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What is Agency under the Indian Contract Act?

18 min read

By Akanksha Sharma

Published On: October 8, 2021 at 12:45 IST

Introduction

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.

Agency as it is a well-settled legal concept which is employed by the Court when it becomes necessary to explain and resolve the problems created by certain fact or situation. The act of the agent binds the principal in the same manner in which he would be bound if he does that act himself.

The agent must be expressly authorized to do an act on behalf of the principal. An agent here 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 the other hand is a person for whom an act is done.

Section 182 of the Indian Contract Act, 1872 states that “an “agent” is a person 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”.

What are the Different Kinds of Agency?

Depending upon the kind of authority given to the agent to act on behalf of the principal, the agents are of various kinds. These are-

  • Auctioneers

An auctioneer is an agent whose business is to sell goods or other property by an auction i.e. by open sale. The authority vested in him is to sell the goods only and not to give warranties on behalf of the seller, unless expressly authorized in that behalf. He is a mercantile agent within the meaning of Section 2(9) of the Sale of Goods Act.

If the owner of the goods puts him in possession of the goods, although the authority to sell has not been conferred in him, a buyer in good faith from such an auctioneer will get a good title in respect of the goods. Thus, if he has been authorized to sell the goods only subject to a reserved price but he sells the same to an innocent and bona fide buyer below the reserved price, the buyer will get a good title in respect of such goods.

  • Factors

A factor is a mercantile agent who is entrusted with the possession of the goods for the purpose of sale. He has also the power to sell goods on credit and also to receive the price from the buyer. If the owner has put a factor in possession of the goods or the document of title but without authorizing him to sell the goods, the sale of goods by him will convey a good title to a bona fide buyer.

According to Section 171 of the Indian Contract Act, a factor has right of general lien over the goods belonging to his principal, which are in his possession for the general balance of account.

  • Brokers

A broker is an agent who has an authority to negotiate the sale or purchase of goods on behalf of his principal, with a third person. Unlike a factor, he himself has no possession of the goods. He gets his commission whenever any transaction materializes through his efforts.

  • Del Credere Agents

Generally, the function of an agent is over after a contract is established between his principal and a third person. He is not answerable to his principal for the failure of the third person to perform the contract. A del credere agent constitutes an exception to this rule. He is a mercantile agent who on the payment of some extra commission known as del credere commission, guarantees the performance of contract by the third person.

  • Banker Agent

It acts as the agent of the customer on behalf of his customers. He collects cheques, drafts, bills or buys that too on behalf of his customers. He has a general lien in respect of the general balance of account.

What are the Features of Agency?

  • Section 183 – Principal should be competent to contract

Section 183 states “Any person who is of the age of majority according to the law to which he is subject and who is of sound mind, may employ an agent.”

As in an agency the client creates a contractual relationship between his principal and the third persons, it is necessary that the principal and the third person should be competent to contract. If a person is not competent to contract and therefore is incapable of making a contract, he cannot make a contract through an agent either.

A person can do only such thing through an agent which he himself is personally capable of doing. Therefore, if the principal is a minor or of unsound mind, he is incapable of being bound through the acts of his agent. Although a minor himself cannot appoint an agent, there is nothing in Section 183, which prohibits the guardian of a minor from appointing an agent for him.

When a client gives a power of attorney to his counsel, while he is in good state of health and mental understanding, but subsequently the client becomes old, feeble, weak, unable to comprehend under a mental incapacity, the power of attorney becomes worthless after the change in the state of health and mental infirmity of the client.

  • Section 184 – The agent may not be competent to contract

Section 184 states “As between the principal and the third person, any person may become an agent, but no person who is not of the age of majority and of the sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained.”

The capacity of an agent could be looked on from two angles.Firstly, the capacity of the agent to act on behalf of the principal, so as to bind his principal and the third person. Secondly, his capacity to bind himself by a contract between himself and his principal.

So far as the agent’s capacity to bind himself to the principal is concerned, for that it is necessary that the agent should also be competent to contract. Section 184, therefore provides that no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained.

