Relationship Between Principal and Agent

The relationship between a principal and an agent is one of the most fundamental and widely applicable concepts in law. Defined and governed under Chapter X of the Indian Contract Act, 1872, this relationship facilitates a legal and commercial connection where one party (the principal) delegates authority to another party (the agent) to act on their behalf. 

What is an Agency?

Agency is defined as a fiduciary relationship where the principal authorises an agent to represent or act on their behalf in dealings with third parties. This relationship is encapsulated by the Latin maxim “Qui Facit per alium facit per se”, meaning, “He who acts through another is deemed in law to do it himself.”

Definition Under Section 182 of the Indian Contract Act:

• Agent: A person employed to do an act or represent another (the principal) in dealings with third parties.
• Principal: The person who delegates authority to the agent.

The essence of this relationship lies in the agent’s ability to bind the principal legally through their actions.

Essentials of Agency

The legal validity of an agency relationship hinges on specific essential elements:

1. Competency of the Principal (Section 183): The principal must have the legal capacity to contract, i.e., they must be of sound mind, of the age of majority, and not disqualified by law.
2. Competency of the Agent (Section 184): An agent need not have full contractual capacity. Even a minor can act as an agent, provided the principal and the third party are competent to contract.
3. Consideration Not Necessary (Section 185): Unlike other contracts, no consideration is required to form an agency relationship. The agent’s acceptance of the role is sufficient.

What is Relationship Between Principal and Agent?

The relationship between a principal and an agent is a fiduciary one, where the principal delegates authority to the agent to act on their behalf. Governed under Chapter X of the Indian Contract Act, 1872, this relationship is based on mutual trust and the Latin maxim “Qui Facit per alium facit per se”—he who acts through another acts himself. 

The principal authorises the agent to represent them in dealings with third parties, creating binding legal obligations. While the principal provides guidance and bears responsibility for the agent’s actions, the agent is expected to act with diligence and skill, and within the scope of their authority. This relationship is crucial in commercial, legal, and personal transactions.

Types of Agents

Agents are classified based on the authority granted by the principal:

1. Special Agent: Authorised for a specific act or transaction.
2. General Agent: Authorised to perform all acts relating to a particular job or business.
3. Sub-Agent: Appointed by the agent to assist in their duties.
4. Co-Agent: Multiple agents appointed jointly for a single task.

Rights of an Agent

An agent enjoys specific rights under the Indian Contract Act:

1. Right to Retain Sums (Section 217): An agent can retain money received during the course of the agency to settle any dues or remuneration owed by the principal.
2. Right to Remuneration (Section 219): The agent is entitled to the agreed remuneration unless they commit fraud or misconduct.
3. Right of Lien (Section 221): Agents can retain the principal’s movable property until compensated for services rendered.
4. Right to Indemnity (Sections 222 & 223): Agents have the right to indemnity for lawful acts or acts performed in good faith, even if such acts unintentionally harm third-party rights.
5. Right to Compensation (Section 225): If the agent suffers an injury or loss due to the principal’s negligence, they can claim compensation.

Duties of an Agent

The agent’s role entails fiduciary responsibilities that must be carried out with diligence, skill, and honesty:

1. Duty Not to Delegate Authority (Section 190): Agents cannot delegate their duties unless expressly authorised by the principal or necessitated by trade custom.
2. Duty to Protect the Principal’s Interests (Section 209): Upon termination of the agency due to the principal’s death or insanity, the agent must protect entrusted assets until handed over to the rightful successor.
3. Duty to Act with Care and Skill (Section 212): Agents must execute their tasks with reasonable care and skill to avoid losses.
4. Duty to Render Accounts (Section 213): Agents are obligated to maintain and provide accurate accounts of the principal’s property and funds upon request.
5. Duty to Communicate (Section 214): Agents must communicate difficulties or uncertainties to the principal and seek guidance.
6. Duty Not to Make Secret Profits (Section 216): Agents cannot exploit their position for undisclosed personal gains.
7. Duty to Pay Sums Received (Section 218): Agents must remit all amounts collected on behalf of the principal after deducting expenses.

Principal’s Duties Towards the Agent

The principal’s obligations ensure fair treatment and protection of the agent:

1. Duty to Indemnify: The principal must indemnify the agent for lawful acts performed in the course of their authority.
2. Duty to Compensate for Loss: The principal is liable for injuries caused to the agent due to negligence or lack of skill.
3. Duty to Reimburse Expenses: The principal must reimburse legitimate expenses incurred by the agent during agency execution.
4. Duty to Pay Agreed Remuneration: Principals must honour remuneration agreements unless the agent breaches their duties.

Termination of Agency

Agency relationships may terminate either by the parties’ actions or due to legal circumstances.

Termination by Act of Parties:

1. Revocation by Principal: The principal may revoke the agent’s authority, provided reasonable notice is given.
2. Renunciation by Agent: Agents may renounce their role, provided reasonable notice is issued.
3. Mutual Agreement: Both parties may mutually decide to terminate the agency.

Termination by Operation of Law:

1. Completion of Purpose: The agency ends automatically once the specific task is accomplished.
2. Expiration of Time: Agencies established for a fixed period terminate after the period lapses.
3. Death or Insanity: The relationship ends if the principal or agent dies or becomes of unsound mind.
4. Destruction of Subject Matter: If the object of the agency is destroyed, the agency is terminated.
5. Insolvency: Insolvency of the principal leads to termination.

Difference Between Principal and Agent

The relationship between a principal and an agent is rooted in the delegation of authority, with clear distinctions in their roles and responsibilities. Below is a concise explanation of their differences:

Role

• The principal is the individual or entity that delegates authority and control over specific tasks or decisions.
• The agent acts on behalf of the principal to execute tasks or represent them in dealings with third parties.

Authority

• The principal has inherent authority and is the original decision-maker.
• The agent’s authority is derived from the principal’s consent, either expressed or implied.

Responsibility

• The principal bears ultimate responsibility for the outcomes of the agent’s actions.
• The agent is responsible for executing their duties with due diligence and within the scope of the authority given.

Relationship

• The principal’s relationship with third parties is indirect and mediated through the agent.
• The agent directly interacts with third parties but does so on behalf of the principal.

Legal Implications and Case Laws

The principal-agent relationship is subject to scrutiny in cases of breach, fraud, or misconduct.

1. Pannalal Jankidas v. Mohanlal (1950): The Supreme Court held the agent liable for failing to insure goods despite charging the principal for the premium.
2. Jayabharathi Corporation v. PN Rajasekara Nadar (1991): The agent was found liable for misinforming the principal, leading to a loss.
3. Ormrod v. Crosville Motor Service Ltd: This case highlighted the agent’s implied authority when acting on behalf of the principal in emergencies.

Conclusion

The relationship between a principal and an agent is rooted in trust, mutual obligations, and legal accountability. This dynamic facilitates smooth business operations and legal transactions, emphasising the importance of clear roles, communication, and adherence to the law. By understanding the rights, duties, and liabilities in this relationship, parties can ensure fairness, efficiency, and minimised conflicts.

The principal-agent framework, as established by the Indian Contract Act, 1872, serves as a cornerstone for numerous commercial and legal interactions, reinforcing its significance in both personal and professional realms.