Contract of Agency
When person having capacity to contract (called Principal) enters into a contract with another through a third person (called Agent), a contract of agency is created (s. 182)
- Agent is a person employed to do any act or to represent another in dealings with other persons.The function of an agent is to bring his principal into contractual relations with third persons. Thus an agent is a connecting link between the principal and third parties.
- Any person who is authorised to act as such may be an agent (s.184). The agent does not make contracts on his own behalf, so it is not essential for agent to have contractual capacity. Even a minor may be an agent. If a person who is not competent to contract is appointed an agent, the principal is liable to the third party for the acts of the agent. It is therefore in the interest of the principal that the agent should have contractual capacity.
- Principal is the person for whom an act is done by the agent or who is represented by the agent in respect of dealing with third persons.
- Any person who is of the age of majority and of sound mind, may employ an Agent. So, the person employing an agent must be capable to enter into a contract. So, a lunatic, minor or a drunken person cannot employ an agent (s.183)
Principles of Agency
The concept of Agency is based on 2 major principles:
- Except of an act of personal nature (e.g., marriage) or annexed to a public office (e.g., that of a magistrate), a person can do anything through an agent, what he can do personally. Contracts involving personal performance, cannot be conducted through an agent. (e.g. An agent cannot be employed to sing on behalf of his principal).
- The person acting through an agent is doing it himself. So, theacts of an agent, subject to certain conditions, are acts of the principal and contracts through Agents have the same legal consequences as if the contracts had been entered by and the acts are done by the principal himself in person.
- The principal becomes bound by the acts of the agent. Thus, for all legal purposes, the acts of the agent are the acts of the principal.
Characteristics of Agency
- Agreement : An agency is based on agreement (but not necessarily a contract) between the principal and third persons. (s. 182)
- Any person may become agent: Even person incapable to contract (like minor or a person of unsound mind) may even be an agent (the principal is, however, liable for the acts of such an agent). (s.184).
- No Consideration necessary: Consideration is not essential to create an agency so far an agreement exists between the Principal and Agent (sec. 185)
- Intention to act for principal: There must be an intention on part of the agent to act on behalf of the principal to create a relationship of agency.
- Interest on Principal: The agent must take all reasonable steps for the protection and preservation of the interests entrusted to him. (s.209)
- Liability of Principal: The principal is liable for all the acts of an agent which are lawful and within the scope of agent’s authority.
- Status of Contracts :The contracts entered into by the agent on behalf of the principal have the same legal consequences as if these contracts were made by the principal himself. [Edmunds vs Bushell & Jones].
- Status of Agent : Through the contract of Agency, the Agent :
- bind the principal into legal relations with the third person,
- make the principal answerable to third parties
- establish a privity of contract between the third person and the principal.
Agency creation Modes
Agency may be created through 1. Express agreement, 2. Implied agreement, 3. Ratification, 4. Operation of law.
- Agency creation by Express agreement : Normally the Principal gives an express authority to the Agent to act on his (principal’s) behalf and to bind the principal within the scope of his authority. The agent may be appointed either by word of mouth or by an agreement in writing (normally through formal instrument called power of attorney on a stamped paper). (s.187)
- Agency creation by Implied agreement : An agency may be inferred from the conduct, situation, circumstances or relationship, even without any express agreement. (s.186,187)
- : Sometimes a person may act on behalf of another without his knowledge or consent and the Principal, may ratify the agent’s act (s.196-200)
- : Sometimes an agency arises by operation of law.
For example, when a company is formed, its promoters are its agents by operation of law. A partner is the agent of the firm for the purposes of the business of the firm, and the act of a partner done to carry on the business of the firm in usual way, binds the firm.
Implied agency arises when the principal conducts himself towards the person alleged to be the agent or the third parties in such a manner, as if the principal had conceded to the appointment of that person as agent. Implied agency may be created by:
- creation by rule of estoppel : Agency by estoppel arises when a person holds himself out as Agent, i) though in fact he is not so or ii) even after he ceased to be an agent (s.237).
