • the third party believing such representation to be true, enters into a contract with the pretended agent.
  • Then – the person making the representation is prevented from denying the truth of agency. He may be held liable as a principal by such third party.

• Agency of holding out
  Such an agency comes into existence when a person by his affirmative or positive conduct leads third persons to believe that person doing some act on his behalf is doing with authority.

• Agency by necessity – Conditions
  • There was an actual and definite necessity for acting on behalf of the principal.
  • The agent was not in a position to communicate with the principal.
  • The act was done for the purpose of protecting the interest of his principal.
  • The agent has exercised such reasonable care as a man of ordinary prudence would have exercised in his own case.
  • The act was done bonafide.

• Agency by operation of law
  Agency by operation of law arises where the law treats one person as an agent of  another.

• Agency by ratification
  Meaning
  • If –a person (viz., pretended agent) acts on behalf of another person (viz, the principal)
  • the pretended agent acts without the knowledge or consent of the principal; and
  • Afterwards, the principal accepts such act.
  • Then – Agency by ratification comes into existence.

Effects of ratification

• The principal is bound by the acts ratified by him as if such acts had been performed by his authority.
• Ratification relates back to the actual date of the act that is ratified and not from the date when the act ratified

ESSENTIALS OF A VALID RATIFICATION (Sec. 197 to 200)

• Full knowledge
  No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective. In other words, the principal must have full knowledge of all the material facts.
• Whole transaction
  It must be done for whole transaction in fact; ratification of the part of a transaction operates as a ratification of the whole transaction.
• Act on behalf of another person
  The acts done by a person (i.e. pretended agent) on behalf of another person (i.e. pretended principal) can only be ratified.
• By the principal
  Ratification can be made by only such person for whom the act was done.
• Existence of principal
  The principal must be in existence at the time when the act was done in his name
• Contractual capacity
  The principal must have contractual capacity both at the time of entering into the contract and at the time of ratification.
• Lawful acts.
  Only those acts which are lawful can be ratified. Void, illegal, or ultra vires acts cannot be ratified.
• Acts within principal’s power
  Ratification can be made only for such acts which principal had the power to do.
• Communication
  Ratification must be communicated to the third party so as to bind him
  Within reasonable time
  Ratification must be made within reasonable time of the act purported to be ratified.

Kind of Agents

A.  Based on Authority

The types of agents in contract law are based on the scope of authority and the tasks they perform. The Indian Contract Act classifies agents into various categories:

1. General Agent:
   A general agent is appointed to act on behalf of the principal in all business matters of a specific kind or in a particular place. A general agent has broad authority to act within the scope of their appointment.

   Example: A manager of a business who has broad authority to perform all acts necessary for running the business.

2. Special Agent:
   A special agent is appointed for a specific purpose or to carry out a specific task. The authority of a special agent is limited to the particular task for which they are appointed.

   Example: An agent appointed to purchase a specific piece of property on behalf of the principal.

3. Sub-Agent:
   A sub-agent is appointed by the original agent to perform acts on behalf of the principal, with the principal’s consent. The original agent is responsible for the acts of the sub-agent.

   Example: A real estate agent appoints another agent to handle negotiations for a property deal, with the principal’s approval.

4. Broker:
   A broker is an agent employed to buy or sell goods or securities on behalf of the principal, typically in exchange for a commission. The broker does not take possession of the goods.

   Example: A stockbroker who buys or sells shares on behalf of a client.

5. Del Credere Agent:
   A del credere agent acts as both a salesperson and a guarantor. In addition to selling goods, the agent guarantees that the third party will pay the principal for the goods sold.

   Example: An agent who sells goods and guarantees the payment from the buyer.

6. Commission Agent:
   A commission agent is appointed to sell goods and is remunerated based on a commission for each sale. The agent may also possess goods for sale.

   Example: An agent who sells agricultural products on behalf of a farmer and earns a commission for each sale.

