Agency | Law of Contracts - CLAT PG PDF Download

Contract of Agency

When one party delegates some authority to another party to perform actions on behalf of the first party, a relationship called agency is formed. Agency can be either express or implied.

Chapter X of the Indian Contract Act, 1872 governs the laws related to agency. Understanding the law of agency is crucial because most business transactions globally are conducted through agency. All corporations, regardless of size, operate through agency. Therefore, agency laws are a significant aspect of Business Law. The principal and agent relationship involves three main parties:

• The Principal
• The Agent
• A Third Party

An agent acts on behalf of the principal, either representing the principal in transactions with third parties or performing acts for the principal. To determine if someone is an agent, one can check if their actions bind the principal.

Illustrations:

• Mastrations:
• Illustration 1: A, a businessman, delegates B to buy goods on his behalf. Here, A is the principal, B is the agent, and the person from whom the goods are bought is the 'Third Person.'
• Illustration 2: Joe appoints Mary to handle his bank transactions. In this case, Joe is the Principal, Mary is the Agent, and the Bank is the Third Party.
• Illustration 3: Lavanya, who lives in Mumbai but owns a shop in Delhi, appoints Susan to manage the shop's dealings. Here, Lavanya is the Principal, and Susan is the Agent.

Who Can Appoint an Agent?

According to Section 183, any person who has reached the age of majority and possesses a sound mind is legally capable of appointing an agent. In simpler terms, anyone who is capable of entering into a contract can appoint an agent. Minors and individuals who are mentally incapacitated are not allowed to appoint an agent.

Who Can Be an Agent?

Similarly, as per Section 184, an agent must be someone who has reached the age of majority and has a sound mind. This requirement is crucial because an agent is accountable to the principal for their actions.

Principal's Liability for Agent's Actions

The principal is responsible for all actions taken by the agent that are lawful and within the scope of the agent's authority.

Contracts made by the agent on behalf of the principal carry the same legal consequences as if the principal had made them himself.

Who Can Employ an Agent?

Anyone can employ an agent if they are of the age of majority and of sound mind.

Who Can Be an Agent?

Any person can become an agent. Even minors or individuals of unsound mind can act as agents.

Liability of Agent

Generally, an agent is liable to the principal. However, an agent is not liable to the principal if they are a minor or of unsound mind.

Requirement of Consideration

• No consideration is necessary for creating an agency, as stated in Section 185.

General Rule of Agency

• No essential of consideration
• Delegation of Authority
• Contractual capacity
• Agent can appoint sub-agent with permission of Principal
• If the agent has removed, sub-agent is automatically terminated

Essentials of Agency

The principal should be competent to contract

• Any person who is of the age of majority and is of sound mind may employ an agent. Since in an agency, the agent creates a contractual relationship between his principal and the third persons, it is necessary that the principle and third person should be competent to contract.

Muhendra Pratap Singh v Padom Kumar Devi, AIR 1993, ALL 143

• When a client gives a power of attorney to his counsel, while he is in good state of health and mental understanding, but subsequently the client becomes old, feeble, weak, unable to comprehend under a mental incapacity, the power of attorney becomes worthless after the change in the state of health and mental infirmity of the client.

Madanlal Dhariwal v Bherulal AIR 1965 272.

• If the principal is a minor or of unsound mind, he is incapable of being bound through the acts of his agent. Although a minor himself cannot appoint an agent, there is nothing in sec 183, which prohibits the guardian of a minor from appointing an agent for him.

The Agent's Competence to Contract

• Between the Principal and Third Parties: Any person can become an agent in the relationship between the principal and third parties. However, individuals who are minors or of unsound mind cannot be agents in a way that makes them responsible to their principal. This principle is outlined in Section 184 of the law.
• Capacity of an Agent:The capacity of an agent can be viewed from two perspectives:
  • Binding the Principal: The agent must have the capacity to act on behalf of the principal in a way that legally binds the principal to third parties.
  • Binding Themselves: The agent should also have the capacity to bind themselves through a contract with the principal.
• Creating Valid Contracts: A capable agent can establish a valid contract between the principal and a third party. In this scenario, the agent acts as a connecting link between the two parties, facilitating the agreement.

Consideration in Agency (Section 185)

• No consideration is required to establish an agency relationship. The principal is bound by the actions of the agent on their behalf, and this is considered sufficient detriment to the principal.
• The principal also has a duty to indemnify the agent. The law does not mandate any specific consideration for the validity of an agency contract.
• It is not necessary for a formal contract of agency to be created. It is enough if a person acts on behalf of another and is accepted by the latter.

Modes of Creation of Agency

Modes refer to the various ways or methods through which the relationship of principal and agent is established.

• By Actual Authority: Actual authority is conferred on the agent to act on behalf of the principal. This authority can be either express or implied.
• Express Authority: Express authority is when the principal explicitly grants authority to the agent through spoken or written words.
  Example: A written contract of agency, such as a Power of Attorney, giving the agent the right to act on behalf of the principal.
• Implied Authority:Definition: Implied authority is inferred from the circumstances of the case. The agent can take any legal action necessary to carry out the work of the principal.
  Example: In carrying out the principal's work, the agent may need to take actions not explicitly stated but necessary for the task.
• By Agent's Authority in Emergency: In situations of emergency, the agent is given authority to act on behalf of the principal. This authority is granted to address urgent and unforeseen circumstances.
  
• By Conduct of Principal (Estoppel): Agency is created based on the conduct of the principal, which gives rise to an agency relationship under the law of estoppel. This means that the principal's actions lead others to believe that an agency relationship exists.
• By Ratification: Agency can be established by the ratification of the agent's actions by the principal, even if those actions were taken without the principal's prior authority. Ratification makes the agent's actions binding on the principal.
• By Presumption of Agency in Husband-Wife Relationship: Agency can be presumed in certain relationships, such as between a husband and wife, where one spouse acts on behalf of the other in a manner that creates an agency relationship.