CONTRACT OF AGENCY

Agency can be defined as the relationship between two persons, wherein a person has the authority to act on behalf of another, bind him/her into a legal relationship with the third party. There are two parties in a contract of agency – principal and agent. Contract of Agency is based on the fact that one person cannot perform all the transactions and so he can appoint another perform or act on his behalf.

Who is a Principal?

Any person who employs another person to perform an act and who is being represented by another person in dealing with the third party is the Principal.

Who is an Agent?

A person employed by the Principal, to act on his behalf, represent him in the dealings with the third party and also to bring him into a contractual relationship with the third party, is called an Agent.

In a contract of agency, the agent is not just the bridge between the principal and the third party, but he can also make the principal answerable for the acts performed by him. Here it must be noted that while the agent is acting for the principal, he works in the capacity of principal.

ESSENTIAL FEATURES OF CONTRACT OF AGENCY

The major essentials to the contract of agency include:

essentials of contract of agency

COMPETENCY OF THE PRINCIPAL  

The requirement for the competency of the principal has been laid down in the Indian Contract Act under sec. 183, where the requirements for a competent principal have been listed down to:

  • Majority, i.e. the principal must have attained the age of majority, under the relevant laws.
  • Sound mind, i.e. the principal must be of sound mind, at least at the moment of appointing the agent.

The basic rule of thumb here is that the principal should be capable of performing the tasks, which he wants his agent to do for him. 

Thus any appointment of an agent by a minor or a person of unsound mind is explicitly declared to be void.

COMPETENCY OF THE AGENT

The requirements regarding the competency of the agent have been listed down in Sec. 184 of Indian Contract Act, 1872, where it has been explicitly mentioned that anyone between the principal and the third party may become an agent, regardless of its age or soundness of his mind. It prescribes that any person, including a minor and an unsound person, may become an agent. However, they (the agent) may not be liable to the principal unless they have attained the age of majority and are of sound mind.

From the general description provided under the section, it can be interpreted that, any person, including ones who themselves might not be competent enough to contract (minors and persons of unsound mind included), have the capacity to represent and bind their principals into direct and valid contractual relationships. 

CONSIDERATION NOT REQUIRED 

As per the view of the Indian Contract Act, even consideration is not an essential element for the creation of an Agency; hence no consideration is required to be presented while the formation of an agency.

However, these provisions do not deprive the agent of his legal and justified remunerations unless proven to be specified otherwise in the contract. 

These principles of the contract act are based upon the ideologies of Common Law, which specify that no consideration is required to give an individual the authority of an agent, neither does it bar any one of the parties from suing each other, either it be for the negligence on part of the agent or for the recovery of due compensation from the principal. 

FORMALITIES REQUIRED BY LAW

While the Contract Act sets out certain general guidelines for the contract of agency, it is not to be considered exhaustive. Thus to prevent disagreements later on, certain additional formalities have been prescribed by numerous statues and the Hon’ble courts, dependent on the diverse kinds of agencies; such as:

  • The Registration act, 1908; provided that an agent for the purpose of registration and execution of a document must be effected in writing.
  • A proxy to be appointed for attending the meeting of a company should be registered in writing and that too only in the prescribed form.
  • A Power of attorney issued on behalf of the company should only be under the company’s common seal. 

KINDS OF AGENTS

1. GENERAL AGENT

The principal appoints a general agent to do anything within his authority in all transactions or in all transactions relating to a specific trade, business or matter. The principal grants the authority to the agent to act on his behalf.

It may be assumed by the third party that such an agent has the authority to do all that is usual for a general agent to do. Any private restrictions on the agent’s authority do not affect the third party.

2. SPECIAL AGENT

He is the one who is appointed or employed to do or perform only a specific act, task or function. Outside of this special act, task or function, he has no authority or power. In this case, the third party cannot assume that the agent has unlimited authority. Thus, any act of the agent outside his authority cannot bind the principal.

3. MERCANTILE AGENT

As per section 2(9) of the Sale of goods act, 1930, a mercantile agent is a person who in the customary course of business has an agent’s authority either to sell or consign the goods for the purpose of sale or to buy goods or to raise money on the security of goods. Thus, this definition covers the following:

a. Factors:

A factor is a person who is appointed to sell goods which are put in his possession or to buy goods for his principal. He is the evident owner of the goods in his custody and can thus sell them in his own name and receive payment for them.

He also has an insurable interest in the goods in his custody and a general lien regarding any claim that he may have to arise out of the agency.

b. Brokers:

A broker is a person whose business is to make contracts with the other parties for the sale and purchase of goods or securities for brokerage.