Thus, if an agent is a minor, through him a valid contractual relationship will be created between the principal and the third party, through such an agent will not himself be responsible for his acts to his principal.

  • Section 185 – No consideration is necessary to create an agency

Section 185 provides that no consideration is necessary to create an agency. From the very nature of the contract of agency, the principal agrees to be bound by the acts done by the agent on his behalf and that serve as a sufficient detriment to the principal. Moreover, the principal’s duty to indemnify the agent is also there. The law does not require any consideration as such for the validity of a contract of agency.

As in the case Adamson Vs Jarvis[i], the plaintiff who was an auctioneer, sold certain cattle on the instruction of the defendant. It subsequently turned out that the livestock did not belong to the defendant, but to another person, who made the auctioneer liable and the auctioneer in his turn sued the defendant for indemnity for the loss he had thus suffered by acting on the defendant’s directions.

  • Section 186 – Agent’s authority may be expressed or implied

Section 186 states “The authority of an agent may be expressed or implied.”

As seen in the case of Chairman, L.I.C. Of India And Ors. Vs Rajeev Kumar Bhaskar[ii] the salary savings scheme floated by the L.I.C. provided for a tripartite arrangement under which, the employer accepted the sole responsibility to collect premium from its employees and remit the same by means of one cheque to the corporation. No individual premium notice was required to be sent to any employee and furthermore, no receipt was to be given therefore. The employer was to inform the Corporation about changes in staff including factum of cessation of employment. The employees were not made aware of communication between the L.I.C. and the employer.

It was held that the employer, though not agent of L.IC. qua its regulations, it could be interfered that the employer had implied authority to act as agent of the L.I.C. in view of Section 186 of the Indian Contract Act, 1872.

  • Section 187 – Definitions of express and implied authority

Section 187 states “An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.”

Illustration: 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.

As in case Kandhe and Ors Vs Jhanjan Lal And Ors.[iii] it was held that the agreement was intended to be a permanent provision for securing peace between the parties and that having regard to Section 187 it was right to infer the representative character of the signatories to the agreement from the surrounding circumstances and that the agreement was binding on the plaintiffs who brought the suit.

  • Extent of Implied Authority (Section 188)

Section 188 states “An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act. An agent having an authority to carry on business has authority to do every lawful thing necessary for the purpose or usually done in the course of conducting such business.”

Illustration- A constitutes B his agent to carry on his business of a ship builder. B may purchase timber and other materials and hire workmen for the purpose of carrying on the business.

Implied authority of an agent simply means such authority which has not been conferred by the express words, but which can be inferred from the circumstances of the case, or the course of dealing between the parties, or the usage of particular trade. An agent’s implied authority depends upon the nature of business which the agent has been authorized to transact. As in case Ishaq Abdul Karim and Anr. Vs Madanlal[iv] , it was held that person with whom the agent has implied authority to accept any consideration from the fact that the agent is armed with the power to take the delivery of the goods and to dispose of them and the fact that the agent accepts the particular terms offered, it is not necessary for the purchaser in these circumstances, to make inquiries from the principal about the extent of the agent.

  • Agent’s authority in an Emergency (Section 189)

Section 189 states “An agent has 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.”

Illustration- A consigns provisions to B at Calcutta, with directions to send them immediately to C at Cuttack. B may sell the provisions at Calcutta if they will not bear the journey to Cuttack without spoiling.

  • Duty not to delegate his Duties (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.”

This Section contains the general rule that when an agent has expressly or impliedly undertaken to perform a contract personally, he cannot employ a sub- agent for the same.

  • Definition of Sub- Agent (Section 191)

Section 191 states “A sub- agent is a person employed by and acting under the control of the original agent in the original agent in the business of the agency.”

  • Representation of principal by sub- agent properly appointed (Section 192)

Section 192 states “Where a sub- agent is properly appointed, the principal is so far as regards third persons, represented by sub- agent and is bound by and responsible for his acts, as if he were an agent originally appointed by the principal. Agent’s responsibility for sub-agent- The agent is responsible to the principal for the acts of the sub- agent. Sub- agent’s responsibility- The sub- agent is responsible for his acts to the agent, but not to the principal, except in cases of fraud or wilful wrong.”

