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Principal-Agent relationship under the Indian Contract Act

16 min read

By Akanksha Sharma

Published on: September 13, 2021 at 19:56 IST

Introduction

As we know when one party (principal) employs another party (agent) to represent him or work on his behalf, as in dealings with the third person. This relationship between them is known as agency. Those contracts are very common in business law who establish a relationship of agency. An agency is created when a person delegates his authority to another person as it appoints them to do specific work.

The Principal-Agent Relationship confers certain rights and duties upon both the parties. Examples of such types of agency are:

  • Insurance agency,
  • Travel agency,
  • Brokers etc.

Three main parties are involved in the relationship of agent and principal these are the agent, the principal and the third party.

Now an agent is a person who is employed to do an act for another party or to represent that party in front of third party. And principal on is a person for whom an act is done and the difference between both is clearly defined in Section 182 of the Indian Contract Act.

Modes of Creation of Agency

  • Acts done with principal’s actual authority

A principal is bound by the acts done by his agent with his authority. The authority of an agent may be expressed or implied and Section 187 defines that. An authority is said to be expressed when it is given by words which may be spoken or written and it is said to be implied when it is to be inferred from the circumstances of the case.

For example, A owns a shop in Serampore, who himself is living in Calcutta and visit the shop on some occasions. The shop which is at Serampore is managed by B and he orders goods from C in name of A for shop purposes. He also pays funds for the items without A being having any knowledge about that. Here B has an implied authority from A to order goods from C in the name of A for the purpose of the shop.

  • Agent’s authority in an emergency

An agent here has an 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 in his own case, under similar circumstances. It is clearly explained under Section 189 of the Act.

For example, an agent must have the goods repaired if it is necessary for the sale.

  • Principal Bound by Estoppel

Sometimes what happens is an agent has neither expressed nor employed authority to do an act on behalf of the principal, but the principal by his conduct creates an impression in the mind of the third person that the agent has an authority to act on his behalf. In such a case principal becomes liable to the third person for the acts done by the agent on the grounds of application of the law of estoppel.

For example, the sale is good if A entrusts C with negotiable instruments which is endorsed in blank. B sells them to C in violation of private orders from A.

  • Principal bound by Ratification

Principal is bound by the acts done by the agent with his authority which may be expressed or implied. He is also bound by the acts done in emergency and even on grounds of estoppels. Hence there is an exception that when the principal may not be bound for the acts done by an agent without any authority. If principal here ratifies i.e., gives approval that the act was done without his authority but on his behalf the principal would be bound in respect of such act.

  • Agency in Husband-Wife relationship

When a man and women are living together and they appear to be husband and wife to a third person, the women will be able to bind the man in the same way as if she was his wife. The implied authority to the wife to bind the husband arises when the husband and wife are cohabiting. If they are living separately, there is presumed to be no such authority in wife to pledge the credit of her husband. It is further necessary that the husband and wife must be living in a domestic establishment, the husband cannot be made liable for the purchases made by the wife.

What are the Duties of an Agent?

  • Duty not to delegate his duties

When an agent has undertaken to perform certain duties personally, he is not allowed to delegate his duties to another person. The rule is contained in the maxim ‘Delegatus non potest delegare’, which means that an agent to whom some authority has been delegated cannot further delegate that authority to another person. The relationship of principal and agent is based on confidence and trust.

In other words, an agent cannot employ a sub-agent to get the work done through him. Though this rule contains certain exceptions under Section 190.

Section 190 states “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.

  • Exceptional situations when a sub agent can be validly appointed

An agent can employ a sub-agent in the following exceptions:

When there is a custom of trade to that effect, the agent may employ a sub-agent.

When the nature of agency so requires, an agent must employ a sub-agent.

For instance, an agent authorized to recover some amount from a third person by filing a suit most engage a lawyer for the purpose, or when an agent has been authorized to purchase or sell goods in a foreign country, he must engage a sub-agent for doing so.

When an act does not require personal skill, the same may be got done through a sub-agent.

The rule against delegation is only for such acts, which an agent has undertaken to perform personally. If the undertaking is of a purely ministerial nature, where an agent has not undertaken to perform personally. If the undertaking is of is of a purely ministerial nature, where an agent has not undertaken to perform the same personally, a sub-agent may be appointed to do the work.

For instance, if an agent has been appointed to weigh coal lying at a place, or to transport goods from one place to another, he may get the work done from a sub-agent.

When the principal, expressly or impliedly, agrees to the appointment of a sub-agent for doing certain work, which has been otherwise assigned to the agent, a sub-agent may be validly appointed.

  • Duty to follow principal’s directions

According to Section 211, an agent has a duty to follow the directions given to him by the principal. As in this section an agent is bound to conduct the business of his principal according to the directions given by the principal. When the agent does not acts as stated above, if any loan is sustained by the principal, he must make it good to his principal and if any profit accrues, he must account for it.

  • Duty to show proper skill and care

The agent is supposed to take due care and act with reasonable diligence in the matter of agency. Section 212 makes the following provision in this regard.

