MODULE -II

CONTARCT OF AGENCY

Contract of Agency
Definition: Agency can be defined as the relationship between two
persons, wherein a person has the authority to act on behalf of another,
bind him/her into a legal relationship with the third party. There are two
parties in a contract of agency – principal and agent.

Contract of Agency is based on the fact that one person cannot

perform all the transactions and so he can appoint another perform
or act on his behalf.

Intention to Act on behalf of the principal:

There shall be an intention of the agent to act on behalf of the principal.
When the agent enters into a contract for himself, then the principal will not
be liable.

Who is a Principal?

Any person who employs another person to perform an act and who is
being represented by another person in dealing with the third party is the
Principal.

Who is an Agent?
A person employed by the Principal, to act on his behalf, represent him in
the dealings with the third party and also to bring him into a contractual
relationship with the third party, is called an Agent.

In a contract of agency, the agent is not just the bridge between the
principal and the third party, but he can also make the principal answerable
for the acts performed by him. Here it must be noted that while the agent is
acting for the principal, he works in the capacity of principal

Characteristics of the Agency1

The basic characteristics of the contract of the agency are discussed as
under:

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 Legal Binding: The crux of the contract of agency is that the principal is
legally bound by the acts performed by the agent.

 Consideration is not mandatory: There is no legal requirement of

consideration, to support the relationship between the principal and agent.

 Who may be a Principal?: One who is legally competent to contract is

eligible to employ an agent, i.e. he should have attained the age of 18
years and of sound mind.

 Who may be an Agent: ? a minor can also act as an agent, though he is

not having the capacity, however, he can have the authority to act as
agent.

This is due to the fact that an agent initiates a contractual relationship

amidst the principal and third party, and so the contractual capacity of the
agent is irrelevant.

Creation of Agency

The agency can be created in the following ways:

1. Express Agency: One can enter into the contract of agency through an
express agreement, i.e. oral or written. In a written contract of agency, the
power of attorney is transferred in the name of the agent, conferring him
the authority and power to act on behalf of the principal, subject to the
terms and conditions specified in the contract.

When the purpose of creation of agency is to transfer the immovable

property, it is required to be registered,
2. Implied Agency: When something is not directly or clearly stated, it is said
to be implied. Therefore, the implied agency is created by way of conduct,
the situation of the parties, i.e. principal and agent, or necessity of the case.

o Agency by Estoppel: Suppose a person by his conduct informs another

person that a particular person is his agent and the person who is signified
as an agent is present and hearing at the time when it is intimated. Now, if
the third person enters into a contract with that person thinking that he is
the agent. This is the case of agency by estoppel, where the agent will be
precluded from refusing his authority

o Agency by holding out: For this some prior or affirmative act on behalf of
principal is required to establish the agency.

For exp: P authorised his agent A to habitually buy goods from T on credit
and pay for them. On one occasion he pays him ready cash to buy goods
from T. Agent misappropriates the money and bought the goods on credit
from T. Now T can recover the price from P as he had held out A as his
agent on previous occasions.

o Agency of Necessity: There may be certain circumstances that compel

the parties to enter into a contract of agency. Suppose a person is
entrusted with property or goods of another person, he is obligated to take
reasonable care of it as well as to incur necessary expenses so as to
preserve and protect such property.

o Agency by Ratification: Agency can also be created by ensuing

ratification. When a person who does not have any authority claims to act
as an agent or a legally employed agent performs an act which is beyond
his authority, then the principal is not legally bound by the contract entered
into on his behalf. However, he may ratify the act performed by the agent
and accept the liability. This results in an agency by ratification.

In such a case, the parties i.e. the principal and agent will be in the same
position if the acts were performed with authority.

3. Agency by operation of law

Partners of partnership firm and promoters when company is formed .

TYPES OF AGENTS

1. Special Agent

The special agent is one who has authority to act only in a specifically designated
instance or in a specifically designated set of transactions. For example, a real estate
broker is usually a special agent hired to find a buyer for the principal’s land.

2. General Agent:

   A General Agent is one was employed to do all acts connected with particular
business or employment.

For example, A manager of a firm. He can bind the principal by doing

 anything which Falls within the ordinary scope of that business. Whether he is
actually authorised for any particular act or not, is immaterial provided that
third party acts bona fide.