When an agent has, without authority, done acts or incurred obligations to third party on behalf of his principal inducing to believe that such acts and obligations were within the scope of the agent’s authority, the principal cannot deny the agency and is bound by such acts or obligations of the agent. [Darbari Lal vs Sharif Hussain], [Truman v. Loder],
- creation by holding out: Agency by holding out is a kind of agency by estoppel. In this case, a prior positive or affirmative act on the part of the principal establishes the relationship of agency subsequently.
- : In certain urgent circumstances, the law confers an authority on a person to act as agent for the benefit of another, there being no opportunity of communicating to the other. Such agency is called an ‘agency of necessity’. It arises in the following cases:
- Agent exceeding his authority in an emergency (sec. 189): When an agent exceeds his authority in an emergency, an agency of necessity arises provided the agent (i) was not able to communicate with the principal, (ii) had taken all reasonable steps to protect the interests of the principal, and (iii) had acted bona fide. In such a case the principal is liable for the acts of the agent.
In case of emergency during voyage, the master of a ship may borrow on the shipowner’s credit, hypothecate the ship, cargo and freight, or sell whole or a part of the cargo. [Great Northern Rail vs Swaffield], [Sims & Co. v. Midland Rail. Co.].
- Husband and Wife: If the husband does not make adequate provision for maintenance of his wife, the wife is entitled to pledge his credit for necessaries (goods and services normally required in couple’s joint style of living).
If the husband & wife lives together, the husband may escape liability if he can prove that (i) he has expressly-forbidden his wife to pledge his credit, or (ii) the goods purchased are not necessaries, or (iii) he has allowed sufficient funds for purchasing the articles she needed to the knowledge of the tradesman, or (iv) the tradesman has been expressly told not to give credit to the wife. Where the wife has been deserted by her husband (unless the wife lives separately on her own will and without justification), the wife has authority to pledge her husband’s credit for necessaries.
- Agency crated by Ratification : Sometimes a person may act on behalf of another without his knowledge, consent or authority, and the Principal may ratify the agent’s act as authorised (s. 196 to 200).
Agency created by Ratification
An implied Agency arises when a person ratifies the work of another, as Agent. Ratification may be express or may be impliedin the conduct of the person on whose behalf the acts are done (s.197).
A acts as P’s agent though he has no prior authority from P. In such a case P may subsequently either Accept the act of A or reject it. If P accepts A’s act, P is said to have ratified the agency, and becomes liable for P’s Acts as Principal.
Effect of Agency Ratification of Agency
- Ratification renders the acts done by one person (agent) on behalf of another (principal), without his (principal’s) knowledge or authority, binding on the other person (principal) as if they had been performed by his authority (s. 196)
- Ratification tantamount to prior authority. It means that agent’s authority to bind the principal is presumed to come into existence not from the date of ratification but from the date when the agent first contracted on behalf of the principal (without authority). Thus, ratification is an authorisation which has retrospective effect with prior authority. So, it is also called ‘ratification tantamount to acceptance’.
Requisites of valid ratification for creation of Agency
- The agent must purport to act as agent for a principal
- The principal must be in existence at the time of contract [Mohamad Taquiddin vs Ghulam Mohammad],
- The principal must have contractual capacity at the time of the contract and also at the time of ratification.
- Ratification must be with full knowledge of facts. (s.198) [Fitzmaurice v. Bayley], [Damodharan Dass vs Sheoram Dass],
- Ratification must be done within a reasonable time. Ratification done after the expiry of the reasonable time is not valid.
- The Ratified act must be lawful. An agreement which is void ab initio cannot be ratified. [Mulamchand vs State of M.P]
- The whole transaction can be ratified (s. 199). The ratification of an action or its rejection must be in toto (entirely, wholly).
- Ratification must be communicated to the party who is sought to be bound by the act done by the agent
- The principal should have power to do the acts which are sought to be ratified.
- 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 a third person, is invalid.
- Ratification is effective from the date of the act of the agent.
Termination of Agency
An agency may come to an end in any of the following ways (s.201)
- : By Agreement, By Revocation by Principal, By Revocation by Agent
- : Impossibility of Performance, Expiry of Time, Death of either party, Insanity of either party, Insolvency of either party, Destruction of subject matter, Principal becomes alien enemy, Dissolution of a Company, Termination of sub agent’s authority
Termination of Agency by the Parties
- Agreement. Agency may be terminated at any time and at any stage by the mutual agreement between the principal and the agent.