• 1. Special Agent	2. General Agent	3. Universal Agent
  Appointed to perform a particular transaction, e.g. sale of a house property. Agent has limited authority Agent cannot bind Principal for acts other than for which he is employerd	a Appointed to do all acts connected with a particular trade, business or employment. B Authority is wide and continues till agency is terminated. (c)         Principal may limit his authority. Principal is bound by all acts unless it is beyond authority of Agent	Appointed to do all acts for the Principal. Authority is unlimited All acts of Agent bind his Principal provided that his acts are legal and agreeable as per law of land.

• B. Based on Nature of work

• 1. Commercial or Mercantile Agents	2. Non – Mercantile Agents.
  One who is authorised to sell goods or consign goods for the purpose of sale or to buy gods or to raise money on the security of goods. Includes Banker, Factor, Auctioneer, Broker, Commission Agent, & Del Credere Agent.	Not engaged in business of selling or buying goods, but act in their respective professional capacities. i.e. render professional services for their Principal Includes Solicitors, Attorneys, C & F Agents, Insurance Agents, etc.

• DUTIES OF AN AGENT (Sec. 209 to 218)

1. To conduct the business in accordance with the directions given by the principal
2. To work with reasonable diligence, care and skill.
3. To render proper accounts to the principal on demand.
4. To communicate with his principal in case of difficulty and seek his instructions.
5. Not to deal on his own account unless all the material facts have been disclosed to  the principal and consent of the principal has been obtained.
   If the agent, without the knowledge of the principal, deals in the business of agency on his own account, the principal has the following rights:
   • He may repudiate the transaction, if the agent dishonestly conceals any material facts or the dealings of the agent prove to be disadvantageous to him.
   • He may claim from the agent the agency business other than the agreed remuneration.
6. Not to make any secret profit out of the agency business other than the agreed remuneration
7. To remit to the principal all the sums received in the principal’s accounts in accordance with the terms and conditions of contract of agency.
8. Not to delegate authority or appoint sub – agent.
9. To protect and preserve the interest on behalf of the principal’s representative in case of his death or insolvency of the principal.
10. Not to use information obtained in the course of the agency against the principal.

• RIGHTS OF AN AGENT (Sec. 217 to 225)

1. To retain money out of the sums received in agency business for advances made or expenses incurred and remuneration due to him.
2. To receive the agreed remuneration. If the remuneration is not fixed, then he has the right to recover such remuneration as is usual and customary in such business.
3. Right of lien on principal’s goods, papers and other property until the amount due to him in respect of the same is paid.
4. An agent has the right to be indemnified by the principal against the consequences of all lawful acts done in exercise of the authority conferred on him.
5. An agent has the right to be indemnified by the principal against consequences of acts done in good faith that caused an injury to third person.
6. To claim compensation for injury caused because of principal’s neglect or want of skill.

• WHEN AN AGENT IS PERSONALLY LIABLE? (Sec. 230 and 231)
• General Rule – No personal liability [ Sec.230]
  In the absence of contract to contrary, an Agent cannot –
  • personally enforce contracts entered into by him, on behalf of his Principal,
  • be held personally liable for them.
    This is because the Agent merely acts on behalf of his Principal. Thus, he enjoys immunity from being personally sued.
• Exceptions, i.e. Agent personally as well as Joint & Severally Liable
• The Agent is personally liable in the following cases –