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.

As in the case Nensukhdas Shivnaraen Vs Birdichand Anraj[v] it was held the principal has a choice to bring an action action against the agent or the sub- agent as this was the case of fraud and wilful wrong.

  • Agent’s responsibility for sub- agent appointed without authority (Section 193)

Section 193 states “Where an agent, without having authority to do so, has appointed a person to act as sub- agent, the agent stands towards such person in the relation of a principal to an agent, and is responsible for his acts both to the principal and to the third person; the principal is not represented by or responsible for the acts of the person so employed, nor is that person responsible to the principal.”

When an 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. For the acts of sub-agent it is he agent who is responsible to the third person as well as the principal.

  • Relation between principal and person duly appointed by an agent to act in business of agency (Section 194)

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.”

Illustration- A authorizes C, a merchant in Calcutta, to recover the money due to A from C & Co. B instructs D, a solicitor, to take legal proceedings against C & Co. for the recovery of the money. D is not a sub- agent, but is a solicitor for A.

An agent’s only function is to appoint substituted agent with due care. After a substituted agent has been appointed, the work o agency is to be performed by the substituted agent, and the principal is represented by the substituted agent in relation to the third person. A substituted agent is himself responsible towards the principal.

  • Agent’s duty in naming such person (Section 195)

Section 195 states “In selecting such agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and if he does this, he is not responsible to the principal for the acts of negligence of the agent so selected.”

When 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.

Illustration: A instructs B, a merchant to buy a ship for him. B employs a ship surveyor of good reputation to choose a ship for A. The surveyor makes the choice negligently  and the ship turns out to be unseaworthy and is lost. B is not, but the surveyor is responsible to A.

  • Act done on behalf of another (Section- 196)

Section 196 states “Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratify them the same effects will follow as if they had been performed by his authority.”

Similarly, if an agent acts on his own account, such an act cannot be ratified by another person.

As in case Keighley, Maxsted & Co. Vs Durant[vi] it was held that they could not be made liable, because the act by Roberts not having been done on their behalf, purported ratification by them was ineffective.

  • Ratification may be express or implied (Section 197)

Section 197 states “Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.”

Illustration: A without B’s authority lends B’s money to C. Afterwards B accepts interest on the money from C. B’s conduct implies a ratification of the loan.

  • Ratification with full knowledge of facts (Section 198)

According to this section no valid ratification can be made by a person whose knowledge of the facts of the case is materially defective.

As in Savery Vs King[vii] It was held that since B did not knew about the invalidity of agreement, the purported ratification of the same by him was of no effect.

  • Ratification of the whole transaction (Section 199)

According to this section a person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of which the act formed a part. The object of this provision is that no principal to him and disown others. If he makes a ratification, it is deemed to be the ratification of the whole of the act.

  • Ratification of unauthorized act cannot injure third person (Section 200)

Section 200 states “An act done by one person on behalf of another, without such other person’s authority, which if done with authority, would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot by ratification be made to have such effect.”

Illustration: A holds a lease from B, terminable on three months’ notice. C, an unauthorized person, gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A.

  • Termination of agency (Section 201)

Section 201 states “An agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated on insolvent provisions of any Act for the time being in force for the relief of insolvent debtors.”

The agency which may be validly created stands revoked in the event of different situations mentioned above, including the death or insanity of either the principal or the agent, or by the insolvency of the principal.

  • No revocation of agency when agent has interest in the subject- matter (Section 202)

Section 202 states “Where the agent has himself an interest in the property which forms the subject- matter of the agency, the agency cannot in the absence of an express contract be terminated to the prejudice of such interest.”

Illustration: A gives authority to B to sell A’s land and to pay himself out of the proceeds, the debts due to him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death.

As in the case Birat Chandra Dagara Vs Taurian Exim Pvt. Ltd.[viii] there was an intention to transfer leasehold area in favour of power of attorney holder in respect of such property. The Orissa High Court held that Section 202 was attracted and such agency could not be terminated in the absence of any express contract, to the prejudice of such interest.

