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LAB/U1 Topic 14 Law of Agency- Essentials, Kinds of Agents, Rights and Duties of Agents

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.

Meaning

Section 182 of the Indian Contract Act defines an “agent” as a person employed to do any act for another or to represent another in dealing with a third person. The person for whom such act is done, or who is so represented, is called the “principal”. Chapter 10 of the Indian Contract Act deals with the rights and liabilities and duties of principal and agent inter se as well as those of third parties. In an agency one person (principal) employs another person (agent) to represent him or to act on his behalf, in dealing with the third person. If an agent has been duly authorized to do an act on behalf of the principal, the principal is bound by such act with the third party as if the principal had done the act himself.

Different Kinds of Agents

Depending on the kind of authority given to the agent to act on behalf of the principal, the agents are of the various kinds.

  1. Auctioneers: An auctioneer is an agent whose business is to sell goods or other property by public auction, i.e., by open sale. An auctioneer is a mercantile agent within the meaning of Section 2(9) the Sale of Goods Act. He only has the authority to sell goods and not to give warranties on behalf of the seller, unless expressly authorized in that behalf.
  2. Factors: A factor is also a mercantile agent who is entrusted with the possession of the goods for the purpose of sale. He has the power to sell goods on credit and also to receive the price from the buyer. A factor has the right of general lien over the goods belonging to his principal, which are in his possession, for the general balance of the account.
  3. Brokers: A broker is an agent who has an authority to negotiate the sale or purchase of goods on behalf of his principal, with a third person. Unlike factor, he himself has no possession of the goods. He gets his commission whenever any transaction materializes through his efforts.
  4. Del Credere Agents: He is an exception to the rule that an agent is not answerable to his principal for the failure of the third party to perform the contract. A del credere agent is a mercantile agent, who, on payment of some extra commission, known as del credere commission, guarantees the performance of the contract by the third person. On the failure of the third person to pay, the principal can make the del credere agent liable.

Some Features of a Contract of Agency

  1. Section 183 of the Indian Contract Act says that the principal should be competent to contract. Since through an agent, a contract is to be created between the principal and the third person, it is necessary that both of these parties should be competent to contract. Therefore, any person who is of the age of majority and of sound mind may employ an agent.
  2. The agent may not be competent to contract. The capacity of the agent could be looked from two angles i.e capacity of the agent to act on behalf of the principal so as to bind the principal to the third person; and, the capacity of the agent to bind himself by a contract between himself and the principal. Considering the first case, Section 184 of the Indian Contract Act provides that, any person can become an agent even though he is not competent to contract. But, in the second case where it is about the capacity of the agent to bind himself by a contract between himself and the principal, it is necessary that the agent should be competent to contract. Thus, if an agent is minor, through him a valid contractual relationship will be created between the principal and the third person, though such an agent himself will not be responsible for his acts to his principal.
  3. No consideration is necessary to create an agency. As per Section 185 of the Indian Contract Act, no consideration is necessary to create an agency. From the fact that the principal agrees to be bound by the act of the agent, and he has a duty to indemnify the agent, sufficient consideration is presumed, and, therefore, no other consideration is necessary for such a contract.

Duties of an Agent

  1. Duty not to delegate his duties. Latin principle of “delegatus non potest delegare” states that an agent to whom some authority has been delegated cannot further delegate that authority to another person. The has been imbibed in Section 190 of the Indian Contract Act. It means an agent who agreed to act personally cannot appoint a sub-agent to do that job. But, there are certain exceptions to this rule where an agent can employ a sub-agent and these are, where there is a custom of trade to that effect, when the nature of agency so requires, when action does not require a personal skill and when the principal expressly or impliedly agrees to the appointment of a sub-agent for doing certain work.
  2. Duty to follow the principal’s directions. an agent is bound to conduct the business of the principal according to the directions given by the principal. In absence of any directions, the agent should conduct the business according to the custom which prevails in doing the business of the same kind at the place where the agent conducts the business. When the agent does not act as stated above, if any loss is sustained by the principal, he must make it good to his principal, and if any profit accrues, he must account for it (Section 211).
  3. Duty to show proper skill and care as in generally possessed by persons engaged in similar business unless the principal has notice of his want of skill. According to Section 212, he is bound to make compensation to his principal, in respect of the direct consequences of his own neglect, want of skill, or misconduct.
  4. Duty to render proper accounts to the principal on demand (Section 213).
  5. Duty to communicate with the principal and in case of difficulty use all his diligence in communicating with his principal, and in seeking to obtain his instructions (Section 214).
  6. Duty to not deal on his own account in the business of the agency, unless the principal consents thereto. And, if the agent does so without the prior consent of the principal, the principal may, repudiate the transaction by showing either that any material fact has been dishonestly concealed from him or that the dealings of the agent have been disadvantageous to him (Section 215) or claim from the agent any benefit which may have resulted to him from the transaction (Section 216).
  7. Duty to pay sums received by him on the principal’s account (Section 218). Before making the payment to his principal, the agent is entitled to deduct out of the same sums as are lawfully due to him (Section 217).