- Revocation by the principal. The principal may revoke the authority of the agent at any time before the agent has exercised his authority to bind the principal (unless the agency is irrevocable) (s.203). But if the act is begun, the authority can only be revoked subject to any claim which the agent may have for breach of contract. Where the agency is a continuous one, notice of termination of agency must be given to the agent and the third parties.
- If the agency is coupled with interest, the principal cannot revoke agent’s authority to the prejudice of such interest.
- When agency is for fixed period, the principal must make compensation to the agent for premature revocation of agency without sufficient cause.
- Revocation may be expressed or implied from the conduct of the principal.
- The termination of agent’s authority takes effect when it becomes known to agent (for the agent), before it becomes known to third parties (for the third parties) (s.208)
- Revocation by the agent: An agency may also be terminated by an express renunciation by the agent after giving a reasonable notice to the principal.
- Notice of revocation : Reasonable notice must be given of such revocation or renunciation otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made good to the one by the other (s.206)
- Compensation : Where there is an express or implied contract for the agency to be continued for a specified period, the principal must make compensation to the agent, or the agent to the principal, as the case may be, for any revocation or renunciation without sufficient cause.(s.205)
- Implied Revocation : Revocation and renunciation may also be implied by the conduct of the principal or agent respectively (s.207) [Azam Khan v. S. Sattar].
Termination of Agency by operation of law
- Performance or impossibility. 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 completed.
- Death or insanity. When the agent or the principal dies or becomes of unsound mind, the agency is terminated. In such situation, on behalf of the representatives of the principal, all reasonable steps should be taken by the agent for preservation of property. (s.209)
- Insolvency. The agency automatically gets terminated on insolvency of the principal.
- Destruction of subject-matter. An agency gets terminated when the subject matter of the agency gets destroyed.
- Principal becoming an alien enemy. When the agent and the principal belong to alien enemy countries, the contract of agency is terminated.
- Dissolution of a company. When a company (either principal or agent) is dissolved, the agency automatically comes to an end.
When an agency cannot be terminated or put an end to, it is said to be an irrevocable agency. An agency becomes irrevocable in the following cases:
- Where the agency is coupled with interest : Where the agent has himself an interest in the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such Interest. This rule applies only if the agency is created for the protection of the interest of the agent, but does not apply where the interest arises after the creation of the agency (s.202).
- Where the agent has incurred a personal liability : Where an agent incurs a personal liability, principal cannot revoke the agency leaving the agent exposed to the risk or liability he has already incurred.
- 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.(s.204).
Agency coupled with interest
Where the agent himself has an interest in the property which forms the subject matter of agency, the Agent may get some additional benefit over and above his remuneration as an agent.
Characteristics of Agency coupled with Interest:
- The interest should exist at the time of creation of agency (purpose of creation of agency is to protect the interest of agent). If the interest arises after the creation of agency then it is not an agency coupled with interest.
- Agency coupled with interest cannot be terminated to the prejudice of such interest, unless there is a contract to the contrary.
- Agency coupled with interest does not terminate even on the death, insolvency or insanity of the principal.
- Such agency is irrevocable to the extent of such interest.
P engages A to sell P’s house and to pay himself (in respect of a debt due to A from P) out of the proceeds of the sale. This is agency coupled with interest. Therefore, P cannot revoke A’s authority to sell the house. Even on death, insolvency or insanity of P, the agency is not terminated.
Distinction between Agent and independent contractor
|Rights||An agent can act only within the scope of the authority given to him.||Ancontractor works Independently of principal’s controlor interference.|
|Liability||An agent only represents his principal in dealings with third persons and is not personally liable for acts done by him within the scope of his authority.||An independent contractor is personally liable for all acts done by him.|
Distinction between Agent and Servant
- Legal Relationship : An agent creates legal relations between principal and third persons or to represent him in dealings with third persons. A servant does not necessarily create such legal relationship between the employer and third persons
- Control : Agent should follow all the lawful instructions of the principal but he is not subject to the direct control and supervision of the principal. A Servant acts under the direct control and supervision of his employer and is bound to follow all reasonable orders given to him in the course of his employment.
