Contract of Agency

Introduction

• The contract of the agency is a legal relationship, where one person appoints another to perform the transactions on his behalf.
• When a person employs another person to do any act for himself or to represent him in dealing with the third persons, it is called a ‘Contract of Agency’.

Legal Provision

• Section 182 of the Indian Contract Act, 1872 defines “agent” and “principle”.
  • 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 “principle”.

What are the essentials of ‘Contract of Agency’?

• Competence of the parties to enter a contract of agency-
  • Section183: Who may employ 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.
  • Section 184: Who may be an agent. - As between the principal and third person, any person may become an agent, but no person who is not of the age of majority and of sound mind can became an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained.
• Considerations not required-
  • As per Section 185 of the Indian Contract Act, 1872(ICA), contract of agency requires no consideration. It comes under the category of those contracts which the law has declared to be valid without consideration.
  • However, these provisions do not deprive the agent of his legal and justified remuneration unless proven to be specified otherwise in the contract.

Methods of Creation of Agency

• By Express agreement:
  • Ordinarily the position given by the principal to his agent is an express expert, in such a case the agent might be selected either by the words expressed or composed.
• By Implied agreement:
  • When agency arises from the conduct of the parties or inferred from the circumstances of the case, it is called implied agency.
    • Example: - A of Calcutta has a shop in Delhi. B, the manager of the shop, has been ordering and purchasing goods from C for the purpose of the shop. The goods purchased were being regularly paid for but of the funds provided by A. B shall be considered to be an agent of A by his conduct.
    • Partners, servants and wives are usually regarded as agents by implication because of their relationship.
• By Necessity:
  • Under certain circumstances, a person may be compelled to act as an agent to the other, e.g., master of the ship can borrow money at a port where the owner of the ship has no agent to carry out necessary repairs to the ship in order to complete the voyage.
  • In such a case of necessity, a person acting as an agent need not necessarily have the authority of the principal. However, the agent must act under pressing conditions and for the benefit of the principal.
• By Estoppel:
  • Section 237 of Indian Contract Act,1872, provides the liability of principal inducing belief that agent’s unauthorized acts were authorized. - ‘When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority.’
  • In the event that an individual addresses by words or leads that someone else is his agent and third party sensibly accepts on such portrayal and goes into an understanding, the individual who addresses so is limited by the act of others, this is known as the agency by estoppel.
• By Holding Out:
  • This might emerge from the connection of manager and worker. An administrator is an agent of the organization. The agency that is held because of any sort of business relationship is known as an agency by waiting.
• By Ratification:
  • Ratification means subsequent acceptance and adoption of an act by the principal originally done by the agent without authority.
  • According to Section 196 of ICA, 1872, “Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his previous authority.”

Classification of Agents

• Special Agent:
  • A special agent is one who is appointed to perform a particular act or to represent his principal in some particular transaction as, for example, an agent employed to sell a house, or an agent employed to bid at an auction.
• General Agent:
  • A general agent is one who has authority to do all acts connected with a particular trade, business or employment.
• Universal Agent:
  • A universal agent is one whose authority to act for the principal is unlimited.
• Commercial and Mercantile Agent:
  • According to Section 2(9) of the Sales of Goods Act, 1930, a ‘Mercantile agent’ means “a mercantile agent having in the customary course of business as such agent, authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods”.
  • It includes factor mercantile agent, auctioneer, broker, commission agent, de credere agent.
• Non-Mercantile Agent:
  • These include attorney, solicitors, insurance agents, clearing and forwarding agents and wife, etc.

Rights of an Agent

• Right to claim reimbursement for expenses-
  • Section 217 of ICA provides that an agent had the right to retain, out of the money received on behalf of the principal, money advance or expenses properly incurred in conducting the agency business.
• Right to receive remuneration-
  • According to Section 19, an agent also has a right to claim remuneration as may be payable to him for acting as an agent.
• Right to indemnification against consequences of all lawful acts-
  • Under Section 222 of the Indian Contract Act, 1872, enables the agent to have a right to be indemnified by the principal against the consequences of all lawful acts done in exercise of his authority.
  • In Sheikh Farid Bakhsh v. Hargulal Singh (1936), the Allahabad High Court said that the principal must pay the remuneration as soon as the agent has substantially performed all the tasks, they have contracted him to perform.
• Right to Compensation-
  • According to Section 225 of the Indian Contract Act, 1872, it entitles the agent to compensation in the event of any injury or loss he suffers because a principal lacks skill or competency.
• Right of Lien-
  • Section 221 of the Indian Contract Act, 1872 says that where the agent is not paid lawful charges, remunerations, or expenses by his principal and the goods are under his control. He can keep the goods until the principal pays the lawful charges.