Rights of Agent and Duties of Principal

  1. Right to remuneration: An agent is entitled to remuneration for the work of agency done by him, but an agent’s remuneration does not become due until the completion of the act assigned to him. According to Section 219, this rule is subject to any special contract between the principal and the agent. However, as per the rule laid down in Section 220, an agent who is guilty of misconduct in the business of agency is not entitled to any remuneration in respect of that part of the business which he has misconducted.
  2. Right to retain sumse the agent has a duty to pay his principal all the sums received on the principal’s account but has the right to retain money due to himself (Section 217).
  3. Right of lien on principal’s property until commission, etc. due to him has been paid (Section 221).
  4. Right to be indemnified. It is very crucial, the principal is bound to indemnify an agent against the consequences of all lawful acts done by such agent in the exercise of the authority conferred upon him (Section 222). The agent is also entitled to indemnify against the consequences of the act done in good faith, even though the act causes an injury to the rights of third persons (Section 223). And, if an agent commits crime at the instance of the principal, the agent cannot claim indemnity from the principal against the consequences of the crime, even though the principal has expressly or impliedly, promised to indemnify him (Section 224).
  5. Right to compensation for damage due to the principal’s neglect in respect to an injury caused to such agent (Section 225).

Relations of Principal and Agent with Third Person

Liability of the Principal

According to Section 226 of the Indian Contract Act, an agent acts on behalf of the principal for creating contractual relationship between the principal and the third persons, and, therefore, for the contracts entered into through an agent, the principal becomes bound towards a third person in the same manner as if he entered into the contract himself.  Apart from being bound by the acts which are done under the principal’s authority or for which he is bound in an emergency, by estoppel or ratification, the question of the principal’s liability arises in the following cases:

  1. Principal’s liability when the agent exceeds authority –Section 227 states that the principal is bound only for such acts of the agent which are within the authority of the agent. He is not liable for the agent’s acts done outside the authority. If a part of the agent’s act is within the authority and a part outside it, and both can be separated, the principal is bound by that part which is within the authority, and not for that part which is outside the authority. And Section 228 talks about how if the two parts cannot be separated, then the principal is not bound to recognize the transaction.
  2. Notice to the agent is notice to the principal, but it should be in the course of business (Section 229).
  3. Principal’s liability for the agent’s fraud, misrepresentation or torts.According to Section 238, when there is a fraud or misrepresentation by an agent while making an agreement on behalf of the principal, it not only affects the validity of the contract but also makes the principal liable, as if that fraud or misrepresentation has been made by the principal. The liability of the principal is based on the rule ‘Qui facit per alium facit per se’, which means the act of the agent is the act of the principal. For example, in National Bank of Lahore v. Sohan Lal, the manager of a bank, tampered with the locks of the lockers in which plaintiffs’ valuables were kept, the bank was held vicariously liable for the loss which has been caused to a customer due to the theft of their valuables from the lockers.

Personal Liability of the Agent

According to the Section 230 of the Indian Contract Act, when an agent acts on behalf of his principal in his dealings with a third person, a contractual relationship between the principal and the third person is created and the agent is not personally liable. It is the principal who is liable to the third person. Nor is the agent entitled to enforce the contracts entered into on behalf of the principal and this is subject to contract to the contrary.

In the following exceptional cases, the agent is presumed to have agreed to be personally bound :

  1. When the agent acts on behalf of a foreign principal –When an agent has entered into a contract for the sale or purchase of goods on behalf of a principal resident abroad, the presumption is that the agent undertakes to be personally liable for the performances of such contract.
  2. When the agent acts for an undisclosed principale. when he does not disclose the name of the principal then there arises a presumption that he himself undertakes to be personally liable. When the principal is undisclosed, the liability under Section 230 is of the agent only, and the principal cannot be sued in such a case. And under Section 231, if an agent makes a contract with a person who neither knows nor has the reason to suspect that he is an agent, his principal may require the performance of the contract. This Section also makes clear that the rights of a third person, he has against the principal. If the principal wants to obtain the performance of the contract, he can do so subject to the rights and obligations between the agent and the third person (Section 232).
  3. When the principal cannot be suede. he is someone who is not potent to contract, the agent is presumed to be personally liable. (Section 230)
  4. When there is a contract for the agent’s personal liability – Section 230 mentions the general rule that the agent is not personally liable also states that this is so “in the absence of any contract to that effect”. If an agent undertakes a personal liability, for example, he purchases the goods mentioning himself as the purchaser and does not disclose that he is an agent and mentions that the purchaser is under obligation to perform the contract, the agent will be personally liable in such a case (Alliance Milla v. India Cements Ltd.)
  5. When the agent commits a breach of legal obligatione fails to perform a legal obligation, such as a contractual duty or statutory duty or commits a tort against a third person, that renders him personally liable for the consequences thereof.
  6. Liability of pretended agent –if the agent pretends but is not an actual agent, without any authority and the principal does not rectify the act but disowns it, the pretended agent will be himself liable (Section 235).
  7. Liability for breach of warranty of authority –When the agent exceeds his authority, misleads the third person in believing that the agent he has the requisite authority in doing the act, then the agent can be made liable personally for the breach of warranty of authority.
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