- Masters : An agent may work for several principals at the same time, but a servant usually serves only one master.
- Liability : A principal is liable for the acts of agent done within the scope of his authority. A master is liable for the acts of the servant committed in the course of his employment.
- Wrongful Acts : A principal is liable for wrongful acts of his agent done by the agent within the scope of his authority. An employer is liable for the wrongs of his servant only when they have been done in the course of his employment.
- Remuneration : An agent is paid by way of commission on the basis of work done. A servant is paid by way of salary or wages.
Classification of Agents
- As per authority : Special Agent, General Agent, Universal Agent
- As per nature of work :
- Mercantile or Commercial agents, like : Factor, Auctioneer, Broker, Commission Agent, Del credere Agent, Banker etc.
- Non Merchantile Agent
- As per Appointment : Pretended Agent, Sub Agent, Substituted Agent
Classification of Agents as per Authority
- 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 (e.g to sell a particular house). Such an agent has a limited authority and as soon as the act is performed, his authority comes to an end. He cannot bind his principal in any matter other than that for which he is employed. The persons who deal with him should ascertain the extent of his authority.
- General Agent : A general agent is one who has authority to do all acts connected with a particular trade, business or employment. For example, the manager of a firm has an authority to bind his principal by doing anything necessary for carrying on the business of the firm within the ordinary course of the business. Such authority of the agent is continuous until it is put to an end.
- Universal Agent : A universal agent is one whose authority to act for the principal is unlimited. He has authority to bind his principal by any act done by him which is legal and does not violate the law of the land.
Classification of Agents as per Nature of Work
- Commercial or mercantile agents : A mercantile agent normally has the authority to perform normal commercial transactions like selling & buying of goods, raise money and related duties like :
- Factor: A Factor is a mercantile agent entrusted with the possession of goods for the purpose of selling them. He has ostensible authority to do such things as are usual in the conduct of business. He can sell them on credit as well. He has the authority to receive the price and give a good discharge to the purchaser.
A factor has a general lien on the goods of his principal for a general balance of account between him and the principal. If he is in possession of goods, or of the documents of title to goods, with the consent of the owner, any sale, pledge or other disposition of them made by him, in the ordinary course of business. is binding on the owner, whether or not the owner authorised it.
- Auctioneer. An acutioneer is an agent appointed by a seller to sell his goods by public auction for a reward (generally in the form commission). He is primarily the agent of the seller, but after the sale has taken place, he becomes the agent of the purchaser also. He resembles a factor in all respects except that he has only a particular lien on the goods for his charges. He has authority to receive the price of the goods sold. He can also sue for the price in his own name. The principal is liable to the third parties for the acts of the auctioneer if the auctioneer acts within the scope of his apparent authority (even though he disobeys instructions privately given to him).
If the auctioneer declares a reserve price but by mistake knocks the article down at a price below the reserve price, the sale is not binding on the owner.
- Broker : ABroker is an agent who is employed primarily to bring about a contractual relation between the principal and the third parties. He cannot act or sue in his own name. He is not entrusted with the possession of the goods in which he deals. And as he has no possession, he has no right of lien.
- Commission Agent : A commission agent is employed to buy and sell goods, or make business transaction generally for other persons for consideration for his remuneration (called commission).
- Del credere Agent : A del credere agent is like a commission agent who, in consideration of an extra commission, guarantees his principal that the persons with whom he enters into contract on behalf of the principal, shall perform their obligations. So he acts like an agent as well as guarantor.
- Banker: The relationship between a banker and his customer is really that of debtor and creditor. The banker has an additional and ostensible obligation to pay the customer when called upon to do so (through draft / cheque). In that respect, the banker acts an agent of his customer.
- Non-mercantile agents : These include various professionals performing services on behalf of the principal (other than sale & purchase of goods) like attorneys, solicitors, insurance agents, clearing and forwarding agents.
Classification of Agent as per Appointment : These include 1. Sub Agent, 2. Co-Agent or substituted agent, 3. Pretended Agent, etc.
