Contract of Agency under Indian Contract Act | Law Optional Notes for UPSC PDF Download

Introduction

• Definition of Agency:
  • An agency relationship occurs when one party, known as the principal, delegates authority to another party, the agent, to act on their behalf independently to a certain extent.
  • This relationship can be established through an express agreement or implied by the circumstances.
• Indian Contract Act, 1872 - Chapter X: Laws on Agency
  • Chapter X of the Indian Contract Act, 1872 specifically covers the legal aspects of agency relationships.
  • Understanding agency laws is crucial as most business transactions globally are conducted through agencies.
  • Business entities, regardless of size, typically operate through agency structures.
• Parties Involved in Agency Relationships:
  • Principal: The party delegating authority to the agent.
  • Agent: The individual or entity authorized to act on behalf of the principal.
  • Third Party: Any other party involved in transactions facilitated by the agent on behalf of the principal.
• Importance of Agency Laws:
  • Agency laws govern the legal relationships between principals and agents, ensuring clarity and accountability in business transactions.
  • These laws provide a framework for understanding rights, duties, and responsibilities of all parties involved in an agency relationship.
• Examples of Agency Relationships:
  • Real Estate Agent: Represents the property owner (principal) in transactions with potential buyers (third parties).
  • Legal Representative: An attorney acts as an agent for their client (principal) in legal matters.

Parties Involved in an Agency

• An "Agent" is defined in Section 182 of the Indian Contract Act, 1872 as a person employed to act on behalf of another or represent another in dealings with third parties.
• An agent is someone authorized to act on behalf of another, known as the "principal." The agreement between them is termed the "Contract of Agency."
• According to Section 182, the individual on whose behalf the agent acts or represents is referred to as the "principal." Thus, the person delegating authority becomes the principal.
• Illustration: For instance, consider a scenario where A resides in Chandigarh but owns a shop in Delhi. A appoints B to manage the shop's affairs. Here, A is the principal as she delegates her authority to B, who becomes the agent in this context.

Who is Eligible to Be Appointed as an Agent?

According to Section 183 of the Indian Contract Act, 1872:

• Any individual who has reached the age of majority and possesses a sound mind is eligible to be appointed as an agent.
• In simpler terms, any person who is capable of entering into a contract can be legally designated as an agent.
• Minors and individuals of unsound mind are not qualified to serve as agents.

Age and Mental Capacity:

• An individual who has reached the age of majority, typically 18 years, and is of sound mind can act as an agent.
• Having a sound mind and being of mature age is crucial because an agent carries responsibility towards the Principal (as per Section 184).

Creating a Contract of Agency under the Indian Contract Act

• Direct Appointment: An agency is typically formed through direct appointment, where one person appoints another as their agent either in writing or verbally.
• Implication: Sometimes, an agency can be implied from the circumstances even if there is no direct appointment. For example, when someone consistently acts on behalf of another without explicit authorization.
• Necessity: In certain situations, one person may act on behalf of another to prevent harm or loss, leading to the creation of an agency out of necessity. For instance, a friend rushing a sick person to the hospital without explicit permission.
• Estoppel: An agency by estoppel can arise when someone behaves in a way that leads a third party to believe they are authorized to act on behalf of another. This belief can create an agency relationship.
• Ratification: When a person later approves an act performed by someone as their agent without prior authorization, it leads to the creation of an agency by ratification.

Types of Agents

• Special Agent: Appointed for a specific singular task.
• General Agent: Authorized to perform all acts related to a specific job.
• Sub-Agent: Appointed by an existing agent.
• Co-Agent: Agents jointly appointed to carry out a task.
• Factor: An agent remunerated through commissions, often appearing as the apparent owner of the goods in question.
• Broker: Facilitates the creation of contracts between two parties.
• Auctioneer: Represents the seller in an auction.
• Commission Agent: Empowered to buy and sell goods on behalf of the principal to secure the best deals.
• Del Credere Agent: Acts as a salesperson, broker, and guarantor, ensuring credit extended to the buyer.

In the case of Syed Abdul Khader v Rami Reddy, the Supreme Court defined agency as the relationship where one person has the authority to create legal relations between a principal and a third party.

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

Types of Authority: Express and Implied

Express Authority

Express authority is granted through spoken or written words, as stated in Section 187.

Implied Authority

Implied authority is inferred from the circumstances of the case. The agent is empowered to take lawful actions necessary to fulfill the Principal's work.

Subtypes of Implied Authority:

• Incidental authority: Performing tasks incidental to express authority.
• Usual authority: Carrying out tasks typically done by individuals in a similar role.
• Customary authority: Acting in accordance with established customs of a particular place.
• Circumstantial authority: Acting based on the situation at hand.

Case Example: Chairman L.I.C v. Rajiv Kumar Bhaskar

In the case of Chairman L.I.C v. Rajiv Kumar Bhaskar, a situation arose where the employer failed to deduct insurance premiums from the employee's salary as per the company's policy. The employer, acting as the agent of the employee, was held responsible for the lapse of the policy, making the company (L.I.C) accountable as the Principal due to the agent's (employer's) negligence.

