Business Law

Agency under Indian Contract Act, 1872

By Subhi Shukla

Introduction

Whenever one party (the principal) sanctions the other party (the agent) to perform a certain duty or act on his behalf and the agent consents for the same so this is termed as Agency. Let’s understand this with an example, Alisha authorized Aman to submit some documents at a government office, on her behalf. So this relationship between them is said to be that of an Agency where Alisha acts as a principal and Aman acts as an agent.

In the Indian Contract Act, 1872 contract of agency is explained in detail under section 182 – 238 of Chapter 10. The principal sanctions the agent to perform certain acts on his behalf with the capacity to bind them with a legal relationship then the contract of agency comes into existence between both parties.

Needs for Agency of Contract

When the principal himself is unable to perform certain acts due to some reasons, circumstances, or situations he gets it done by the means of the contract of agency. There are certain rights and duties to be fulfilled by the principal as well as the agent.

Principal and Agent

The party who is authorized to perform certain acts or deals is termed as the agent. And the party that authorizes a person to act on his behalf is termed as the principal. Both terms are defined in the Indian contract act 1872 under section 182. It is not mandatory for the agent to be authorized by the principal himself. It is not necessary that the relationship between both parties is the outcome of a certain contract. It can arise due to many factors such as obligation by the law, necessity, etc.

An agent is a person who acts according to his circumspection and thought process, he carries the capacity to make the authorizer (the principal) be directly liable for the loss caused to any third party. He enables the principal to be liable for the loss suffered by the third party due to his own fault.

Consent plays a significant role when it comes to contracts. Consent means to enter into a contract willingly without any coercion by the other party. Even in the contract of agency, it is an essential element. However, it is not important for the consent to be explicit, In order to create a contractual relationship between the principal and the agent.

If in case both the parties deny their acceptance for the association, the court of law on its discretion decides the consent for the formation of a contractual relationship at a given circumstance.

Types of Contract of Agency

Expressed Agency

There are no fixed criteria for the contract of an agency to be in a written or oral format. Here the parties express their willingness to enter into a contract and act accordingly.

Implied Agency

When a contract is made other than words or writing by means of some action or acts so this is termed as Implied agency

Agency Estoppels

It is mentioned under section 237 of the Indian contract act 1872. When you represent something as fact even though it is not, and you preclude from denying the truth so this is the agency of estoppel.

Wife as Agent

Whenever we deal with a case involving a husband and wife where both the parties are legally married and are living together we presume that the wife has the husband’s authority to pledge his credit for the purchase of necessities of life suitable to their standard of living. However, there are cases when the husband is not liable:-

  • When the husband himself ask the tradesman to stop supplying goods on credit to his wife
  • In case he has denied his wife to use his credit
  • When the husband has already supplied his wife with the articles in question
  • When he supplies his wife with a sufficient allowance

Agency of Necessity

It is mentioned under sections 188 and 189, in a situation where one party who has been entrusted with another’s property has to sustain some unauthorized expenses in order to protect and preserve it is termed as an agency of necessity. It is also known as agents authority in emergency cases.

 Agency by Ratification

 Whenever the agent acts beyond its authority which the principal party has not consented to, In such a case the principle is not bound by the contract but even in such a scenario if the principal can ratify the act done by the agent and accepts the liability so here the agency by ratification comes into being.

 Essentials of contract of Agency

 Apart from the general necessary elements given as under section 10, there are some more essentials for the contract of agency they are:-

  1. Competency of both the parties
  2. Competency of the principle

 As per section 183 let down by the Indian contract act, the Principal has to follow certain criteria to be eligible to enter into a contract:-

  • The principal must have attained the age of majority according to law
  • He should be of sound mind and
  • He should not be disqualified from getting into a contract by any law to which he is subject to

Competency of the agent

 Any person can become an agent regardless of the fact that the person is of sound mind. Any person whether it be a minor or a person of unsound mind can act as an agent between the principal and the third party. Such parties even after not being competent enough to contract can enter into the contract of the agency and possess the capacity to represent and bind their principals into a valid contractual relationship.

No requirement of Consideration

 When at the desire of the promiser the promise is or any other person does or abstains from doing, has done or abstained from doing, or promises to do or to abstain from doing something such act or promise is called consideration.

According to the Indian contract, act consideration is not considered to be a very significant element for the purpose of creating a contract of agency. Hence consideration is not required while forming the contract of agency however this feature does not harm the agent in regards to his legal remuneration.

