Effect of Agency on Contracts with Third Person

By Jalaj Tokas

Published On: September 9, 2021, at 17:02 IST

Introduction

It is often remarked that, “A man is responsible for his own actions.” Generally, a person is liable for his own deeds, good or bad, and doesn’t incur any liability for the acts done by others. But, this rule comes with its own set of exceptions- Contract of Agency being one of them.

Agency creates a legally enforceable contractual relationship between two parties wherein one party is authorized to perform duties on behalf of the other. There are certain aspects attached to it covering a wide range of rights and duties.

The following article develops on the relationship existing between an agent and a third party; wherein it focuses upon the effect it has on the contract of agency, while an agent deals on his principal’s behalf. To understand it better, we must be thorough with the concept of agency.

What is Agency?

Section 182 of the Indian Contract Act, 1872 defines an ‘Agent’ as “A person who employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the ‘principal’.”[i]

This contractual principle-agent relationship is called an Agency. The contract of agency traces its root from the legal maxim Qui facit per alium facit per se, which means, ‘one who acts through another does the act himself.’

Contract of Agency is based on the popular belief that a person cannot perform all of his transactions efficiently and so he appoints another to perform or act on his behalf. The Contract of Agency, if not wholly then mostly, is covered under the guidelines provided in Chapter X of the Act.

We now know what a contract of agency is. The purpose behind creating it is something more than establishing a fiduciary relationship between the Principal and agent. Its ultimate purpose is to employ an agent who, acting on behalf of principal, can carry out business with a third party. In other words, an agency binds three parties altogether- Principal, Agent and Third Party. They exercise certain rights and owe some duties towards each other which have briefly been discussed below.

Position of Principal

According to Section 226 of Indian Contract Act, 1872, “Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into the acts done by the Principal in person.”

The relationship of Principal and Agent between the person represented and the person representing has to exist in order to prove the principal’s liability towards the third person.

If the name of the Principal is disclosed by an Agent, who enters into a contract on his behalf then the contract is formed between the Principal and the third-party creating rights and obligations between them only.
A Principal who knowingly represents that the agent has authority to act on his behalf even if the agent doesn’t, then according to the Rule of Estoppel the Principal will be prevented from denying such agent’s authority if the third party relied on such representation and acted on the agent’s authority.
All acts of the Agent which are well within his actual or ostensible authority bind the principal.
The Principal can be held liable even for the acts committed out of the scope of an agent’s actual authority as they still remain well within his apparent authority.
An unauthorized act done by the agent is not binding on the Principal.

It was held in Daruvala Bros. (P) Ltd. Vs Commissioner of Income-Tax[ii] that if an agent deals without obtaining the consent of his Principal and without informing him about all material circumstances, then the Principal is entitled to repudiate the transaction.

Position of Agent

An agent, in its true essence, is an individual who, acting on his discretion and fair judgment, has the ability to make the Principal directly liable to third parties, enabling the Principal to sue or be sued by any third party directly, based on his agent’s acts. However, every right comes with its own set of responsibilities.

Therefore, an agent is liable for his acts to both- the principle as well as the Third Party.

With regards to the Third Party

When an agent represents a disclosed principal, well within his actual authority, he is neither liable to the third party on the contract nor can he sue the third party on it. This is because the agent is not a party to the contract.

If in a contract with the third party, it is expressly stated that the agent shall be held personally liable to the third party independent of his principal, then the third party can sue the agent under the terms of the contract.

Generally, an agent is not held personally liable to a third party for failing to carry out a contractual duty owed by his Principal to the third party. But, he can be held liable for duties which have been delegated to him by his Principal to perform on the principal’s behalf.

The Agent can be sued by the third party where the existence of the Principal is undisclosed at the time the contract is made, provided that the agent made the contract in his own name rather than representing his principal.

Where an agent, either by words or conduct, represents to a third party that he has legal authority to act on behalf of a principal, and if the third party based on such representation is induced/influenced into entering into a contact, then the agent is adjudged to be liable for any loss caused to such third party by a breach of that warranty of authority. This holds true even if the agent was under a mistaken belief that he had such authority.

