Agency Under Indian Contract Act

Introduction

When one party delegates some authority to another party whereby the latter performs his actions in a more or less independent fashion, on behalf of the first party, the relationship between them is called an agency. Contract of agency under Indian Contract Act can be express or implied.

Chapter X of the Indian Contract Act, 1872 deals with the laws relating to Agency. It is important to know the law relating to agency because nearly all business transactions worldwide are carried out through agency. All corporations, big or small, carry their work out through agency. Therefore, laws relating to the agency are an important area of Business Law. Relationships relating to principal and agent involve three main parties: The Principal, the Agent, and a Third Party.

Parties to an Agency

Agent:

As per Indian Contract Act, 1872 the term ‘Agent’ is defined in Section 182: as a person employed to do any act for another or to represent another in dealing with third persons.

An “agent” is a person employed to do any act for another, or to represent another in dealing with third persons. The person for whom such act is done, or who is so represented, is called the “principal”. The contract between Principal and Agent is called ‘Contract of Agency’.

Principal:

Section 182: The person for whom such act is done or who is so represented is called the “principal”. Therefore, the person who has delegated his authority will be the principal.

Illustration: A lives in Chandigarh, but owns a shop in Delhi. She appoints a person B to take care of the dealings of the shop. In this case, A has delegated her authority to B and she becomes a Principal while B becomes an agent.

Who can be appointed as an Agent?

Section 183 of Indian Contract Act, 1872:

Any person who has attained the age of majority and has a sound mind can be appointed as an agent. In other words, any person capable of contracting can legally be appointed as an agent. Minors and persons of unsound mind cannot be appointed as agents.

The person who has attained the age of majority (18 years) and has a sound mind can become an agent. A sound mind and a mature age is a necessity because an agent has to be answerable to the Principal. (Section: 184)

How is Contract of Agency under Indian Contract Act created?

An agency can be created by:

1. Direct appointment– The standard form of creating an agency is by direct appointment. When a person in writing or speech (express) appoints another person as his agent, an agency is created between the two.
2. Implication– When an agent is not directly appointed but his appointment can be inferred from the circumstances, an agency by implication is created. 
3. Necessity– One person can act on behalf of another to save the person from any loss or damage, without expressly being appointed as an agent. This creates an agency out of necessity.
4. Estoppel– An agency can also be created by estoppel. In a situation where one person behaves in such a manner in front of a third person, as to make someone believe he is an authorized agent on behalf of someone, an agency by estoppel is created.
5. Ratification– When an act of a person, who acted as another person’s agent (on his behalf) without his knowledge is later ratified by that person, this creates an agency by ratification between the two.[1]

Types of Agents:

1. Special Agent- Agent appointed to do a singular specific act.
2. General Agent- Agent appointed to do all acts relating to a specific job.
3. Sub-Agent-An agent appointed by an agent.
4. Co-Agent- Agents together appointed to do an act jointly.
5. Factor- An agent who is remunerated by a commission (one who looks like the apparent owner of the things concerned)
6. Broker- An agent whose job is to create a contractual relationship between two parties.
7. Auctioneer- An agent who acts a seller for the Principal in an auction.
8. Commission Agent- An appointed to buy and sell goods (make the best purchase) for his Principal
9. Del Credere- An agent who acts as a salesperson, broker and guarantor for the Principal. He guarantees the credit extended to the buyer.

In Syed Abdul Khader v Rami Reddy [2]: 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”.

Authority of an Agent as per Contract of Agency under Indian Contract Act

• express
•  Implied.

Express authority

According to Section 187, the authority is said to be express when it is given by words spoken or written.

Implied authority

According to Section 187, authority is said to be implied when it is to be inferred from the facts and circumstances of the case. In carrying out the work of the Principal, the agent can take any legal action. That is, the agent can do any lawful thing necessary to carry out the work of the Principal.

