This Article has been written by Sulagna Talukdar from Shyambazar Law College, University of Calcutta

Table of Contents

Introduction

Since it is not always possible for a person to do everything by himself, it becomes necessary to delegate some of the acts to be performed by another person. Such another person is called an agent. The person represented is called the principal. The law relating to agency is contained in Chapter X (Sections 182 to 238) of the Indian Contract Act, 1872.

The term agency refers to a connection between a principle and an agent in which the principal delegated his or her authority to the agent to act on behalf of the principal. An agency contract governs such a connection. The agent and principal’s rights and responsibilities are governed by the contract’s written or implied provisions. ^[1]

Test Of Agency

The true test of agency lies in answering the question whether a person has the capacity to create contractual relationship between the principal and a third party and to bind the principal by his acts. If the answer to this question is yes, there exists the relationship of agency otherwise not.

Consideration For Agency

Is Consideration for Agency Necessary [Section 185] ?

No consideration is necessary to create an agency. Thus, a contract of agency constitutes an exception to the general rule contained in Section 25 that no contract can be valid unless it is entered into for a consideration.

It means that there can be a gratuitous contract of agency and a gratuitous agent will be as much bound by his acts as a paid agent.

Relationship between Principal and Agent

The relationship between principal and agent can be established in one of the four ways:

•Agency by Expressed Agreement

Definitions of express and implicit authority are discussed in section 187 of the India Contract Act. An authority is explicit when it is conveyed by words spoken or written.

Illustration: X who owns a shop, appoints Y to manage his shop by executing a power of attorney In Y’s favour.

Here, the relationship of principal and agent has been created between X and Y by an express authority

•Agency by Operation of law

Without any special agreement or legal necessity to enter any formalities, the law establishes the connection between Principal and Agent. The Partnership Act is the best example, in which each Partner acts as the firm’s agent.

•Agency by Ratification

After completing the required task, the agency can be constituted. This occurs in the event of ratification, in which the principal endorses the act performed on his behalf by another person. This confirmation or approval can be expressed or implicit.

Section 196 of Indian Contract Act establishes a person’s rights in relation to acts performed on his behalf without his consent. This gives the Principal of Election the option of ratifying or disowning such activities.

Case Law:

The case of Bolton Partner v. Lambert T offered to sell land to the managing director of a company, who accepted without authority on behalf of the firm. T rescinded the offer and informed the employer of the situation. The unauthorized acceptance of the managing director was subsequently ratified by the company. It was determined that the contract is valid. T’s retraction of the offer was useless because P ratified on time. The agent is also placed in the same position as if he had authority to perform the act at the time it was performed.

Essential of a Valid Ratification

– Full knowledge (Section 198)

– Whole transaction (Section 199)

– No damage to third party (Section 200)

– Act on behalf of another person

– Existence of Principal

– Contractual capacity of Principal

– Within reasonable time

– Lawful acts

– Acts within Principal’s power

– Communication

•Agency by Implied Authority

The definition of implicit authority is discussed in Section 187 of the Indian Contract Act. When things spoken or written, or the customary way of dealing, are accounted conditions of the situation, such authority is said to be implied.

Illustration: A owns a shop in Shimla, living himself In Calcutta, and visiting the shop occasionally. The shop Is managed by B, and he is In the habit of ordering goods from C In the name of A for the purposes of the shop and of paying for them out of A’s funds with A’s knowledge. B has an Implied authority from A to order goods from C in the name of A for the purposes of the shop.

Following are the different types of Implied Agency:

•Agency by Estoppel:

It occurs when a person, through his words or actions, leads others to believe that another person is his agent.

Illustration: A consigns things to B for sale and instructs him not to sell at a fixed price. B’s instructions are unknown to C, so he enters a contract with B to purchase the goods at a lesser price than the reserved price. By the contract, A is obligated.

•Agency by Necessity:

It emerges under the following circumstances: first, when acting on behalf of the principal is an actual and concrete necessity. Second, if communicating with the principle and obtaining his approval is impossible, and third, when the conduct is done in the principal’s best interests.

Agency by Holding Out:

Agency by holding out is almost similar to agency by estoppel. Such agency arises when a person by his past affirmative or positive conduct leads third person to believe that person doing some act on his behalf is doing with authority.

Illustration: X allows Y. his servant to purchase goods for him on credit from Z and later on pays for them. One day X pays cash to Y to purchase goods. Y misappropriates the money and purchases goods on credit from Z. Z can recover the price of his goods from X because X had held out Z as his agent on earlier occasions.

Who is an Agent?

An agent, in legal terminology, is a person who brings his principal into the contractual relations with the third parties. The principal appoints or employs an agent under the contract of agency. Thus, an agent is the link that connects the principal to the third parties. When an agent acts for his principal, he has the capacity of his principal. Thus, the principal is responsible for the acts of the agent to the third parties.

According to the Principle of Agency, if it would be good for something to happen naturally, we may take action to make it happen.

Classification of Agents

•General Agent

The principal appoints a general agent to do anything within his authority in all transactions or in all transactions relating to a specific trade, business or matter. The principal grants the authority to the agent to act on his behalf. It may be assumed by the third party that such an agent has the authority to do all that is usual for a general agent to do. Any private restrictions on the agent’s authority do not affect the third party.^[2]

For Example: Raju is appointed as a special agent to sell a bike. If Raju exceeds his authority, the principal is not bound by it, and third parties do not need to assume that Raju has unlimited powers.