With regards to the Principal

When an Agent is appointed to negotiate a transaction on behalf of the principal, the agent owes a duty to the Principal to act in the principal’s best interests within his authority.

Due to the fiduciary relationship existing between a Principal and his agent, the agent shall not disclose any confidential information concerning the Principal to any third party in the absence of the principal’s consent.

An agent is entitled to remuneration for his services rendered as an agent, subject to the terms of the agency.

The Court in Kishan Lal Vs Bhanwar Lal[iii] held that the Principal of an agent was bound to indemnify him against the consequences of all legal actions committed by such an agent in exercise of the powers conferred on him.

The agent can exercise his right of lien in respect of the documents prepared by him according to the instructions given by the principal.

As in the case of Southern Roadways Ltd. Vs S.M. Krishnan,[iv] where it was held that the agent could exercise his right of lien on principal’s property only if there was no agreement barring it. However, lien cannot be utilized to interfere with principal’s business activities.

Position of Third Party

According to Section 231 of Indian Contract Act, 1872, a third person has a right to enforce a contract against both the agent as well as the principal.

The third party can proceed with a suit against the Principal for any loss suffered as a result of the principal’s failure to perform the duty.

In Ram Pertab Vs Marshall,[v] the Privy Council observed that the right of a third party against the Principal was enforceable if the evidence showed that the contracting party honestly and reasonably believed in existence of authority of agent.

If a third party suffers any loss caused by a tort[vi] of the agent while acting on behalf of the principal, then the agent is personally held liable to the third party. It rules out a possible defense sought by the agent claiming that he acted under the authority or instructions of his principal.

When an agent contracts in his own capacity without disclosing his or his principal’s identity, he becomes personally liable. In this case, the third party may sue the agent or the Principal on discovering him or both.

The third person has a right of being prejudiced by ratification of unauthorized acts.[vii]

The third party can claim compensation from an agent, if the agent untruthfully represents that he has the authority to act on behalf of the principal. If such misrepresentation induces the third party and if it doesn’t get approved by the principal, then the third party can sue the agent.[viii]

Termination of Agency

Termination of agency means ending the contractual relationship existing between an agent and the principal. It can be terminated in two ways-

By the act of parties
By operation of law
By the completion of the purpose for which the agency was created.
By expiry of time, if it was created for a specific period.

As it was held in Sukhdev Vs Commissioner of Endowments,[ix] an agency comes to an end on the expiry of its term. Where the agency is made for a specific period, it was held that the agency expired on its completion and the agent was no longer entitled to enter into a contract on behalf of the principal.

Death or insanity of Principal and agent.
On insolvency of principal.
If the Principal becomes an alien enemy.

Conclusion

In the fast-changing modern world, the contract of agency serves multiple purposes by reducing much ambiguity in the field of contracts. It plays a decisive role in the devolution of authority by the Principal to the agent by creating a contractual relationship between the Principal and the agent. It is created to efficiently deal with a third party contracted. But, these concepts have been discussed time and over again.

When we talk about agency, we discuss the relationship existing between the Principal and his agent while we seldom discuss the part played by the third person. The above article views agency from the perspective of a third party and how it affects the relationship existing between an agent and principal.

It studies its different aspects and intricacies related before finally concluding on the lines of its termination. An agency may terminate in the same way as a contract is discharged except where the agency is irrevocable which distinguishes it from a mere contract. All these things coupled together make the contract of agency a special species of the general contract, thus creating an identity of its own.

References

[i] The Indian Contract Act, 1872, s.182.

[ii] Daruvala Bros. (P) Ltd. Vs Commissioner of Income-Tax 1971 80 ITR 213 Bom.

[iii]Kishan Lal Vs Bhanwar Lal 1954 AIR 500.

[iv]Southern Roadways Ltd. Vs S.M. Krishnan 1990 AIR 673.

[v] Ram Pertab Vs Marshall I.L.R. 26 Calc. 701.

[vi]Any wrongful act or omission that violates the rights of another.

[vii]The Indian Contract Act, 1872, s 200.

[viii]The Indian Contract, 1872, s 235.

[ix] Sukhdev Vs Commissioner of Endowments, (1998) 1 BC 403 (AP).

Effect of Agency on Contracts with Third Person

Introduction

What is Agency?