It is of four main types:

1. Incidental authority- doing something that is incidental to the due performance of express authority
2. Usual authority- doing that which is usually done by persons occupying the same position
3. Customary authority– doing something according to the pre-established customs of a place where the agent acts
4. Circumstantial authority– doing something according to the circumstances of the case

In Chairman L.I.C v. Rajiv Kumar Bhaskar [3]

 As per the salary saving scheme of L.I.C, the employer was supposed to deduct the premium from the employee’s salary and deposit it with L.I.C. Upon the death of the employee, it was found by his heirs that the employer has defaulted in doing so, causing the policy to lapse. A clause in the acceptance letter was referred to, in which the employer had said that he would act as the agent of the employee and not as that of L.I.C. It was held that the employer was acting as the agent of the company, thereby making the company (L.I.C) responsible as a Principal due to the fault of the Agent (the employer).

Agency between Husband and Wife

Generally, there exists no agency between a husband and wife, except in cases where it has expressly or impliedly been sanctioned that either of them would do certain acts or transactions as the agent of the other i.e. a relationship of agency can come into existence between the two through contract, appointment, or ratification. A husband is responsible for necessaries to his wife when they are living apart due to the husband’s fault. This results in an agency of necessity where the wife can use her husband’s credit for what is necessary for her to live. But in cases where they are separated because of the wife’s own whims or faults for no just reason, the husband is not liable for the wife’s necessaries.

Distinction between Agent and Servant

1. An agent is employed to bring the principal into the legal relationship with the third person or to represent him in dealing with third persons. Whereas, a servant does not ordinarily create the legal relationship between his employer and third persons.
2. An agent is bound to 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.

• An agent may work for several principles at the same time.
• A servant usually serves only one master.
• A principal is liable for the wrongs of his agent done within the scope of his Authority.
• A master is liable for the wrongs of the servant if they are committed in the course of his employment.

Essential Elements of Contract of Agency under Indian Contract Act

1. Principal:  To constitute Agency there must be Principal, who appoints another person as agent to represent or work on his behalf.

2. Principal must be competent: According to Section 183 principal must be competent to contract. Section 183 says that 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.

3. There must be an Agent:  In a Contract of agency under Indian Contract Act, Agent is a person one who is appointed by Principal to work on his behalf. According to Section 184 any person may become an agent, but no person who is not of the age of majority and sound mind can become an agent.

4. Consideration not Necessary: Section 185 of the Indian Contract Act 1872 says that, no consideration is necessary to create an agency.  It is exception to the general rule – a contract without consideration is void. But as per this exception, it can be said that a contract without consideration is valid.

Various Methods of Creation of Contract of Agency under Indian Contract Act

Agency by Express Agreement:

This is the most obvious and simple method by which the agency can be created. The express word implies directly and firmly. Thus, there is a clear categorical statement of intention by both the parties, Principal as well as the Agent, to enter into the relationship.

This leads to the express authority being vested in the agent. The authority of the agent can be express and implied. The implied authority would be discussed later. The express authority is given by words spoken or written. Hence, there come two types in which this express agency can be created- Oral or Documentary.

Agency by operation of law:

At times contract of agency comes into operation by virtue of law.

For example: According to partnership act, every partner is agent of the firm as well as other parties. It is implied agency. On account of such implied agency only a partner can bind over firm as well as other partners, to his activities. In the same way according to companies act promoters are regarded as agents to the company

Agency by Ratification:

A principal may subsequently ratify an act done by a person who acted on his behalf without his permission or knowledge. If the act is ratified, a relationship of the agency will come into existence and it will be as if he had previously authorized the person to act his agent. Ratification may be express (by speech or writing) or implied (by act or conduct).

Illustration: Z bought apples on behalf of X, without his permission or knowledge. X later sold those apples to another person. This act of X impliedly ratifies the purchase made by Z.

Ratification is not allowed in the following cases:

• When the person’s knowledge of the facts of the case is defective. That is, he only half knows things that he is ratifying to.
• An act done on behalf of another person which would have the effect of injuring or harming the person or violating any of his rights if the act was done with his authority.

Agency by implied authority:

This type of agency comes into force by virtue of relationship between parties or by conduct of parties.