• Special Agent

A sub-agent is an agent who is appointed by another agency. Due to a huge work pressure or for meeting deadlines, an agent may delegate the tasks delegated to him by the principal at times. Usually, an agent is not supposed to delegate to another person the task that he is supposed to perform himself (delegatus non potest delegare), unless he is bound to do so by necessity.

•Mercantile Agent

As per section 2(9) of the Sale of goods act, 1930, a mercantile agent is a person who in the customary course of business has an agent’s authority either to sell or consign the goods for the purpose of sale or to buy goods or to raise money on the security of goods.^[3]

•Co-Agent

Co-agents are agents who are jointly appointed to perform acts.

•Factor

A factor is an agent who is appointed for a reward in the form of commission (and who seems to be the owner of the things in concern). He is an agent who is given possession of goods. The principal entered into a contract with him for the sale of goods to the latter. He may sell the items on credit, negotiate the price, and give the buyer a discount.

•Broker

A broker is someone who is employed to make contracts for the purchase and sale of goods on behalf of a principal. He is not in possession of any goods. He acts as a connecting link between the parties, bringing them to the negotiating table, and if the circumstances are favourable, he is entitled to his brokerage commission.

•Auctioneer

In an auction, the auctioneer acts as a seller for the principal and invites bids.

•Commission Agent

A commission agent is appointed to buy and sell goods at the best price and terms for his principal.

•Del Credere

Del Credere is a broker who also acts as a salesperson. He often acts as the principal’s guarantor. He guarantees the buyer’s credit line. He is the person who guarantees his principal that the third party will discharge his financial obligations in return for an extra commission.

•Pucca Adatia

A pucca adatia is a person who has the right to profit from his own goods. Section 182 of the Indian Contract Act of 1872 gives a broad definition.

Case Law:

In Shivnarayan Kabra v. The State of Madrasi, the appellant released an advertisement presenting himself as a pucca adatia. Many were interested in entering into forward contracts after reading the advertisement. He assured them that he operated his business in accordance with the pucca adatia system. The respondent accused the appellant of making a false representation. He was not a member of any association and was not authorised to do such business. The question before the Madras High Court was whether the appellant was guilty under Section 420 of the IPC. The court held that the appellant will be held liable under Section 420 of the IPC for creating a false representation about its ability to conduct forward contract business.

How is an Agent different from an indemnity holder?

The rights of the Indemnity-holder are dependent on the terms of the contract of indemnity as a general rule. Section 125 of the Indian Contract Act, 1872 comes into play when the indemnity holder is sued i.e., under a specific situation.

The Indemnity holder is entitled to recover the: if the act of indemnity holder is within the scope of indemnifier or according to him all the damages that he may have been compelled to pay in any suit in respect of any matter to which the promise of the indemnifier applies.

For example, if a contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a particular transaction? If C does institute legal proceeding against B in that matter and B pays damages to C, A will be liable to make good all the damages B had to pay in the case.

All the costs of suits that he may have had to pay to the third party provided he acted as a man of ordinary prudence and he did not act in contravention of the directions of the indemnifier or if he had acted under the authority of the indemnifier to contest such a suit.

Prominent Case Laws

In the case of Adamson vs. Jarvis, Adamson was entitled to recover the money he had to pay to the true owner of the cattle as well as any expenses incurred by him to get a legal counsel, etc. Actually, in this case, Adamson was an auctioneer who was given cattle by Jervis. Adamson followed the instruction of Jervis and sold the cattle. But, Jervis was not a real owner of that particular cattle. And thereafter the real owner filed a suit against Adamson. It was held that the defendant was liable for loss of plaintiff and compel to compensate him as per Section 125 of the 2^nd rule.

All the sums that he may have paid under the terms of any compromise of any such suit provided such compromise is not contrary to the indemnifier’s orders and was a prudent one or if he acted under the authority of the indemnifier to compromise the suit.

Whereas, According to Section 219 of the Indian Contract Act, An agent is entitle to his remuneration. But Section 220 of the said Act says that, an agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted.

In the absence of any contract to the contrary, 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, disbursements and services in respect of the same has been paid or accounted for to him. Agent to be indemnified against consequences of lawful acts. According to section 225 of the said Act, an agent is entitled to claim compensation for the injuries suffered as a consequence or want of skill of the principal.

In Syed Abdul Khader v Rami Reddy Case, the Supreme Court held that “the expression agency is used to connote the relation which exists where one person has an authority or capacity to create legal relations between a person occupying the position of principal and a third party”.^[4]

Conclusion

Contracts establishing a relationship of the agency, where a person delegates his authority to another person, that is, appoints them to do some specific job or a number of them in specified areas of work are very common in business law. There are various examples of such a relationship: Travel agency, advertising agency, insurance agency, brokers, del credere agents, etc. The relationship exists in such a way that the agent becomes liable for compensating his or her principal for loss resulting from his or her actions and the principal owes his or her agent contractual services. Further, the task too contains the task of avoiding conflicts, the task of not delegating duties, the task of caring for skills and keeping accounts. The rights of an indemnity holder on the other hand plays a crucial role in ensuring the protection and compensation in a contract of indemnity. The rights of Indemnity holder include the rights to recover damages, costs incurred in a suit, and sums paid under a compromise.