Contracts of Agency | UGC NET Commerce Preparation Course PDF Download

Introduction

Legal Provision

• Section 182 of the Indian Contract Act, 1872 provides definitions for the terms 'agent' and 'principal'. According to this section, an 'agent' is an individual authorized to act on behalf of another or represent them in interactions with third parties. The person for whom the agent acts or who is being represented is referred to as the 'principal'.

This response paraphrases the provided content to explain the concept of the contract of agency and the legal provisions related to it in a detailed and easy-to-understand manner.

Essentials of Contract of Agency

Competence of the parties to enter a contract of agency:

• Who may employ an agent: Any individual who has reached the age of majority and is of sound mind can employ an agent.
• Who may be an agent: Any person can act as an agent between the principal and third party. However, individuals who are underage or not of sound mind cannot act as agents.

Considerations not required: 

• According to Section 185 of the Indian Contract Act, 1872, a contract of agency does not necessitate consideration. This type of contract is considered valid without the need for consideration. However, unless specified otherwise in the contract, the agent is entitled to legal and justified remuneration.

Methods of Creation of Agency

• Ordinarily, the position given by the principal to the agent is explicitly defined. This can be through either spoken or written words.

Implied Agreement:

• Implied agency arises from the conduct of the parties or inferred from the circumstances of the case.
• For instance, if A from Calcutta has a shop in Delhi and B, the shop manager, regularly orders goods from C for the shop using funds provided by A, B is considered an agent of A by conduct.
• Partners, servants, and wives are often seen as agents by implication due to their relationships.

Necessity:

• Under certain circumstances, a person may be compelled to act as an agent for another. For example, a ship's master may need to make urgent decisions in the absence of the ship owner's agent to ensure the completion of a voyage.

Estoppel:

• Section 237 of the Indian Contract Act, 1872, discusses the liability of a principal when unauthorized acts of an agent are believed to be authorized due to the principal's words or conduct.
• When a principal induces belief that an agent's unauthorized actions were authorized and a third party acts on this belief, the principal is bound by those actions. This is known as agency by estoppel.

Holding Out:

• Arises from relationships like that of a manager and an employee. An administrator is considered an agent of the organization. This type of agency is known as agency by holding out.

Ratification:

• Ratification involves the subsequent acceptance and adoption of an act by the principal that was originally performed by the agent without authority.
• Section 196 of the Indian Contract Act, 1872, explains that a principal may choose to ratify or disown acts done by another person on his behalf without his knowledge or authority. Ratification leads to the same legal consequences as if the acts were initially authorized by the principal.

Classification of Agents

Types of Agents:

• Special Agent: A special agent is appointed for a specific task or to represent the principal in a particular transaction. For instance, an agent hired to sell a house or to bid at an auction.
• General Agent: A general agent is authorized to perform all tasks related to a specific trade, business, or employment.
• Universal Agent: A universal agent possesses unlimited authority to act on behalf of the principal.
• Commercial and Mercantile Agent: As per the Sales of Goods Act, 1930, a 'mercantile agent' is defined as someone who, in the regular course of business, has the authority to sell goods, consign goods for sale, buy goods, or raise money against goods. This category includes various roles like factor mercantile agent, auctioneer, broker, commission agent, and de credere agent.
• Non-Mercantile Agent: This category encompasses roles such as attorneys, solicitors, insurance agents, clearing and forwarding agents, and others.

Rights of an Agent

• An agent, as per Section 217 of the Indian Contract Act (ICA), has the right to retain money advanced or expenses properly incurred while conducting agency business out of the funds received on behalf of the principal.

Right to Receive Remuneration:

• Section 19 of the ICA grants agents the right to claim remuneration due to them for their services as an agent.

Right to Indemnification against Consequences of Lawful Acts:

• Under Section 222 of the Indian Contract Act, agents are entitled to be indemnified by the principal against the repercussions of all lawful acts carried out within the scope of their authority.
• In the case of Sheikh Farid Bakhsh v. Hargulal Singh (1936), the Allahabad High Court emphasized that the principal is obligated to pay the agent's remuneration once the agent has substantially completed the tasks assigned to them.

Right to Compensation:

• Section 225 of the Indian Contract Act, 1872, provides agents with the right to receive compensation in cases where they suffer injury or loss due to the principal's lack of skill or competency.