Classification of Agent as per Appointment
Sub Agent in Contract of Agency
Sub Agent is a person employed by the original agent and acting under his control (s.191). Principal appoints a particular agent to act on his behalf, relying upon the agent’s skill, integrity and competence. So, an agent normally cannot delegate his authority to another person without the consent of his principal. (s. 190). However, in the following case, an agent may appoint another person (normally known as sub agent) to delegate his work :
- There is a custom of trade to that effect
- The nature of work is such that a sub-agent.is necessary.
- Where the principal is aware of the intention of the agent to appoint a sub-agent but does not object to it
- Where unforeseen emergencies arise rendering appointment of a sub-agent necessary.
- Where the act to be done is purely ministerial not involving confidence or use of discretion.
- Where 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.
Co-Agent or substituted agent
A co-agent or a substituted agent is a person who is named by the agent, on an express or implied authority from the principal, to act for the principal. He 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.
- The agent should exercise the same amount of discretion in selecting a co-agent for his principal as a man of ordinary prudence would exercise in his own case. If he does so, he is not responsible to the principal for the act or negligence of the co-agent (s. 195).
- There is privity of contract between the principal and the substituted agent. The substituted agent is an agent of the principal and so is directly responsible to the principal for his acts.
- The substituted agent is not responsible for his acts to the agent. Similarly, the agent is not responsible to the principal for the acts of substituted agent.
A person may sometimes untruly represent himself to be the authorised agent of another, and thereby induce a third person to deal with him as such agent. In such case, the rights of such Agent, Principal and third party as are follows:
- If the alleged principal ratified act of pretended agent, an Agency of Ratification emerges and the principal becomes bound by the acts of the pretended agent.
- If his alleged employer does not ratify his acts, such person is liable to make compensation to the third person in respect of any loss or damage which he has incurred by so dealing.(s.235)
- While the third person has the right to claim compensation from the pretended agent, the agent has no right to proceed against that person for the contract. (s.236)
Relationship between Principal Agent & Sub Agent
A Sub Agent is the agent of the original agent and so relation of the sub-agent to the original agent as between themselves is that of the agent and principal (s.194). The principal is bound by the acts of the sub Agent if he is properly appointed by the principal. The original Agent is responsible for the acts of Sub-Agent.
Responsibility of Agent for Acts of sub-agent when Sub-agent is properly appointed
- The principal isbound by the acts of the sub-agent as if the sub-agent were an agent originally appointed by the principal.
- The agent is responsible to the principal for the acts of the sub-agent. [Jugaldas v. Harilal]
- The sub-agent is responsible for his acts to the agent, but not to the principal except in case of fraud or wilful wrong.
- There is no privity of contract between the sub-agent and the principal. Therefore, the sub-agent cannot sue the principal for remuneration. Similarly, the principal cannot sue the sub-agent for any money due from him. However, the sub-agent shall be liable to the principal in case of fraud or willful wrong.
Responsibility of Agent for Acts of sub-agent when Sub-agent is not properly appointed
- agent is responsible for the acts of the sub-agent to the principal and to the third parties
- sub-agent is responsible to the agent.
- principal is not responsible for the acts of the sub-agent
- sub-agent is not responsible to the principal
Distinction between sub-agent and substituted agent
|Control||Works under the control of the agent||Works under the instructions of the principal.|
|Privity||There is no privity of contract between a sub-agent and the principal. The principal cannot sue the sub-agent directly for any amounts or money. Similarly, a sub-gent cannot sue the principal for his remuneration. Both the principal and the sub-agent can sue the agent.||There is a privity of contract between him and the principal. Substituted agent & principal may sue each other.|
|Responsibility||The agent is responsible to the principal for the acts of the sub-agent. Sub Agent is not directly answerable to the principal.||Substituted agent is not responsible for his acts to the agent. Agent is not responsible to the principal for any act or negligence of the substituted agent.|
Distinction between General Agent & Special Agent
|Special Agent||General Agent|
|Appointment||A special agent is appointed to perform a particular act or to represent the principal in some particular transaction.||A general agent is appointed to do all acts connected with a specified trade, or assignment.|
|Authority||A special agent has limited authority. He cannot bind the principal in any matter other that for which he is employed.||A general agent has the authority to bind his principal with all the acts connected with the specified trade or assignment for which he is authorised.|
|Termination||The authority of the special agent comes to an end as soon as the act for which he is appointed, is completed.||The authority of the general agent is continued until it is put to an end.|
Duties of Agent
An agent owes a number of duties to his principal according to the nature of agency, as summarised below :
- Carry out the work: He should carry out the work as per specific direction of the agent or according to usual customs prevailing in such business. Otherwise, he would be liable to compensate any loss suffered by the principal and account for the profit. The principal may even terminate the agency if he disregards the principal (s. 211). [Pannalal Jankidas v. Mohanlal]. An agent may disobey his principal’s directions where he is privileged to protect his interest.