  • Revocation possible before the authority has been exercised (Section 203)

According to Section 203, the principal may save as otherwise provided by the last proceeding by the last preceding Section i.e. Section 202 revoked the authority given to his agent at any time before the authority has been exercised so as to bind the principal. It means that when the agent has already exercised the authority conferred upon him by the principal, the revocation of the same is not possible.

As in case Subhadra Vs M. Narasimha[ix] Murthy the plaintiff sold the suit property to the 1st defendant by executing a power of attorney based on ehich, the 1st defendant executed a sale deed in favour of the 2nd defendant. The plaintiff had received Rs 29,000 as consideration from the 1st defendant. The plaintiff had cancelled the power of attorney without paying back the consideration of Rs 29,000 received by him.

  • Revocation where authority has been partially exercised (Section204)

Section 204 states “The principal cannot revoke the authority given to his agent after the authority has been partly exercised so far as regards acts and obligations as arise from acts already done in the agency.”

Illustration: A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out of A’s money remaining in B’s hands. B buys 1,000 bales of cotton in A’s name, and so as not to render himself personally liable for the price. A can revoke B’s authority to pay for the cotton.

  • Compensation for Revocation by principal, or renunciation by agent (Section 205)

Section 205 states “Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause.”

If the agency is for a fixed term, although with the possibility of fresh appointment after the expiry of the term, it automatically terminates on the expiry of the said term. Such agency cannot be said to be irrevocable.

  • Principal should give reasonable notice of revocation (Section 206)

According to Section 206 when the principal having justification to do revokes the authority, he must give reasonable notice of such revocation to the agent, otherwise he can be made liable to make good any damage which may be caused to the agent.

As in the case M/S Om Prokash Pariwal And Anr. Vs Union Of India (Uoi) And Ors.[x] it was held that termination of agency without giving to the storing agent a notice asking him to show cause and opportunity of hearing before the termination, was illegal.

  • Revocation and renunciation may be expressed or implied (Section 207)

According to Section 207 revocation or renunciation may be expressed or may be implied in the conduct of that principal or agent respectively.

  • Time from which the termination of agent’s authority becomes effective (Section 208)

According to section 208 the termination of the authority of an agent does not, sop far as regards the agent, take effect before it becomes known to him, so far as regards third persons, before it becomes known to them.

Illustration: A directs B, his agent, to pay certain amount of money to C. A dies, and D takes out probate to his will. B, after A’s death, but before hearing of it pays the money to C. The payment is good as against D, the executor.

  • Agent’s duty on termination of agency by principal’s death or insanity (Section 209)

When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him.

  • Termination of agency terminates sub- agency (Section 210)

According to Section 210, the termination of the authority of an agent causes the termination of the authority of all sub- agents appointed by him.

Conclusion

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.

Edited by: Aashima Kakkar, Associate Editor, Law Insider

References


[i] Adamson Vs Jarvis on 1827 [4 Bing 66 : 5 Lj (os) (cp) 68: 29 RR 503]

[ii] Chairman, L.I.C. Of India And Ors Vs Rajeev Kumar Bhaskar on 12 October, 2001 [2003 ACJ 86]

[iii] Kandhe And Ors  Vs Jhanjan Lal And Ors. on 5 September, 1935 [AIR 1936 All 1]

[iv] Ishaq Abdul Karim And Anr. Vs Madanlal on 2 January, 1964 [AIR 1965 All 34]

[v] Nensukhdas Shivnaraen Vs Birdichand Anraj on 30 August, 1917 [ 43 Ind Cas 699]

[vi] Keighley, Maxsted & Co. Vs Durant on 1901 [A.C. 240]

[vii] Savery Vs King on 1856 [H.L.C. 627]

[viii] Birat Chandra Dagara Vs Taurian Exim Pvt. Ltd. on 18 March, 2005 [AIR 2005 Ori 147]

[ix]Subhadra Vs M. Narasimha on 13 October, 2011 [A.I.R. 2012 Kar. 19]

[x] M/S Om Prokash Pariwal And Anr. Vs Union Of India (UOI) And Ors. on 16 September, 1987 [AIR 1988 Cal 143]