For example, A is a merchant in Calcutta has an agent B in London to whom a sum of money is paid on A’s account with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent B is liable for the money and interest from the day on which it ought to have been paid, according to the usual rate and for any further direct loss as e.g., by variation of rate of exchange but not further.

  • Duty to render proper accounts

Another duty of agent is to render proper accounts to his principal on demand. This means that he should maintain proper accounts of the sums belonging to the principal which are in his hands, he should not mis utilize and misappropriate them, and on demand from the principal, he should render true accounts to his principal.

According to Section 213 the agent is bound to render proper accounts to his principal on demand. There is no provision in the Act enabling an agent to require the principal to render accounts or filing a suit for that purpose.

  • Duty to communicate with principal

According to Section 214, it is the duty of an agent in case of difficulty to use all reasonable diligence in communicating with his principal and in seeking to obtain his instructions.

  • Duty not to deal on his own account

An agent is under a duty not to deal on his own account in the business of agency, unless the principal consents thereto. If in any transaction an agent deals on his own account without the principal’s prior consent, the principal has the following two rights-

  • To repudiate the transaction by showing either:
  • That any material fact has been dishonestly concealed from him by an agent or
  • That the dealings of the agent have been disadvantageous to him (Section 215)
  • To claim from the agent any benefit which may have resulted to him from the transaction (Section 216).

Duty to pay sums received for principal

Another duty of the agent is to pay his principal all sums received by him on principal’s account. Before making such payments to his principal, the agent is however entitled to make such deductions out of the same as are lawfully due to him. According to Section 217, 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 or expenses properly incurred by him in conducting such business and also such remuneration as may be payable to him for acting as agent.

What is Sub-agent?

According to Section 191, a “sub-agent” is a person employed by and acting under the control of, the original agent in the business of agency. Now according to Sec 192 following position emerges:

  • The acts of the sub-agent bind the principal towards third persons

When the sub-agent is properly appointed, he gets vested with the power to represent the principal and therefore for the acts of such a sub-agent, the principal becomes bound towards third persons. In such a case the principal is represented by and is responsible for the acts of the sub-agent towards third persons as if such sub-agent was originally appointed by the principal. It means that the act of the sub-agent would bind the principal in the same way as an act of any duly appointed agent.

  • Position when sub-agent is not properly appointed

When an agent makes improper delegation of his authority i.e. when the appointment of the sub-agent is not covered by any of the exceptions which permit such an appointment, the agent is responsible both to the third person and the principal. Section 193 makes the provision in this regard. When the agent makes the appointment of a sub-agent without having an authority to do so, the principal is not represented by or responsible for the acts of the sub-agent. It means that for the acts of the sub-agent the principal will not be bound to any third party.

The sub-agent is also not responsible for his acts to the principal. For the acts of the sub-agent, it is the agent who is responsible towards the third party as well as the principal. Between the agent and the sub-agent, the position is considered to be that of the principal and agent and therefore the agent is answerable for the acts of the sub-agent.

  • Substituted agent

Like a sub agent the appointment of a substituted agent is made by an agent. A sub-agent is the agent of the agent, whereas a substituted agent is an agent of the principal, though he is not appointed by the principal himself but though the efforts of an agent. An agent having been so authorized by the principal, may name a person to act for the principal in the business of agency.

There is a privity of contract between the principal and the substituted agent. The principal becomes bound by the acts of the substituted agent is directly responsible towards the principal. Section 194 explains the relation between the principal and the substituted agent.

Section 194 states “Where 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 sub- agent but an agent of the business of the agency as is entrusted to him.”

  • Agent’s duty in appointing a substituted agent

While selecting a substituted agent for the principal, the agent must exercise due care. Section 195 explains the nature of an agent’s duty in this regard. The agent exercises due care in selecting a substituted agent for his principal his responsibility is over. The agent is not responsible for the acts of negligence of the substituted agent.

  • Sub-agent and Substituted agent distinguished

One thing common between a sub-agent and a substituted agent is that their appointment is made by the agent and not by the principal. The points of distinction between the two are as follows:

  • A sub-agent is the agent’s agent, whereas a substituted agent is the principal’s agent, in conducting the agency work.
  • A sub-agent is responsible for his acts to the agent and the agent in his turn is responsible for the sub-agent’s acts to the principal.
  • A sub-agent is not responsible to the principal, except in case of fraud or wilful wrong.
  • A substituted agent is directly responsible to the principal for its acts.
  • After appointing a sub-agent, the agent continues to be responsible for the acts of the sub-agent towards the principal.
  • An agent’s responsibility on the other hand is over when he names a substituted agent. He then goes out of picture.

Rights of Agent and Duties of Principal

The Act confers a number of rights on an agent and imposes right to remuneration for the act done on behalf of the principal:

  • Right to Remuneration (Section 219)

Section 219 states “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; but an agent may detain moneys received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actually complete.”

The Act confers a number of rights on an agent’s right to remuneration for the act done on the behalf of the principal. According to the above stated provision, an agent’s remuneration does not become due to him until the completion of the act assigned to him. This rule is subject to any special contract between the principal and the agent. If the parties have agreed that the agent will be entitled to commission when he finds a purchaser, who is ready and willing to purchase the property, the agent becomes entitled to the commission on doing that.