- Work with care : An agent should conduct the business of the agency with as much skill as is generally employed in similar business, unless the principal knows about his deficiency in skill. He will be responsible for any loss to the agent, in direct consequence of his neglect, want of skill or misconduct (but is not liable for loss or damage which is indirectly or remotely caused). [Surajmal vs Fateh Chand], [Kimber vs Barber],(s. 212):
- Proper Accounts : An agent is bound to render proper accounts to his principal on demand (s.213)
- Communicate : It is the duty of an agent, in cases of necessity & difficulty to use all means of communication with his principal to seek his instructions (s.214):
- Principal’s deals not on own account: If the agent deals on his own account in the business of the agency without prior consent of the principal and disclosing all material facts, the principal may repudiate the transaction, claim the benefit, if any, acquired by the agent on account of such transaction (s. 216).
- Pay the moneys to Principal: The agent must pay to his principal all sums received on his account. He may deduct there from all moneys due to himself arising out of transactions made on behalf of the principal (s. 218).
- Protect and preserve the Principal’s interests: When an agency is terminated by the principal’s death, insolvency or becoming of unsound mind, the agent is bound to take, on behalf of the representatives of his principal, all reasonable steps for the protection and preservation of the interests entrusted to him (s. 209).
- Use of information. The agent must compensate any loss suffered by the principal, if the agent uses any information about the principal against the interest of principal. The principal may also restrain the agent from using such information by an injunction.
- Secret profit : As the agent occupies fiduciary position, he should not make any profit beyond the agreed commission or remuneration, without the knowledge of the principal. If he makes any additional profit, he must pay it to the principal. In case of agent making secret profit, the principal may
- recover the amount of the secret profit from the agent;
- refuse to pay the agent his commission or remuneration ;
- dismiss the agent without notice ;
- repudiate the contract with the other party.
- Adverse title:An agent must not set up his own or third person’s title to the goods received from the principal on account of agency, unless it makes a better title for him.
- Conflict of interest & duty:The agent must not put himself in a position where his duty to theprincipal and his personal interest conflict unless he has made full disclosure of his interest to his principal, specifying its exact nature and obtained his assent.
- Not to delegate authority: An agent must not depute another person to do what he should have done himself personally, without the consent of the principal (s.190).
Rights of Agent
An agent has the following rights against the Principal :
- Right to Retain his dues: Out of sums received on account of the principal in the business of the agency, the agent may retain moneys due to himself in respect of his remuneration and payments made by him in conducting such business (s. 217).
- Right to receive remuneration.
- The agent is entitled to his remuneration. In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act (s.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 having been misconducted.(s. 220)
- Right of lien: An agent is entitled to retain goods, papers and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission ( unless agreed to the contrary) and services has been paid or accounted for to him. Such Lien of the agent is a particular lien and is confined to claims arising in connection with the goods or property in respect of which the right is claimed. An agent may have a general lien extending to all claims arising out of the agency, by a special contract (s. 221). [Chidambaram vs T S Sugar Mills Co., Ltd.]
- Right of indemnification :
- The agent has a right to be indemnified against the consequences of all lawful acts done by him in exercise of the authority conferred upon him (s. 222).
- The principal is not responsible any illegal act done by the agent, even if it is done as per principal’s instruction.
- where one person employs another to do an act, and the agent does the act in good faith, the agent can claim to be indemnified against the consequences of that act, even though it causes an injury to the rights of a third person (s. 223).
- Right of compensation.: The agent has a right to be compensated for injuries sustained by him by neglect or want of skill on the part of the principal (s. 225).