Important Judgements

Narandas v. Papammal [1967]

In the following case Supreme Court held that as per section 213, two types of situations can exist: First where the agent demands the principal to render the accounts to him, and second were the principal demands the agent to render the accounts to him. Before this case came into existence only the principal had the authority to ask the agent to render the accounts and the agent was always expected to provide him with the same. But after this judgment, both the parties were held responsible to share details of the accounts with each other whenever demanded by any of the parties.

 Bussche v. Alt [1878]

In the following case, the principal asked the agent to sell his old ship. And the agent tried to sell the ship but even after much hard work he wasn’t able to find a customer for the ship then the agent himself decided to purchase the ship from the principal and he did so without notifying the principal about the same. After a few days of purchasing the ship from the principal the agent manages to get a customer and he sells him the ship at a much higher price than that of what he has purchased from the principal so in this case, the court held that agent was liable to pay the profit to the principal earned by him from the sale of the ship. Because secret profits are not allowed to the Agent.

Types of Agent

The word agent briefs about a number of acts and activities. There exist various kinds of agents in the business world. A Broker is considered as one of the mercantile agents. The principal appoints him with the intention to make contracts by arranging prices for the purchase and sale of the property. The Factor is also a mercantile agent. He also gains the possession to sell the goods. An agent usually drops out after negotiating between the principal and the third party, not before receiving his part of remuneration. He cannot be liable for the third party’s failure to perform the act.

Duties of an Agent

The agent has to fulfill certain duties in the contract of the agency. The following are the duties of an agent:

(I) Oversee the Principal’s Business

The agent must manage his principal’s business. He should conduct it according to the directions as given by the principal. If the agent contradicts by not following the guidelines as prescribed by the principal, then he must make it good with the principal. If he makes any gain by opposing the principal, then he is accountable to pay it to the principal.

(II) Reasonable Skill and Diligence

The agent has to act diligently and skillfully. If in case he fails to do so then the agent himself has to compensate the principal for his negligence act. 

(III) Communicate with Principal

Communicating with the principal and acting according to the guidelines given by him is one of the significant duties to be fulfilled by the agent.

(IV) Avoid Conflict of Interest

If the agent doesn’t pay any heed to the guidelines given to him by the principal and if the principal is not satisfied with the act of his agent then in such a scenario he can deny the transaction. The following are the reasons:

  • If the agent has given the materials in a dishonest way.
  • If the principal has a disadvantage of such a dealing
  • Secret Profits are not allowed

When the agent acts without consent and knowledge of the principal and if he makes profit out of such acts then the principal has complete claim over the profits earned.

(V) Remit Sums

The agent is expected to provide the principal with the complete sum which is earned from the transaction. However, he is allowed to deduct his share in the transaction.

(VI) Not to Delegate

When the agent himself delegates the task to some other person which has been legally delegated to him, In such cases the agent’s agent is termed as sub-agent. An agent is only allowed to hire a sub-agent only in circumstances like

  • Consent of principal
  • Ministerial action 
  • Trade Custom Nature of work

Acts did by the sub-agent bind the principal in the same manner as the agent does. If in case the sub-agent appoints another person and delegates the task to him then such a person will become an agent to the principal and will be known as a substituted agent. 

(VII) Position of Minor in a Contract of Agency

 A minor is not considered a competent party when it comes to getting into a contract because an agreement by a minor is void. An act which a minor cannot do himself, he cannot do that even if he hires a major agent for the same. In a nutshell, a minor cannot appoint an agent or in simpler terms, he cannot become a principal. As mentioned in section 183 any person of sound mind and has attained the age of majority according to the law which he is subject to may employ an agent.

 There is no restriction for a minor to become an agent because an agent merely acts as a connecting link between the principal party  and the third party and it is they who should be competent to contract.

 Section 184 provides that as between the principal and third-person any person even a minor is capable of becoming an agent. Even in such cases where the agent was a minor, the principal and the third person would be legally bound to each other.

 It should be noted that a minor party is qualified to become an agent for the purpose of binding the third person and his principal. If a minor is authorised to act as an agent he will be able to create a contract between the principal and the third person but if we see the other way round, the minor when acting as an agent cannot be held liable towards the principal because of his minority.

Conclusion

As we have understood now, any party who is authorised to represent the other party in his authority with the capacity to bind that person into a legal relationship can be termed as an agent. And the party whom he represents is termed as the principle. Contract of agency is highly regulated by the guidelines as given under chapter 10 of the Indian contract act 1872 and it covers almost every aspect related to the contract of agency. However there remain certain exceptions according to the requirements of the situation.

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