3. Universal Agent :

  A Universal agent is one who is authorised to do all the acts which the
Principal can lawfully do and can delegate.

4. Del Credere Agent:

  He is one who in consideration of an extra commission guarantees his
Principal that the third person with whom he enters into contracts shall
perform its financial obligations.

Rights and Duties of an agent

Duties
1. To work as per the directions of the principal
An agent is bound to conduct the business of his principal according to
the directions given by the principal, or, in the absence of any such
directions, according to the custom which prevails in doing business of
the same kind at the place where the agent conducts such business.
When the agent acts otherwise, if any loss be sustained, he must make
it good to his principal, and, if any profit accrues, he must account for
it.
For ex.
 P orders A to insure the goods. A failed and goods got damaged. A is
responsible to P

2. Skill and diligence required from agent:

                 An agent is bound to conduct the business of the agency with

as much skill as is generally possessed by persons engaged in similar
business, unless the principal has notice of his want of skill. The agent is
always bound to act with reasonable diligence, and to use such skill as he
possesses; and to make compensation to his principal in respect of the
direct consequences of his own neglect, want of skill or misconduct, but
not in respect of loss or damage which are indirectly or remotely caused
by such neglect, want of skill or misconduct.

A, an agent for the sale of goods, having authority to sell on credit, sells to B on
credit, without making the proper and usual inquiries as to the solvency of B. B
at the time of such sale is insolvent. A must make compensation to his principal
in respect of any loss thereby sustained.

3. Duty to render proper accounts

    According to Section 213 of Indian Contract Act 1872, An agent is

bound to render proper accounts to his principal on demand.

4. Duty to communicate with principal:

    It is the duty of an agent, in cases of difficulty, to use all reasonable

diligence in communicating with his principal, and in seeking to obtain his
instructions.

5. Duty to pay sums received for principal : 

        According to Section 218 of the said Act, An agent is bound to pay to
his principal all sums received on his account.
6. To protect and preserve the interests of the principal in case of his

death or insolvency

7. Not to make Secret Profits

 Section 216 of Indian Contract Act, deals with Principal's right to benefit
gained by agent dealing on his own account in business of agency.  An
Agent, without the knowledge of his principal, should not deal in the
business of agency on his own to make secret profit.

8. Not to set adverse title

9. He shall not appoint a sub-agent.

Rights of agents
1. Right of retainer

Agent may retain, out of any sums received on account of the principal in the
business of the agency, all moneys due to himself in respect of his remuneration
and advances made or expenses properly incurred by him in conducting such
business.

2. Right to Remuneration

As per section 219, an agent has a right to receive the agreed remuneration or in
absence of agreement, a reasonable remuneration for rendering the services to the
principal that are not voluntary or gratuitous. He becomes eligible to receive the
remuneration as soon as he completes the work that he undertook.

Green vs Barlett

An agent was appointed to sell a house. Agent held an auction but could not find a
purchaser. One of the person who attended the auction obtained the address from
the agent and directly contacted the owner and finalised the deal without
intervention of the agent. Held agent was entitled to his commission as the
transaction was the result of his efforts.

3. Lien on Goods

Some agents who have the possession of goods, securities or properties of their
principal also have a lien on these goods, securities or properties regarding their
remuneration and also for any expenses or liabilities that they incur.

4. Right to Indemnity :  Agent to be indemnified against

consequences of lawful acts. Indemnity means promise make
good the loss (See.. Contract of indemnity ) According to
Section 222 of the Indian Contract Act, 1872 "The employer of
an agent is bound to indemnify him against the consequences of
all lawful acts done by such agent in exercise of the authority
conferred upon him.

Illustrations 

  (a) B, at Singapure, under instructions from A of Calcutta,

contracts with C to deliver certain goods to him. A does not
send the goods to B, and C sues B for breach of contract. B
informs A of the suit, and A authorities him to defend the suit.
B defends the suit, and is compelled to pay damages and costs,
 and incurs expenses. A is liable to B for such damages, costs
and expenses.
5. Right to Compensation :
       According to section 225 of the said Act,  an agent is
entitled to claim compensation for the  injuries suffered as a
consequence or want of skill of the principal. Section 225 reads
as follows -  

    "The principal must make compensation to his agent in

respect of injury caused to such agent by the principal’s neglect
or want of skill.