- Right of stoppage in transit. The agent acquires the right to stop the goods in transit (like an unpaid seller) where, the agent has bought goods for his principal by incurring a personal liability, in respect of the money which he has paid or is liable to pay.
- Insolvency of Buyer : The agent is personally liable to the principal for the price of the goods sold, on the insolvency of the buyer.
- Ostensible authority: When an agent is employed for a particular business, persons dealing with him can presume that he has authority to do all such acts as are necessary to such business (s.188). Such authority is called ostensible authority. In case the acts of an agent are in excess of his actual authority but within his ostensible authority, the principal is bound by such acts of the agent.
Agent exceeding authority
Agent acting beyond authority
- Authorised Part : The principal is bound by that part of the work which is within his authority, that can be separated from the part which is beyond his authority. (s.227)
- Unauthorised Part : The principal may repudiate the whole of the transaction, if the part “beyond the scope of his authority” cannot be separated from the part ‘within authority’. (s.228)
Agent Acting fraudulently
The principal is liable for the misrepresentations made or frauds committed by the agent in the course of his business for the principal. However, misrepresentations made or frauds committed by the agent in matters, which do not fall within his authority, do not affect his principal (s.238). [Dinabandhu vs Abdul Latif], [National Bank of Lahore Limited vs Sohal Lal Saigal]
- P, being owner of a ship and cargo, authorised A to procure an insurance on the ship. A procured a policy on the ship, and another on the cargo. P is bound to pay the premium for the policy on the ship, but not for the policy on the Cargo.
- P authorises A to buy 10 sheep for him. A buys 10 sheep and 20 lambs for lump sum of Rs. 6,000. P may repudiate the whole transaction.
Termination of agent’s authority
- Termination Agent’s authority :
- As for the agent : when it becomes known to the agent,
- As for the third persons : when it becomes known to them
- Termination of sub-agents authority : The sub-agency is terminated as soon as the main agency is terminated (s.210).
- Termination of substituted agent’s authority : The authority of the substituted agent will not automatically be terminated if the authority of the agent is terminated.
Personal Liability of Agent
Only the principal can enforce, and held liable on a contract entered into by the agent.(s.230). An agent, however, can be personally liable in the following cases:
- Expressly stated in contract: The agent becomes personally liable where contract expressly contains such clauses.
- When the agent acts for a foreign principal: 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 does so, he cannot be sued on the contract.
- When agent acts for an undisclosed principal: Where an agent acts for an undisclosed principal, he is personally liable. The principal, on being discovered, is also liable to third parties. [Trilok Chand vs Rameshwar Lal]
- When agent acts for a principal incompetent to contract: Where the principal is incompetent to enter into a contract (e.g minor), the agent is personally liable.
- Where agent signs a contract in his own name: An agent who signs a contract in his own name without qualification (i.e without disclosing that he is acting as an agent), though known to be an agent, is understood to have contracted personally.
- Where agent acts for a non existent principal: This is a rather peculiar case. The promoters of a company, yet to be incorporated, sometimes enter into contracts on behalf of the company, though in such a case the alleged principal (i.e., the company) has no legal existence till the time of incorporation. In such a case the promoters are held to have contracted on their own account and are personally liable.
- Where agent acts without authority: Where a person acts as an agent but has no authority (or exceeds his authority), he is personally liable for breach of warranty of authority to the third party.
- Where he receives or pays money by mistake or fraud : Where an agent receives money from a third party by mistake or fraud, he is personally liable to the third party. 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 the third party.
- Where his authority is coupled with interest: In such a case, he may sue, or be sued, only to the extent of his interest in the subject-matter.
- Where the trade usage or custom makes him personally liable: Where there is a trade usage or a custom making the agent personally liable, he is liable unless there is a contract to the contrary.
- Special Principal : Where the principal cannot be sued, e.g., foreign sovereigns, ambassadors etc.
- Principal not disclosed: Where the agent signs a negotiable instrument without specially mentioning therein that he is acting as an agent.
- Government servant : Where a Government servant enters into a contract on behalf of the Central Government, in disregard of Articles 299(1) of the Constitution of India.
