Published On:Saturday, 17 December 2011
Posted by Muhammad Atif Saeed
Contract of Agency
According to Section 182 an agent is a person employed to do any act for other or to represent another in the dealings with the third persons. The person for whom such act is done, or who is so represented, is called “principal”. The function of an agent is essentially to bring about contractual relationship between the principal and third parties. Essentials of relationship of agency. There are two essentials of the relationship of agency:
1. Agreement: Agency depends on agreement but not necessarily on contract. It may arise out of an agreement which does not amount to a contract because one of the parties may lack contractual capacity, or there may be no consideration. As between the principal and the third persons, any person may become an agent. (Sec. 184)
This leads to conclude that an agent may be a person who is not competent to the contract. The principal is liable for the acts of such an agent; the principal cannot hold the agent liable for his excess of authority. Capacity to contract is not essential to enable a person to act as an agent.
Again no consideration is necessary to create an agency (Sec. 185). The fact that the principal has agreed to be represented by the agent is a sufficient ‘detriment’ to the principal to support the contract of agency.
2. Intention to act on the behalf of principal. Whether a person intends to act on the behalf of another is a question of fact. Where a person does intend to act on the behalf of another, agency may arise although a contract between the parties provides that there is no such relationship. But the mere fact that a person says he is an agent does not make him an agent if he intends to act on his own behalf and not on the behalf of principal.
Creation of Agency
- Agency by express agreement:
A contract of agency may be created by an express agreement. Normally the authority given by a principal to his agent is an express authority enabling the agent to bind the principal by acts done within the scope of his authority. A person may, in such case be appointed as an agent either by word of mouth or by writing.
- Agency by implied agreement
An authority is said to be implied when it is to be inferred from the circumstances of the case and the things spoken or written, or the ordinary course of dealing may be accounted circumstances of the case.
Example: A owns a shop in Serampore being himself in Calcutta. He visits the shop occasionally. The shop is managed by B and he is in the habit of ordering goods from C in the name of A, for the purpose of the shop, and of paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods from C in the name of A for the purpose of the shop.
Agency by estoppel:
Where a person by his conduct or by statement has led another person to believe that a certain state of affairs exists that a certain person is his agent, he is estopped from denying the fact of that statement subsequently.
Example: A tells T within the hearing of P that he is P’s agent. P does not object to this statement. Later on T supplies certain goods to A who pretends to be acting as an agent of P. P is liable to pay the price to T.
Agency by holding out: It is a branch of the agency by estoppel. In this case, a prior positive act on the part of the principal is required to establish agency subsequently.
Agency by necessity. In certain circumstances the law confers an authority on the person to act as agent for another without requiring the consent of that person. Such type is called as Agency by necessity. He has the authority in an emergency to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence.(Sec. 189).However the following are the essentials:
1.The agent was not in position to communicate with the principal.
2. There was an actual and definite necessity for acting on behalf of the principal.
3. The act was done to protect the interest of the principal.
4. The agent acted as a man of ordinary prudence and the act was done bonafide.
Agency by ratification
A person may act on the behalf of another without his authority in the following two ways:
(a) Where A acts as B’s agent though he has no prior authority from B but while acting, A contemplates that he is acting for B.
(b) Where A is B’s agent for doing a particular thing but at the time of making the contract with the third party he exceeds his authority which B had given to him.
In both cases, B the principal, may either accept the act of the agent or reject it. If he accepts the act of the agent done without his consent later on he is said to have ratified the act of the agent. If he ratifies it, it places the parties in the same position in which they would have been if A had B’s authority at the time he made the contract.
Effects of ratification.
Ratification relates back to the date when the act was done by the agent. This means the agency comes into existence from the moment the agent acted and not from the time when the principal ratified it.
Requisites of a valid ratification:
(a) The agent must purport to act as an agent for a principal who is in contemplation. The agent must contract as an agent at the time of the contract and the principal, if not named, must be identifiable.
Example: A was authorized by P to buy wheat at a certain price. Acting in excess of his authority, A purchased wheat from X at a higher price in his own name. he did not profess to buy on behalf of P. Subsequently P ratified the act of A, but later refused to take delivery of the wheat. X brought an action against P. It was held that the contract could not be ratified because A did not purport to act as an agent for P. The action, therefore failed. [Keighley, Maxted & Co. vs. Durant, (1901) A.C. 240]
(b) The principal must be in existence at the time of the contract: In order that the intended principal may ratify the contract, he must have been in existence at the time when the contract was entered into.