Agency between Husband and Wife

• By default, there is usually no agency relationship between a husband and wife, except in specific cases where they have agreed that one of them can act as the agent of the other.
• This agency relationship can be established through a contract, appointment, or ratification.
• When a husband and wife are living separately due to the husband's fault, the husband is responsible for providing necessaries to his wife.
• In such situations, an agency of necessity is created, allowing the wife to use her husband's credit for essential items required for her livelihood.
• However, if the separation occurs because of the wife's unjustified actions or faults, without valid reasons, the husband is not obligated to provide for the wife's necessaries.

Understanding the Difference between an Agent and a Servant

• Role and Legal Relationship: An agent is typically hired to establish a legal connection between the principal and third parties or to act on behalf of the principal in transactions. On the other hand, a servant generally does not initiate legal relationships between their employer and others.
• Instruction and Control: An agent is obligated to comply with all lawful directives from the principal but usually operates without direct control or supervision. In contrast, a servant functions under the direct supervision of the employer and must follow reasonable orders within their job role.

Additional Distinctions

• Work Arrangements: While an agent can work for multiple principals simultaneously, a servant typically serves only one master at a time.
• Liability: If an agent commits a wrongful act within their authority, the principal is held responsible. Conversely, if a servant commits a wrongful act during their employment duties, the master bears liability.

Essential Elements of Contract of Agency under Indian Contract Act

• Principal: To establish an agency, there must be a Principal who appoints another individual as an agent to represent or act on their behalf.
• Principal's Competence: As per Section 183, the principal must be capable of entering into a contract. This section specifies that any individual who has reached the age of majority as per applicable law and is of sound mind can appoint an agent.
• Presence of an Agent: In a Contract of Agency under the Indian Contract Act, an Agent is the person appointed by the Principal to act on their behalf. According to Section 184, anyone can become an agent, but individuals who are not of the age of majority and sound mind cannot be agents.
• Consideration Not Required: Section 185 of the Indian Contract Act 1872 states that no consideration is needed to establish an agency. This stands as an exception to the general rule that a contract without consideration is void. However, in this scenario, a contract without consideration is considered valid.

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

Agency by Express Agreement

• Agency by express agreement is the straightforward creation of an agency through a clear and direct statement of intent by both the Principal and the Agent.
• Express authority can be either express or implied. Express authority is granted through spoken or written words, leading to two types of express agency creation: Oral or Documentary.

Agency by Operation of Law

• Sometimes, an agency is formed by operation of law, as seen in instances such as the Partnership Act where partners are implied agents of the firm and other parties.

Agency by Ratification

• Ratification occurs when a principal approves an act done by someone on their behalf without prior authorization. This ratification establishes an agency relationship as if the person had been authorized initially.
• Ratification can be either express (through speech or writing) or implied (through actions).
• For example, if Z buys apples for X without permission, and X later sells those apples, X has implicitly ratified Z's purchase.

Agency by Implied Authority

• Implied authority arises from the relationship or conduct of parties.
• For instance, in a scenario where A entrusts B with A's land without explicit request, B becomes A's agent by implied authority.
• There are three types of implied authority: Agency by Necessity, Agency by Estoppel, and Agency by Holding out.
  • Agency by Necessity
  • Agency by Estoppel
  • Agency by Holding out

Delegation of Authority by Agent

• An agent may delegate duties to another person under specific circumstances, defined by Section 191 of the Indian Contract Act, 1872.
• Delegatus non potest delegare principle states that an agent cannot typically delegate their duties, as the principal places trust in the agent's abilities.

Rights of an Agent

• Right of Retainer: An agent is entitled to keep any payment or expenses accrued while carrying out the Principal's business. For example, if an agent pays for travel expenses on behalf of the Principal, they have the right to be reimbursed for those costs.
• Right to Remuneration: When an agent has completed the tasks assigned by the Principal, they have the right to receive compensation for any expenses they have incurred during the business dealings. For instance, if an agent successfully closes a deal for the Principal, they are entitled to a commission.
• Right of Lien on Principal's Property: The agent can retain any movable or immovable property of the Principal until they receive their due remuneration. This means that if the Principal fails to pay the agent, the agent can hold onto the Principal's property. For instance, if an agent sells a property for the Principal but is not paid, they can keep the property until payment is received.
• Right to be Indemnified: The agent has the right to be protected against any legal liabilities arising from their actions on behalf of the Principal. For example, if an agent signs a contract on behalf of the Principal and incurs legal costs due to a breach of contract, the Principal is responsible for indemnifying the agent.
• Right to Compensation: The agent is entitled to compensation for any harm or losses they suffer due to the Principal's lack of skill or competence. For instance, if the Principal's negligence leads to financial losses for the agent, the agent can seek compensation for those losses.

Conclusion

• Agency contracts are prevalent in business law and can be either express or implied. A contract of agency under the Indian Contract Act arises when one person delegates authority to another to perform specific tasks or a range of duties in designated areas of work. Establishing a Principal-Agent relationship entails assigning rights and responsibilities to both parties involved. There are various examples of such a relationship: Insurance agency, advertising agency, travel agency, factors, brokers, Del credere agents, etc.