A Delegate cannot further Delegate. -

the Relationship between a Principal
and a Sub-agent2

Agency is a personal relationship based on mutual trust and confidence between the

principal and the agent. Section 190 provides that an agent cannot lawfully employ
another to perform acts which he has expressly or impliedly undertaken to perform.
Thus, an agent cannot delegate his powers to a third person. The maxim applicable in
this case is delegates non protest delegate: This means that a person to whom
authority has been delegated cannot delegate that authority to another. The reason
for this rule is that confidence in. a particular person is at the root of the contract of
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 agency. Therefore, the agent should perform his responsibilities himself. In other
words the appointment of sub -agent by agent, is not allowed by law.

Section 191 gives the definition of sub-agent in these words: A sub-agent

is a person employed by and acting under the control of the original agent in the
business of the agendy: So sub-agent is the agent of the original agent. As between
themselves, the relation of sub-agent and original agent is that of agent and
principal.

But to the general rule delegate cannot further delegate there are
certain exceptions, where the agent is permitted to delegate his
authority. He may appoint sub-agents. In the following cases:

 Where the principal has expressly allowed his agent to appoint sub-agent. His
consent may. also be implied from the circumstances.

 Where the nature of work demands that a sub-agent should be appointed.

 Where there is a custom of trade to that effect.

 Acts which are of routine nature and can be done by the agent or delegated by him.

 Where in the course of agent’s appointment, unforeseen emergencies arise which

render A necessary to delegate his authority.

 Where the principal knows that the agent intends to appoint a sub-agent.

Consequences of Appointing sub-agent. The legal relation between the principal and

the sub -agent depends upon whether the appointment of the sub-agent is proper or
improper.

In case of proper appointment. Where the sub-agent is

properly appointed, the following consequences emerge as per Section
192:

1. As regards third person, the principal is represented by sub-agent. He is bound by

and is responsible for all the acts of sub-agent.
2. The agent is responsible to the principal for the acts of the Sub-agent. There is no
privity of contract between the principal and the sub-agent and therefore he cannot
sue the sub-agent.

3. The sub-agent is not directly responsible to the principal, except for fraud and
wilful wrong. The sub-agent is responsible to the agent.

In case of improper appointment. The following consequences arise

as per Section 193 when the appointment of sub-agent is improper :

1. The principal is not represented by such sub-agent and so he is not liable for any of
the acts of sub-agent.

2. The agent is responsible to his principal as well as to third party for the acts of his
sub-agent.

3. The sub-agent is not responsible to the principal at all. He will be answerable only
to the agent.

It may be mentioned that the principal may take suitable action against his agent for
wrongfully appointing a sub-agent.

Substituted Agent
Substituted Agent : In some cases, principal asks agent to appoint
another person to do some work (which is normally not done by the agent).
In such case, the another person appointed by agent is not sub-agent, but
is agent of the principal itself. For convenience, such person may be called
Substituted Agent. Section 194 deals with this matter. It states when an
agent holding an express or implied authority to name another person to
act for the principal in the business of the agency, has named another
person accordingly, such person is not a sub-agent but an agent of the
principal for such part of the business of the agency as is entrusted to him.
 A directs B, his solicitor, to sell estate by auction and to employ an auctioneer for
the purpose. B names C, an auctioneer, to conduct the sale. C is not sub -agent but
is A’s agent for the conduct of the sale.

Distinction between Sub-Agent and Substituted Agent : Both sub-agent and

substituted agent are appointed by the agent however,
there are the following points of difference between the two:
1. Appointment : A sub-agent is appointed by the agent. But a Substituted agent may
be appointed by agent or principal.

2. Responsibility : A sub-agent is responsible to the original agent. But the substituted

agent is responsible to the principal for all his acts.
3. Direction and control : A sub-agent works under the control of the agent but a
substituted agent works under the control of the principal.
4. Privity of contract : After the appointment of substituted agent a privity of contract
is established between the principal and the substituted agent, hence both can sue
each other. But there is no Privity of contract between the principal and the sub-
agent.
5. Liability : The agent is responsible to the principal for the acts of the sub-agent but
he is not liable for the acts of the substituted agent, provided he has taken due
care in selecting him.

Personal liability of an agent3

An agent is however, personally liable in the following cases:

1.When the contract expressly provides... A person when .... Into a

contract with an agent may expressly stipulate that he could hold the
agent personally liable in case of breach of Contract the agent agrees to
it, he is personally liable.