(c) The principal must have contractual capacity. The agent must act on the behalf of a principal who has the contractual capacity both at the time of the contract and at the time of ratification.
(d) Ratification must be with full knowledge of facts. No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective. (Sec. 198)
(e) Ratification must be done within a reasonable time. Ratification, to be effective, must be done within a reasonable time of the act purposed to be ratified. If ratification is made after the expiry of the time fixed for ratification, it will not be valid.
(f) The act to be ratified must be lawful one.
(g) The whole transaction can be ratified. The principal must ratify a transaction in toto or reject it in toto. There cannot be a partial ratification and partial rejection.
(h) Ratification may be expressed or implied. Ratification may be expressed or implied in the conduct of the person on whose behalf the acts are done. (Sec. 197)
Example. A, without authority, buy goods for B. Afterwards B sells them to C on his own account. B’s conduct implies a ratification of the purchase made for him by A.
(i) Ratification must be communicated. Where a case is founded on ratification, it must be proved that there was communication of the ratification to the person concerned, before the act became irrevocable.
(j) Ratification can be of the acts which the principal had the power to do. The acts which the principal is incapable of doing cannot be ratified. A company, for example, cannot ratify the acts of the directors which are ultra vires the power of the company.
(k) Ratification should not put a third party to damages. Ratification which has the effect of subjecting a third person to damages or of terminating any right or interest of the third person, cannot be made. (Sec. 200)
Agency by operation of law:
Sometimes an agency arises by the operation of law. For example, when a company is first formed, its promoters are its agents by operation of law. Again, according to Sec. 18 of the Indian Partnership Act, 1932, a partner is an agent of the firm for the purposes of the businesses of the firm.
Duties of agent:
1. To carry out the work undertaken according to instructions: 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 conduct such business. Otherwise he is liable to the principal. (Sec.211)
2. To carry out the work with reasonable care, skill and diligence. An agent is bound to conduct the business of the agency with as much skill as is generally possessed by the persons engaged in the similar business.
3. To communicate with the 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. (Sec.214)
4. Not to deal on his own account. If the agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonesty concealed from him by the agent. If an agent without the knowledge of his principal, deals in the business of agency on his own account, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.(Sec. 216)
5. To pay the sums received for the principal. The agent is bound to pay to his principal all the sums received on his account after deducting all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business and also such remuneration as may be payable to him for acting as an agent.(Sec. 217 & 218)
6. To protect and preserve the interests on behalf of the principals representative in the case of his death or insolvency. Where an agency is terminated by the principal dying or becoming insolvent, the agent is bound to take, on behalf of the representative of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him.
7. Not to make secret profit from the agency. The agent must not, except with the knowledge and assent of the principal, make any profit out of the transactions into which he may enter on the behalf of the principal in the course of employment beyond the commission or remuneration agreed upon between them. Any such profit must be paid over to the principal.
8. Not to put himself in a position where interest and duty conflict. The agent must not put himself in a position where his duty and interest conflict unless he has made full disclosure of his interest to the principal.
9. Not to delegate authority. An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or from the nature of the agency, a sub-agent must, be employed.
10. Not to use information obtained in the course of the agency against the principal
Rights of agent against principal:
· Right of retainer. An 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 advances made and expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as an agent. (Sec. 217)
· Right to receive remuneration .The agent has the right 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. (Sec. 219)
An agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted. (Sec. 220)
· Right of lien. In the absence of any contract, an agent is entitled to retain the goods, paper and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him. (Sec. 221)
· Right of indemnification. The principal is bound to indemnify the agent against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him, or injury caused by principal’s neglect.
Liability of the principal.
1. The principal, as a rule is not liable for the acts of the agent after the revocation of his authority.
2. The revocation should be communicated to the agent. If any act is done before the revocation, the principal shall be liable.
3. The revocation of agency, so far as regards third persons, does not became known to them. (Sec. 208)
Rights and liabilities of the agent, the principal and the third parties:
(a) Position of Principal. The principal is bound by all the acts of the agent done within the scope of his actual authority. (Sec. 238)
(b) Position of agent. When an act is done by the agent, in the course of his employment as an agent and within the scope of his authority, the agent is liable neither to the principal nor to the third parties. He has a right to claim remuneration from the principal in respects of such acts.