Right of Lien:

• Section 221 of the Indian Contract Act, 1872, states that if an agent is not paid lawful charges, remuneration, or expenses by the principal, and the goods are under the agent's control, the agent can retain possession of the goods until the principal settles the outstanding dues.

Duties of an Agent

• Duty to Execute the Mandate: Section 211 of the Indian Contract Act, 1872 binds an agent to conduct the business of his principal according to the principal’s directions or, in the principal’s absence, according to the custom of trade. In the case of Pannalal Janakidas v. Mohanlal (1950), the Supreme Court held the agent liable to compensate the principal. For instance, if the principal instructs the agent to get goods insured and the agent fails to do so after charging the premium, the agent is accountable for any resulting losses.
• Duty to Act with Care and Skill: Section 212 of the Indian Contract Act, 1872 outlines another crucial responsibility of an agent. This provision mandates that an agent must carry out agency tasks with due care and caution. In the legal precedent of Jayabharathi Corporation v. PN Rajshekara Nadar (1991), the Supreme Court clarified that if an agent provides incorrect information to the principal, leading to losses due to misconduct, the agent is liable to the principal.
• Duty to Render Proper Account: Section 213 of the Indian Contract Act, 1872 obliges an agent to provide accurate accounts to the principal upon request. The agent must elucidate these accounts to the principal and substantiate them with relevant vouchers. This duty ensures transparency and accountability in the agent-principal relationship.
• Duty to Communicate with the Principal: As per Section 214 of the Indian Contract Act, 1872, in situations of uncertainty, it is the agent's responsibility to diligently communicate with the principal and seek guidance. Effective communication is vital to ensure that the agent acts in alignment with the principal's intentions.
• Duty Not to Deal on His Account: When representing the principal in business dealings, an agent must disclose all relevant information to the principal and obtain consent before proceeding. Failure to adhere to this duty may result in severe consequences, such as the principal repudiating the transaction or claiming any benefits derived from it, as per Sections 215 and 216 of the Contract Act.
• Duty Not to Delegate His Authority: An agent is prohibited from delegating his authority to a sub-agent. This rule ensures that the agent retains direct responsibility for the tasks assigned by the principal, maintaining accountability and clarity in the agency relationship.
• Duty to Protect and Preserve the Interest: Under Section 209 of the Indian Contract Act, if the principal's incapacity or demise terminates the agency, the agent must safeguard and uphold the interests entrusted to him on behalf of the deceased principal's representative. This duty emphasizes the agent's fiduciary responsibility towards the principal's assets.
• Duty to Pay Sums Received: As per Section 218 of the Indian Contract Act, the agent is obligated to remit all funds received on behalf of the principal after deducting any amounts owed to the agent for advances or legitimate expenses incurred during business operations. This duty ensures that the principal receives all proceeds due to them promptly.

Termination of Agency

Termination of agency is a crucial aspect defined under the Indian Contract Act, 1872. It outlines the different ways in which an agency relationship can come to an end.

• Various Modes of Termination: Section 201 of the Indian Contract Act, 1872 elaborates on the diverse methods through which an agency can be terminated. These modes are essential to understand the dynamics of an agency relationship.
• Agreement: The relationship between a principal and an agent can be ended by mutual agreement at any point by both parties.
• Revocation by Principal: According to Section 203 of the Indian Contract Act, 1872, a principal can withdraw the authority given to an agent before the agent acts in a way that binds the principal, unless the agency is specified as irrevocable.
• Renunciation by Agent: An agent can give up their authority by either refusing to act or by informing the principal that they will no longer act on behalf of the principal.

Termination by Operation of Law

• Performance of the Contract: If the agency was established for a specific purpose, it ends once that purpose is fulfilled or becomes unachievable.
• Expiry of Time: When an agent is appointed for a fixed duration, the agency terminates when that time period ends, even if the work is incomplete.
• Death and Insanity: As per Section 209 of the Indian Contract Act, 1872, the agency ends if either the agent or the principal passes away or becomes mentally incapacitated.
• Insolvency: The insolvency of the agent typically terminates the agency unless the agent's remaining duties are merely formalities.
• Destruction of Subject Matter: If the subject matter essential to the agency is destroyed, the agency ends.
• Principal and Agent Becoming Alien Companies: The agency contract is valid only if the countries of the principal and agent are at peace. If a war erupts between the two countries, the agency contract is terminated.
• Dissolution of a Company: When a company dissolves, any agency contract involving that company also automatically terminates.