He does not have the possession of the goods and acts in the name of the principal. Also, he has no lien over goods because he has no possession of goods.

c. Del Credere Agent:

A del credere agent is a person who ensures or guarantees his principal that the creditors of goods will pay for the goods they buy for extra remuneration. In the case of failure to pay by the third party, he needs to pay the due amount to his principal.

d. Bankers:

The relation between a banker and a customer is basically that of a debtor and creditor. However, when a banker buys or sells securities or collects cheque, dividends, interests, bills of exchange or promissory notes on behalf of his customer, he becomes the agent of his customer. Thus, he has a general lien on all the securities in his possession regarding the general balance due to him by the customer.

e. Partners:

As per the Partnership Act, every partner is an agent as well as the principal of every other partner in a Partnership firm. Also, every partner is the agent of the firm for the business of the firm.

f. Auctioneers:

An auctioneer is a person who sells the goods by auction. An auction is a process by which goods are sold to the highest bidder in a public competition. He cannot warrant his principal’s title to the goods.

He is the agent of the seller until the goods are auctioned or knocked down. However, after the knockdown, he becomes the agent of the buyer. Also, he is evidence that the sale took place.

CREATION OF AGENCY

The following are different modes of creation of agency:

1. Agency by Express agreement: Number of agency contract come into force under this method. It may be Oral or documentary or through power of attorney.

2. 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

3. Agency by Ratification: Ratification means subsequent adoption of an activity. Soon after ratification principal – agent relations will come into operation. The person who has done the activity will become agent and the person who has given ratification will become principal.

  • Ratification can be express or implied. In case where adoption of activity is made by means of expression, it is called express ratification. For example: Without A`s direction, B has purchased goods for the sake of A. There after A has given his support (adoption) to B`s activity, it is called Ratification. Now A is Principal and B is agent.
  • The ratification where there is no expression is called implied ratification. For example: Mr. Q has P`s money with him. Without P`s direction Q has lent that money to R. There after R has paid interest directly to P. Without any debate P has taken that amount from R. It implies that P has given his support to Q`s activity. It is implied ratification.

4.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 enables 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 100 bags of butter for transportation, to a road transport company. Actually it is bailment contract assume that in the transit all vehicles has 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 A , B says to C that he (B) is A`s agent though it is not so actually. A has not restricted B 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: Y is X`s servant and X has made Y accustomed to bring goods on credit from Z. On one occasion X has given amount to Y to bring goods from Z on cash. B bought goods on credit as usually and runs away with the money. This is agency by holding out and therefore X is liable to pay amount to Z.

DUTIES OF AGENT

An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship. This duty supplements the duties created by an agency contract. A fiduciary duty exists because agency is a relationship of trust and confidence. The principal’s many remedies for an agent’s breach of her fiduciary duty include termination of the agency and recovery of damages from the agent.

1.      Duties to execute mandate:

The first and the foremost duty of every agent is to carry out the mandate of this principal.He should perform the work which he has been appointed to do. Any failure in this respect would make the agent absolutely liable for the principal’s loss.Thus it had been held in number of cases that:

“The rule of equity is,that if an order is sent by a principal to a factor to make an insurance,and he charges his principal,as if it was made,if he never in fact made that insurance, he is considered as the insurer himself.”

In such cases the agent is held liable to the principal for the amount which would have been recovered if the goods had been insured.

CASE: Pannalal Jankidas v. Mohanlal:

A commission agent purchased goods for his principal and stored them in a godown pending their dispatch.The agent was under instruction to insure them.He actually charged the premium for insurance,but failed to insure the goods.The goods were lost in an explosion in the Bombay harbor.

The agent was held liable to compensate the principal for his loss minus the amount received under the Bombay Explosion Ordinance,1944, under which the Government paid compensation up to fifty per cent in respect of the uninsured merchandise lost in the explosion.

2.Duties to follow Instructions or Customs:

When an agent is appointed to facilitate or negotiate a transaction on behalf of the principal, the agent owes a duty to the principal to act in the principal’s best interests within the authority of the agent.

In practice, the duty to act in the best interests of the principal requires the agent to use his due diligence and skill to negotiate terms of a transaction on behalf of his principal with a third party to the greatest advantage of his principal in the circumstances.

According to Section 211 an agent that an agent is bound to conduct the business of his principal according to the directions given by the principal and to keep himself within the confines of his authority.In the absence of directions,the agent has to follow the custom which prevails in businesses of the same kind and at the place where the agent conducts such businesses.

CASE: Liley vs. Doubleday:

An agent was instructed to warehouse his principal’s goods at a particular place.He placed a part of them at a different warehouse which was equally safe.But the goods were destroyed without negligence.

The agent was held liable for the loss. Any disobedience, or departure from,the instructions make the agent absolutely liable for the loss.