(c) Position of third parties. As regards third parties, they can enforce the rights arising out of the contract entered into by the agent on the behalf of the principal only against the principal provided the agent:
· Acted within the scope of his authority,
· Did not incur any personal liability,
· Disclosed the facts of agency to the third parties.
(d) Where the agent acts for unnamed principal:
Where the agent discloses that he is acting for an unnamed principal. in such a case, the agent is not personally liable on the contracts entered into by him with the third parties, unless there is trade custom to the contrary. It is however essential that the unnamed principal exists when the agent enters into a contract with third party.
(e) When the agent acts for an undisclosed principal:
Sometimes, an agent enters into a contract with third person without disclosing at all the fact of agency. He not only conceals the name of the principal but also the fact that he is an agent. This gives rise to the doctrine of undisclosed principal. The agent in such a case gives impression to the third party as if he is contracting in an independent capacity.
Meaning and position of sub-agent.
“A sub-agent is a person employed by, and acting under the control of the original agent in the business of the agency.”(Sec. 191)
“An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally unless by the ordinary custom of trade a sub agent may, or from the nature of the agency, a sub-agent must, be employed.”
Exceptions: There are exceptions to the general rule as laid down in Sec. 190:
· The custom of the trade may permit the appointment of a sub-agent.
· The nature of the agency may be such that a sub agent may be necessary.
Where the principal is aware of the intention of the agent to delegate his authority but does not object to it.
· Where the unforeseen emergencies arise rendering the appointment of the sub-agent necessary.
· Where the act to be done is purely ministerial not involving the confidence or discretion.
· Where the power of the agent to delegate can be inferred from the conduct of both the principal and the agent.
· Where the principal permits appointment of a sub-agent.
Relationship between the principal and the sub-agent:
The legal relation between the principal and the sub-agent depends upon this critical question, i.e. whether the appointment of the sub-agent is proper or improper.
- Where the appointment of sub-agent is proper. Where a sub-agent is properly appointed, the principal is bound by the acts of the sub-agent as if he was an agent originally appointed by the principal. The agent is responsible to the principal for the acts of the sub-agent. The sub-agent is responsible for his acts to the agent, but not to the principal except in the case of fraud or willful neglect. (Sec. 192.)
- Where the appointment is improper. Where an agent, without having authority to do so, has appointed a sub agent, the agent is responsible for the acts of the sub-agent to the principal and the third parties. The principal in such case, is not represented by or responsible for the acts of the sub-agent, nor is the sub-agent responsible to the principal. (Sec. 193)
Substituted agent: A substituted agent is a person who is named by the agent holding an express or implied authority from the principal, to act for the principal. in other words, he is the agent of the principal though he is named, at the request of the principal, by the agent. (Sec. 194)
Example: A directs B, his solicitor, to sell his estate by auction and employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub agent, but is A’s agent for the conduct of sale.
Personal liability of agent:
The general rule is that only the principal can enforce and can be held liable on a contract entered into by the agent except where there is a contract to the contrary. (Sec. 230)
An agent is personally liable in the following cases:
1. When the contract expressly provides. A person while entering into a contract with the agent may expressly stipulate that he would hold the agent personally liable in the case of the breach of the contract.
2. When the agent acts for foreign principal. When the contract is made by an agent for the sale or the purchase the goods for a merchant residing abroad, the agent will be personally liable. (Sec. 230)
3. When the agent acts for a concealed principal. Where an agent acts for a concealed principal, he would be personally liable, though the principal, on being discovered by the third person, will also be liable.
4. Where the agent acts for the principal who cannot be sued. Where the principal is incompetent to enter into a valid contract, e.g. where a principal is minor, the agent will be personally liable as the credit shall be presumed to have been given to the agent and not to the principal.
5. Where an agent acts for a principal not in existence. The promoters of a company (yet to be incorporated) sometimes enter contracts on the behalf of the company, though in such a case the alleged principal (the company) has no legal existence till the time of incorporation. In such case the agent is held to have contracted on his own account.
6. Where an agent is liable for the breach of the warranty. Where an agent professes to act as an agent but has no authority from the alleged principal or exceeds his authority, he is personally liable for the breach of the warranty.
7. Where the agent signs a contract in his own name in that case he is personally liable for the contract.
8. Where the agent receives or pays money by mistake or fraud. Where an agent receives from, or pays money to, a third party by mistake or fraud, he will be personally liable to the third party.