1. Foreign Principal [Sec.230] : Where the contract is made by an Agent for the sale  or purchase of goods for a merchant resident abroad.
2. Undisclosed Principal [Sec.230]: Where the Agent does not disclose the name of his Principal.
3. Principal cannot be sued [Sec.230]: Where the Principal, though disclosed, cannot be sued, e.g. Principal becoming of unsound mind, subsequent to appointment of agent.
4. Acting for a Principal not in existence: Where the Agent acts for a Principal who is not in existence at the time of making contracts, he shall be personally held liable e.g. contracts entered into by Promoters before incorporation of a Company are made in their personal capacity and hence personally liable.
5. Agency coupled with interest [Sec.202] : Where the Agent has an interest in the subject matter of agency.
6. Agent guilty of Fraud [Sec.238] : Where an Agent is guilty of fraud or misrepresentation in matters that are outside the scope of his authority, he is personally liable, and do not affect his Principal.
7. Agent exceeds authority & act not ratified: Where an Agent acts either without any authority or exceeds his authority, he shall be held personally liable when the principal does not ratify his acts.
8. Agent receives or pays money: Where an Agent receives or pays money by mistake or fraud to a third party, he shall be personally liable to such third party. Also ha can personally sue the third party if the fraud or mistake is accountable to such third party.
9. Express Agreement for personal liability: Where an Agent expressly aggress to be personally bound.
10. Execution of Contract in his own name: Where an Agent executes a contract in his own name, without disclosing that he is acting as Agent for a Principal, he shall be personally liable, e.g. An Agent signs a Negotiable Instrument without making it clear that he is signing it as an Agent only, he shall be held personally liable on the same. He would be personally liable as Maker of P/N, even though he may be described as Agent.
11. Trade custom or usage: Where trade usage or custom makes an Agent personally liable.
12. Agent with special interest: An Agent with special interest or with a beneficial interest, e.g. a Factor or Auctioneer, can sue and be sued personally. [Subramanya vs Narayana]
13. Action against Agent or Principal [Sec 233] : Where the Agent is personally liable, a person dealing with him may hold – (a) either him or (b) his Principal or (c) both of them liable. The liability of Principal and Agent is “joint and several”.
14. Exclusive liability [Sec. 234]

• Where a person has made a contract with an Agent and – Induces such Agent to act upon it in the belief that only his principal would be held liable,Induces the principal to act upon it in the belief that only his Agent would be held liable.

  Such Third person cannot later on, shift the liability on to – The Agent, orThe principal, respectively.

• AGENCY COUPLED WITH INTERST(Sec 202)
• When agency is created for securing some benefit to the agent over and above his remuneration as an agent, it is called as agency coupled with interest.
• The interest should exist at the time of creation of agency. If the interest arises after the creation of agency then it would not be called as agency coupled with interest.
• Agency coupled with interest cannot be terminated to the prejudice of such interest.
• Agency coupled with interest does not terminate even on the death or insanity of the principal.
• Thus, such agency is irrevocable to the extent of such interest.
• IRREVOCABLE AGENCY(Sec.202 and 204)
• Agency coupled with interest
  Such agency cannot be terminated to the extend of such interest
• Part exercise of authority by the agent
  Where the agent has partly exercised the authority, the principle cannot revoke the authority so far as regard such acts and obligation as arise from already done in the agency
• Personal liability incurred by agent
  Where the agent has incurred personal liability, the agency is irrevocable
• DELEGATION OF AUTHORITY(Sec.190)
• General rule
  The general rule is that an agent cannot lawfully employ another act, which he has expressly or impliedly undertaken to perform personally.
• Exceptions
  • There is a custom or usage of trade to that effect.
  • Where power of the agent to delegate can be inferred from the conduct of the both the principle and the agent.
  • When the principal is aware of the intention of the agent to appoint sub agent by the does not object to it.
  • When principle permits appointment of a sub-agent.
  • If the nature of the agency is such that the sub-agent is necessary.
  • Where the acts to be done is purely ministerial not involving confidence or use of discretion.
  • Where unforeseen emergencies arise rendering appointment of a sub-agent necessary.
• LEGAL RELATIONSHIP BETWEEN THE PRINCIPLE AND SUB-AGENT AND AGENT(Sec.190, 192 and 193)
• If sub-agent is properly appointment
  • Principal is bound to the third parties for the acts of sub-agent.
  • The agent is responsible to the principal for the acts of sub-agent.
  • The sub-agent is responsible to the agent for the acts done by him.
  • The sub – agent is not responsible to the principle, except in case of fraud or willful wrong.
• If sub – agent is not properly appointed.
  • Principal is not bound to the third parties for the acts of sub – agent.
  • The agent is responsible to the principle and third parties for the acts of sub – agent.
  • The sub – agent is responsible to the agent for the acts done by him.
  • The sub – agent is not responsible to the principle.
• LIABILITY OF PRINCIPAL TO THIRD PARTIES FOR THE ACTS OF AGENT (Sec. 226 to 228)
• Principal is liable for the acts of agent
  • The principal is liable for all the acts of an agent which are lawful and within the scope of agent’s authority.
  • The contracts entered into by the agent on behalf of the principal have the same legal consequences as if these contracts were made by the principal himself.
• When agent exceeds his authority
• Whether the acts done within the authority are separable from the acts done beyond authority.
  If yes – The principal is not bound for excess acts done by the agent.
  If no – The principal is not bound by the transaction and the principal can repudiate the whole transaction.
• TERMINATION OF AGENCY(Sec.201 to 210)
• A.  By the acts of parties
• By agreement
  The principal and the agent may mutually agree to terminate the agency, at anytime.
• By revocation
  • When the agency is coupled with interest, the principal cannot revoke the agency to the prejudice of such interest.
  • The principal can revoke the authority at anytime before, the authority has been exercised so as to bind the principal.
  • The principal cannot revoke the authority given to his agent after the authority has been partly exercised.
  • When agency if for fixed period, the principal must make compensation to the agent for premature revocation of agency without sufficient cause.
  • Revocation may be expressed or implied from the conduct of the principal
• By the agent renouncing the business of agency
  • Renunciation may be expressed or implied from the conduct of the agent.
  • When agency is for fixed period, the agent must make compensation to the principal for premature renunciation of agency without sufficient cause.
• B.  By operation of law