Duties of Agent

• Duty to Execute the Mandate-
  • Section 211 of the Indian Contract Act, 1872 bounds an agent to conduct the business of his principal according to the principal’s directions or in the principal’s absence, according to the custom of trade.
  • In Pannalal Janakidas v. Mohanlal (1950), the Supreme Court held the agent liable to compensate the principal. Here, the principal told the agent to get the goods insured. The agent charged the premium from the principal but never got the insurance.
• Duty to Act with Care and Skill-
  • Section 212 of the Indian Contract Act, 1872 covers another role of the agent. This law requires an agent to conduct agency business with due care and caution.
  • In Jayabharathi Corporation v. PN Rajshekara Nadar (1991), the Supreme Court said that where the agent misinforms the principal, and the loss occurs because of his misconduct, he is liable to the principal.
• Duty to Render Proper Account-
  • Section 213 of ICA, 1872 binds the agent to render proper accounts to the principal on demand. He must explain those accounts to the principal and produce the vouchers in support of the entries.
• Duty to Communicate with the Principal-
  • As per Section 214 of the Indian Contract Act,1872, in cases of difficulty, it is the agent’s duty to use all reasonable diligence in communication with his principal and seeking to get his instructions.
• Duty Not to Deal on His Account-
  • If the principal wishes to deal on his behalf in the agency’s business, the agent must disclose all material circumstances that have come to his knowledge. He must also get consent from the principal. Non-observance of this duty may lead to:
    • Under Section 215 of the Contract Act, the principal may repudiate the transaction and disclaim all losses.
    • Under Section 216 of the Contract Act, the principal may claim from the agent any benefit which may have resulted in him from the transaction.
• Duty Not to Delegate His Authority-
  • An agent must not delegate his authority to a sub-agent.
• Duty to Protect and Preserve the Interest-
  • Under Section 209 of the Indian Contract Act, when the principal’s death or unsoundness causes the termination of the agency, the agent must protect and preserve the interests entrusted to him on behalf of the representative of the deceased principal.
• Duty to Pay Sums Received-
  • As per Section 218 of the Indian Contract Act, the agent must pay his principal all sums received on his account after retaining all money due to him regarding advances made or expenses properly incurred by him while conducting the business.

Termination of Agency

Section 201 of the act, 1872 describes the various modes of termination of agency.

• Termination of agency by act of the parties: -
  • Agreement
    • The relation of principal and agent, like any other agreement, may be terminated at any time and at any stage by the mutual agreement between the principal and the agent.
  • Revocation by principal
    • According to Section 203, ICA,1872 the principal may revoke the authority of the agent at any time before the agent has exercised his authority so as to bind the principal unless the agency is irrevocable.
  • Renunciation by agent
    • An agent is entitled to renounce his power by refusing to act or by notifying the principal that he will not act for the principal.
• Termination of agency by operation of law-
  • Performance of the contract-
    • Where the agency is for a particular object, it is terminated when the object is accomplished or when the accomplishment of the object becomes impossible.
  • Expiry of time-
    • When the agent is appointed for a fixed period of time, the agency comes to an end after the expiry of that time even if the work is not complete.
  • Death and insanity-
    • As per Section 209 of ICA,1872, When the agent or the principal dies or becomes of unsound mind, the agency is terminated.
  • Insolvency-
    • The insolvency of the agent, it is accepted, also terminate the agency unless the acts to be done by the agent are merely formal acts.
  • Destructions of subject matter-
    • An agency which is created to deal with a certain subject-matter comes to an end by the destruction of the subject-matter.
  • Principal and Agent becoming Alien company-
    • The contract of agency is valid so long as the countries of the principal and the agent are at peace. If war breaks out between the two countries, the contract of agency is terminated.
  • Dissolution of a company-
    • When a company is dissolved, the contract of agency with or by the company automatically comes to an end.