2.When the agent acts for a foreign principal:

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           When the contract is made by an agent for the sale or purchase of
goods for a merchant residing abroad , the agent is personally liable .he
can exclude his personal liability by express provision to this effect in the
contract . if he dose so , he cannot be sued on the contract

3.When the acts for an undisclosed principal:  

           Where an agent acts for an undisclosed principal, he is personally

liable though the principal ,on being discovered by the third party is also
liable

4.When he acts a principal who cannot be sued:

           Where the principal is incompetent to enter into a contract ,e.g

where the principals a minor or an idiot, the agent is personally liable as
the credit is presumed to have been given to the agent and not to the
principal

5.Where he sign a contract in his own name:

           An agent who signs a contract in his own name without

qualification, though know to be an agent is understood to have
contracted personally unless a country intention plainly appears from the
body of the instruments .

6.Where he acts for a principal not existence:

  This is rather peculiar case. the promoters of a company, yet to be

incorporated,sometimes enter into contract s on behalf of the company
though in such a case the alleged principal (i.e the company) has no legal
existence till the time incorporation. in such case the promoters are held
to have contracted on their own account and are personally liable.

7.Where the receives or pay money by mistake or fraud: 

  Where an agent receives money from a third party by mistake or fraud,

he is personally liable to third parties .likewise ,he has the right to sue the
third party for the recovery of the money where he has paid it by mistake
or under fraud of third party.

Termination/ Revocation of Agency 4

An agency or agency agreement could also be terminated in any of the
subsequent ways:

 Agreement
 Revocation by the Principal
 Revocation by Agent
 Completion of business of Agency
 Expiry of Time
 Death of the Principal or Agent
 The Insanity of the Principal or Agent
 Insolvency of the Principal or Agent
 Destruction of Subject matter
 Principal or Agent becomes Alien enemy
 Dissolution of a company

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1). Agreement:
An agency or agency agreement can be terminated at any time by
a mutual agreement between the principal and the agent. Therefore, the
authority of an agent terminates when the principal and therefore the agent
complies with to terminate it.
2). Revocation by the Principal:
The principal can revoke the authority of the agent at any time before the
agent has exercised his authority.

3). Revocation by Agent:

An agency or agency agreement can be terminated or revoked by the
agent himself because a person cannot be compelled to work as an agent.
4). Completion of business of Agency:
An agency or agency agreement comes to an end automatically when the
business of the agency is completed.

5). Expiry of time:

If the agent is appointed for a fixed period, the agency comes to an end on
the expiry of the fixed period, even though the business may not have been
completed.

6). Death of the Principal or Agent:

An agency or agency agreement terminates automatically on the death of
the principal or agent.

7). The insanity of the Principal or Agent:

An agency or agency agreement terminates automatically, where the
principal or the agent becomes of an unsound mind. When the principal
becomes insane, the agent cannot act for an individual of unsound mind.

8). Insolvency of the Principal:

An agency or agency agreement is also terminated by the insolvency of the
principal.

9). Destruction of Subject matter:

An agency or agency agreement terminates on the destruction of the
subject matter of the Contract of Agency.
10). Principal or Agent becomes Alien enemy:
If the principal and agent are citizens of two different countries and a war
breaks out between the two countries, the contract of agency(agency
agreement) is terminated.

11 Dissolution of company
When company whether principal or agent is dissolved the contract
of agency automatically comes to an end

Irrevocable Agency5

The Agency is Irrevocable in the following Cases:

1. If the agency is coupled with interest:

When the agency is created for securing some benefit to the agent in
addition to his remuneration as agent then it is called as agency coupled
with interest. According to Section 202, “where the agency has himself an
interest in the property which forms the subject matter of the agency,
cannot in the absence of an express contract, be terminated to the
prejudice of such interest.”

2. Where the agent has partly exercised his authority:

According to Section 204, “the principal cannot revoke the authority given to his
agent after the authority has been partly exercised, so far as regards such ads and
obligations as arise from acts already done in the agency.” In other words, the
principal cannot revoke the agents authority already done in the agency. Also that
the principal would be liable for such acts which have already been done on his
behalf.
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 3. When the agent has incurred a personal liability:
If the agent has incurred any personal liability in the pursuance of a contract of
agency, the principal cannot revoke the agency.