9. Where the authority of the agent coupled with interest. Where an agent has an interest in the subject matter of the contract entered into by him with a third party, his authority is coupled with the interest. He has, in such case, the right to sue or be sued, but only to the extent of his interest.
10. Where the trade usage or custom makes agent personally liable. Where there is a trade usage or custom making the agent personally liable, he will be so liable unless there is a contract to the contrary.
11. Where an agent signs the negotiable instrument in his own name without mentioning that he is signing as an agent.
12. Where the agent acts for the pretended principal and the that principal refuses to ratify the agents act.
TERMINATING OF AN AGENCY
Sec. 201 describes the several modes of terminating an agency as follows:
Termination by act of the parties:
· Agreement: the relation of the principal and the agent is generally founded on the mutual consent. It may be brought to an end by the same process with the originated it. i.e. by agreement. The agency can be terminated at any time and at any stage by the mutual agreement between the principal and the agent.
· Revocation by the principal: An agency may be terminated by the principal at any time by giving a notice to the agent. (Sec. 203). If the agent is appointed to do a single act, the authority may be terminated at any time before the act actually begun, the agency can only be terminated subject to any claim which the agent may have for the breach of the contract. (Sec. 204). The revocation may be expressed or implied. However when the agency is coupled with the interest the principal cant revoke the agency to the extent of such interest. Moreover if the agent has already partly exercised his authority then also the agency cant be terminated.
· Revocation by agent: An agency may be terminated by an express renunciation on the part of the agent after giving a reasonable notice to the principal. (Sec. 203). Where the agency is for a fixed period, and the agent renounce it without a sufficient cause, he shall have to compensate the principal for any loss. Renunciation my be expressed or implied.
Termination by operation of law:
· Performance of the contract: The most obvious mode of putting an end to the agency is to do what agent has undertaken to do (Sec. 201). Where, therefore, the agency is for particular object, it is terminated when the object is accomplished or when the accomplishment of the object becomes impossible.
· Expiry of time: Where the agent is appointed for a fixed period of time, it comes to an end after the expiry of that time even if the work is not completed.
· Death: When the death of the agent or principal takes place, the agency is terminated. When such termination takes place by the death of the principal, the agent must take all responsible steps for the protection of the interests of the principal entrusted to him.
· Insanity: An agency comes to an end when the principal or agent becomes of unsound mind. (Sec. 209)]
· Insolvency: The insolvency of the principal puts an end to the agency though nothing is mentioned in Sec. 201 as regards insolvency of the agent. The insolvency of the agent, it is accepted, also terminates the agency.
· Destruction of the subject matter: An agency which is created to deal with a certain subject matter will come to an end by the destruction of the subject matter.
· Principal becoming alien enemy: Where the agent and the principal are aliens the contract of agency is valid so long as the two countries are at peace. If war breaks out between the two countries, the contract of agency is terminated.
· Termination by sub-agent’s authority: The termination of an agent’s authority puts an end to the sub-agent’s authority also. (Sec. 210)
Termination of agent’s authority:
Sec. 208 deals with the question as to when termination of agent’s authority takes effect as to agent, and as to third parties. According to it, the termination of the authority of an agent takes effect as regards the agent and the third persons from the time it becomes known to them.
Irrevocable agency
When an agency cannot be terminated or put an end to, it is said to be an irrevocable agency in following cases:
1. Where the agency is coupled with interest. Where an agent has an interest in the subject matter of the contract entered into by him with a third party, his authority is coupled with the interest. He has, in such case, the right to sue or be sued, but only to the extent of his interest. (sec 202)
2. Where the agent has incurred a personal liability. When an agent incurs personal liability, the agency becomes irrevocable. The principal cannot, in such case, withdraw leaving the agent exposed to the risk or liability he has already incurred.
3. Where the agent has partly exercised the authority: The principal cannot revoke the authority given to his agent after the authority has been partly exercised; so far as regards such acts and obligations as arise from the acts already done in agency.(Sec. 204)
Agency coupled with interest:
When an agency is created for securing certain benefits 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 o0f creation of the agency .The agency coupled with the interest cant be terminated even on the death or the insanity of the principal. Thus such agency is irrevocable upto the extent of such interest.
Example. A owes Rs.500 to b and appoints him as his agent to sell his goods and pay him (B) the debt out of the sale proceeds. The authority of B is coupled with interest.