If the agent’s efforts are the effective cause of making the contract, the agent is entitled to his commission. Therefore, when a broker is instrumental in purchase of land by the municipal commissioner strikes the bargain with a vendor, who has already agreed to sell the land with the efforts of the broker, the broker is entitled to his commission.

Similarly, if the plaintiff is asked to negotiate a loan and he makes a principal have a contract with a banker who is willing to advance the loan but the transaction does not materialize loan at that time, but subsequently the principal takes the loan from the same source through another broker, the plaintiff would be entitled to the commission.

  • Right to retain sums

The agent has a duty to pay to his principal all sums received on principal’s account. But he has also right to retain, out of any sums received on account of the principal in the business of the agency, all money 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 agent.

Similarly, when an agent sells his principal’s goods, he may detain moneys received, for his remuneration on account of the goods sold by him. Such right can be exercised by an advocate but the lien must be confined to the costs incurred in that particular case.

  • Right of lien on principal’s property

According to Section 221, in the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property, whether moveable 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. A purchasing agent can exercise lien over the goods purchased for his principal until the amount due to him for such purchase has been paid.

  • Right to be indemnified

According to Section 222, 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.

For example, B, at Singapore under the 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 the breach of contract. B informs A of the suit and A authorizes 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.

Apart from the right of indemnity against the consequences of all lawful acts done by the agent, the agent is also entitled to indemnity against the consequences of an act done in good faith, even though the act causes an injury to the rights of the third persons as it is a tort.

For example, A, a decree- holder and entitled to execution of B’s goods requires the officer of the Court to seize goods, representing them to be the goods of B. The officer seizes the goods and is sued by C, the owner of goods. A is liable to indemnify the officer for the sum which he is compelled to pay to C.

Right to compensation for damages due to principal’s neglect- It is according to Section 225, 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.

For example, A employs B as a bricklayer in building a house and puts up the scaffolding himself. The scaffolding is unskilfully put up and B is in consequence hurt. A must make compensation to B.

Case Laws

  • Lilley Vs Doubleday[i]

Defendant was held liable without any negligence

Here the defendant was held liable for the loss of plaintiff as the defendant had agreed to store plaintiff’s goods in his own repository, stored some of them in another warehouse. Those goods were destroyed by fire without any negligence on the part of the defendant. As the agent when does not act according to the principal’s directions he will be held liable for the loss caused to the principal.

  • Shankarlal Agarwalla Vs State Bank of India And Anr.[ii]

Claiming interest through writ of mandamus was barred

It was held that the case was covered by the exception of “compulsion of law”, when the duty of secrecy need not be observed by the bank. Moreover, the petitioner could not prove that his claim for interest was justified by any provisions of law. Apart from that his action claiming interest through a writ of mandamus was time barred. The petitioner’s application was therefore dismissed.

Agent did not show proper skill and care in the matter

The agent communicated an offer of a prospective purchaser who was willing to buy the estate. Before the contract for sale was concluded the agent got another offer from the buyer. The agent did not communicate about the second offer to the principal. It was held that the agent did not show proper skill and care in the matter and therefore he was liable to pay damages to his principal for the loss suffered by him.

  • Bentley Vs Craven[iv]

Partner was bound to make profit to the firm

The partner of a firm of sugar refiners, who was asked to purchase sugar for the firm for the purpose of refining, supplied to the firm his own sugar, without informing the other partners about this fact. He supplied this sugar at the prevailing market rate but had himself purchased it at a lower rate. It was held that he was bound to account for the profit made in this transaction, to the firm.

  • Continental and Eastern Agencies Vs Coal India Limited And Ors.[v]

Failure of defendant to keep the site ready

The Delhi High Court held that as there was failure of defendant to keep the site ready, therefore agent could not be responsible for non-installation of machines and as such was entitled for commission.

Conclusion

Contracts that establish a relationship between the agent and principal are very important and these can be expressed or implied. Establishment of a Principal-Agent relationship confers rights and duties upon both the parties. There are various examples of such relationship as Insurance agency, advertising agency, travel agency, factors, brokers etc.

The contracting agency plays a significant part in the devolution of authority from the principle to the agent in modern times, as the company organisation grows. The Indian Contract Act, Chapter X, explains the numerous complexities of an agency contract, including the rights, obligations, and liabilities of the third party, the principal, and the agent. It further indicates that the use of an agency is not required; this might be inferred from the parties’ implicit behaviour. Furthermore, this contract outlines the many methods through which the principal and agent might revoke the agency contract.

References


[i]Lilley Vs Doubleday on 1881 [LR 7 QBD 510]

[ii] Shankarlal Agarwalla Vs State Bank of India on 19 November, 1984 [AIR 1987 Cal 29]

[iii] Keppel Vs Wheeler on 1927 [1 KB 577]

[iv] Bentley Vs Craven on 1853 [18 BEAV 75]

[v] Continental And Eastern Agencies Vs Coal India Limited And Ors. On 20 May, 2003 [2004 IAD Delhi 294]