For example: A and B are brothers, A has got settled in foreign country without any request from A, B has handed over A`s agricultural land on these basis to a farmer and B is collecting and remitting the amount of rent to A. Here automatically A becomes principal and B becomes his agent. Agency by implied authority is of three types as shown below.

• Agency by Necessity
• Agency by Estoppel
• Agency by Holding out.

(I)By Necessity: 

At times it may become necessary to a person to act as agent to the other in emergency situation where the property or interest of another is in danger. The conditions which enable a person to act as an agent of another in necessity are as follows:

1. There should be a real necessity for acting on behalf of the principal.
2. It should be impossible to communicate with the principle within the time available.
3. The alleged agent should act bonafide in the interest of the principal.

For example: A has handed over 200 bags of butter for transportation, to a road transport company. Actually, it is bailment contract assume that in the transit all vehicles have got stopped where it takes one week for further movement. So, the transport company authorities have sold away the butter in those nearby villages. Here agency by necessity can be seen. 

(ii)By Estoppel: 

Where a person, by his conduct or words spoken or written, willfully leads another to believe that a certain person is acting as his agent, he is estopped later on from denying the truth of the fact that such a person is dealing as his agent.

Example:  In presence of X, Y says to Z that he (Y) is X`s agent though it is not so actually. X has not restricted Y from making such statement. It is agency by estoppel.

 (iii)By Holding out: 

The principal is bound by the act of agent if on an earlier occasion he has made others believe that other person doing some act on his behalf is doing with his authority.

Example: A is B`s servant and A has made B accustomed to bring goods on credit from C. On one occasion A has given amount to B to bring goods from C on cash. Z bought goods on credit as usually and runs away with the money. This is agency by holding out and therefore A is liable to pay amount to C.

Case Law: Kuchwar Lime & Stone Co. vs. Dehri Rohtas Light Railway Co. Ltd. & Anr.  [4]

Delegation of Authority by Agent

An agent may sometimes delegate the duty that has been delegated to him by the Principal to somebody else. Ordinarily, an agent cannot delegate the duty he is supposed to perform himself to another person (delegatus non potest delegare), except in particular circumstances where he must, out of necessity, do so. Section 191 of the Indian Contract Act, 1872 defines a sub-agent to be a person employed by and acting under the control of the original agent in the business of the agency.

Delegatus non potest delegare:

An agent cannot in ordinary circumstances delegate the duty that was delegated to him. The principle is based upon the idea that when a Principal appoints an agent, he does so by placing his confidence and trusts in the agent and might not have similar trust in the work of another person.

Rights of an Agents

An agent has the following 5 rights:

1. Right of retainer– An agent has the right to retain any remuneration or expenses incurred by him while conducting the Principal’s business.
2. Right to remuneration– An agent, when he has wholly carried out the business of the agency has the right to be remunerated of any expenses suffered by him while conducting the business.
3. Right of Lien on Principal’s property- The agent has the right to hold (keep with himself) any movable or immovable property of the Principal until his due remuneration is paid to him by the Principal.
4. Right to be Indemnified– The agent has the right to be indemnified against all the lawful acts done by him during the course of conducting the Principal’s business.
5. Right to Compensation– the Agent has the right to be compensated for any injury or loss suffered by him due to the lack of skill and competency of the Principal.

Conclusion

Contracts establishing a relationship of the agency are very common in business law. These can be express or implied. contract of agency under Indian Contract Act is created when 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. Establishment of a Principal-Agent relationship confers rights and duties upon both the parties. There are various examples of such a relationship: Insurance agency, advertising agency, travel agency, factors, brokers, Del credere agents, etc.

Related Articles:

• Rights and Duties of a Agent
• Termination of Agency under Indian Contract Act
• For more articles on Law of Contracts, Click Here.
• For law notes, Click Here.

Endnotes

[1] https://www.eaa.org.hk/en-us/Information-Centre/Publications/Agency-Law/-3-Formation-of-agency.

 [2] (1979) 2 SCC 601

[3] 2003 ACJ 86

[4] 1969 AIR 193

Author Details: Aarushi Nayyar (Chandigarh University, Gharuan)

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