1. Completion of business of agency
2. Death or insanity of the principal or agent
3. Where the principal or the agent, being a company is dissolved
4. Destruction of subject matter of agency
5. Principal becoming insolvent
6. Expiration of period where agency was for a fixed period.

• Features of Agency
• The law of agency is characterized by several essential features that govern the principal-agent relationship:

1. Fiduciary Duty:
   The agent has a fiduciary duty to act in the best interest of the principal. The agent must exercise care, diligence, and loyalty in performing their duties.
2. Authority of Agent:
   The agent’s authority can be express, implied, or derived from necessity or ratification. Agents must act within the scope of their authority.
3. Liability of Principal:
   The principal is bound by the acts of the agent when the agent acts within their authority. The principal is also liable to third parties for the acts of the agent.
4. Termination of Agency:
   An agency can be terminated by mutual agreement, revocation by the principal, renunciation by the agent, or by operation of law (such as the death or insanity of the principal or agent).

• Latest Case Law on Agency
• Oriental Insurance Co. v. Rajkumari (2021)
  In this case, the Supreme Court of India addressed the issue of agency by necessity. The court held that an insurance agent acted out of necessity when they agreed to extend the insurance policy to protect the interests of the principal, even without direct authorization. The court reinforced the principle that an agent must act in good faith to protect the principal’s interests in emergency situations.
• Gopal Das v. Sri Thakurji (2019)
  This case examined agency by estoppel, where the court held that the principal cannot deny the existence of an agency when they have allowed a third party to rely on the agent’s authority. The ruling clarified that the principal’s actions or representations can create an agency relationship even in the absence of an express agreement.
• Conclusion
• The agency under Indian Contract Act, 1872 is a key area of contract law that allows principals to conduct business and legal transactions through agents. The contract of agency can be created through various modes, including express agreements, implication, ratification, or necessity. The relationship between the principal and the agent is based on trust, and the agent must act in the best interests of the principal. Understanding the kinds of agents and the modes of creation of agency is vital for anyone involved in business or legal dealings where the appointment of agents is necessary.