Rights of person dealing with personally liable Agent
- Hold Agent & Principal Liable : Where the agent is personally liable, a person dealing with him may hold either Agent or his principal, or both of them, liable (s.233).
- Hold Principal Liable : When a person who has made a contract with an agent induces the agent to act upon the belief that the principal only will be held liable, he cannot afterwards hold the agent liable.
- Hold Agent Liable : If he induces the principal to act upon the belief that the agent only will be held liable, he cannot afterwards hold the principal liable.(s.234)
Duties and rights of principal
Duties of Principal in Contract of Agency
The duties of a principal towards his agent are the rights of the agent against the principal. The principal owes the following duties to an agent:
- To indemnify the agent against the consequences of all lawful acts :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. (s. 222)
- To indemnify the agent against the consequences of acts done in good faith: Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of a third person (s. 223). Where, however, any person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an, implied promise, to indemnify him against the consequences of that act. (s. 224)
- To indemnify agent for injury caused by principal’s neglect :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 (s. 225).
- Commission & Remuneration : To pay the agent the commission or other remuneration agreed.
Rights of Principal in Contract of Agency
The principal has the following remedies against the agent (the right of principal are similar to duties of Agents) :
- Recover damages: The principal can recover damages from the agent on account of any loss caused by the act of agent, due to disregard of the directions of the principal, or by not following the custom of trade in the absence of directions by the principal, or where the principal suffers due to lack of requisite skill, care, or diligence on the part of the agent.
- Recovery of secret profits: If the agent, without the knowledge and assent of the principal, makes any secret profits out of the agency, the principal has the right to recover them from the agent. The agent also forfeits his right to any commission in respect of the transaction.
- Termination of Agency: The principal may even terminate the agency if the Agent disregards the principal.
Position of Principal in Contract of Agency
Position of Known Principal in Contract of Agency
- Agent acts within his authority : The principal is liable for the acts of the agent with third persons provided his acts are done within the scope of his authority, and in the course of his employment as an agent (s.226). He is also liable for such acts of the agent which are necessary for the proper execution of his (agent’s) authority.
- When an agent exceeds his authority to do work of the principal, the principal is bound by that part of the work which is within his authority and which can be separated from the part which is beyond his authority (s.227)
- Where an agent exceeds his authority, the principal may repudiate the whole of the transaction if what he (the agent) does “beyond the scope of his authority” cannot be separated from the rest (s.228)
- :The principal is liable for the misrepresentations made or frauds committed by the agent in the course of his business for the principal. However, misrepresentations made or frauds committed by the agent in matters, which do not fall within his authority, do not affect his principal (s.238)
Position of Unnamed Principal in Contract of Agency
When a person contracts as an agent for a principal but does not disclose Principal’s name, the principal is liable for the contract of the agent, unless there is a trade custom or a term which makes the agent personally liable. If the third party contracts knowing that there is a principal although his identity is not disclosed, he cannot sue the agent. If, however, the agent declines to disclose the identity of the principal, he will become personally liable on the contract.
Position of Undisclosed Principal in Contract of Agency
Sometimes, an Agent may give impression to the third party as if he is contracting in an independent capacity (concealing the name of the principal and also the fact that he is an agent). In such case, the position of each of the party and their relationship as between them are given below:
- in Contract of Agency. When an undisclosed principal is subsequently discovered or he himself intervenes, the other contracting party (if he has not already obtained judgment against the agent) may sue either the principal or the agent or both. The principal may also, if he likes, require the performance of the contract from the other contracting party. But in such a case he must allow to the third party, the benefit of all payments made by the third party to the agent.
- in Contract of Agency. As between the principal and the agent, the agent has all the rights of an agent as against the principal; but as regards the third party, he is personally liable on the contract. He may be sued on the contract and he has the right to sue the third party.
- in Contract of Agency : The third party may elect to sue either the principal or the agent or both.(s.231)
- If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfil the contract, if he can show that, if he had known who the principal was or that the agent was not the principal, he would not have entered into the contract.
- The third party can also claim a right of set-off against the agent. Where the principal requires the performance of the contract, he can only obtain performance as is subject to the rights and obligations subsisting between the agent and the other party to the contract (s.232)
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