3. Duty of reasonable care and skill

Section 212 lays down the standard of care and skill required by an agent.

a.Common law requires an agent to act with due care and skill in performing his duties. Agents who fail to meet this standard are prima facie negligent.

b.Generally speaking, an agent in a certain profession, trade or calling who performs his duty with the degree of care and skill expected of a reasonable, average member of the relevant profession, trade or calling meets the requisite standard.

The Agent is bound to act with reasonable diligence,and to use such skill as he possesses;and to make compensation to his principal in respect of the direct consequences of his neglect,want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect,want of skill,or misconduct.

4. DUTY TO AVOID CONFLICT OF INTEREST

An agent whose interest’s conflict with the principal’s interests may be unable to represent his principal effectively. Therefore, an agent may not acquire a material benefit from a third party in connection with an agency transaction. When conducting the principal’s business, an agent may not deal with himself.

For example, an agent authorized to sell property cannot sell that property to himself. Many courts extend the rule to include transactions with the agent’s relatives or business associates or with business organizations in which the agent has an interest. However, an agent may engage in self-dealing transactions if the principal consents. For this consent to be effective, the agent must disclose all relevant facts to the principal before dealing with the principal on his own behalf.

5. Duty not to make secret profit:

Common law requires that an agent should not make any profit or acquire any benefit in the course and in the matter of his agency without the knowledge and consent of his principal. Such profit, generally known as secret profit, is not restricted to money but may include anything of value, for example, an interest-free loan, a club membership, etc. An agent who has made secret profit is liable to account to the principal for such profit in addition to any other remedies available to the principal for the agent’s breach of duty. The following situations are some examples of secret profit:

i.Use of property

An agent who uses property entrusted to him by the principal to make a profit for himself and without the principal’s consent is in breach of his duty not to make secret profit. For example, if an estate agent is entrusted with the keys to a property by its owner for the purpose of listing while the owner is abroad, and the estate agent lets the property to a third party and receives and keeps the rent for himself without the consent of the owner, the estate agent will be, among other things, in breach of his duty not to make secret profit.

ii.Use of position

In some circumstances, an agent may obtain a benefit simply through his position as agent of the principal. For example, an agent appointed to purchase goods for his principal from a supplier obtains secret monetary benefit from the supplier for placing purchase orders with the supplier. Such an act by the agent will amount to making secret profit.

iii.Use of information or knowledge

An agent who acquires information or knowledge which he has been employed by the principal to collect or discover, or which he has otherwise acquired for the use of his principal should not make use of the same for his personal gain. For example, in the course of acting for a purchaser, an estate agent looks for a property for investment in a particular building specified by the principal and becomes aware of a property in that building which is being offered for sale at below the market price.

6. Duty to remit sums

According to Section 218 of Indian Contract Act, agent is under the duty to remit sum repay to his principal all sums received on his account. The agent is, however, entitled to deduce his lawful charges, but subject only to this right, the principal’s money must be remitted to him even if it has been received in pursuance to a void or illegal contract.

The agent has to perform this duty even if his earnings for the principal flow out of void or illegal transactions.

7. Duty to maintain Accounts:

An agent who receives any property for his principal or from his principal is bound to keep such property separate from his own and he is to be treated as a trustee of such property.

Even after the agency relationship has ceased, the agent’s duty to account to the principal may continue. Hence, the agent is obliged to return to his principal all documents and property originally given to the agent by the principal and documents prepared by the agent on the instruction and at the expense of the principal.

Agents must keep accurate records and accounts of all transactions and disclose these to the principal once the principal makes a reasonable demand for them.

8.Duty not to delegate

The general rule is that an agent may not delegate his authority or duty in whole or in part except with the authority and consent of the principal.

Owing to the fact that an agency agreement is privy to the principal and the agent and that authority is normally given to the agent personally, on account of his trustworthiness, skill or experience, the agent is under a duty to the principal not to delegate his duties under the agency agreement to another person, but to exercise the authority in person. Hence, an agent has normally no implied authority to employ deputies or sub-agents to carry out his duties.

But there are exceptions in the following cases when the agent can delegate:

Nature of work: Sometimes the very nature of work makes it necessary for the agent to appoint a sub- agent .For example,an agent appointed to sell an estate may retain the services of an auctioneer and the one authorized to file a suit may engage a lawyer. A banker instructed to make payment to particular person at the particular place may appoint a banker who has an office at that place.A banker authorized to let out a house and collect rents may entrust the work to an estate agent.

Trade Custom-A sub-agent may be appointed and the work delegated to him if there is ordinary custom of trade to that effect.Thus architect generally appoints surveyors.

Ministerial action-An Agent cannot delegate acts which he has expressly or impliedly undertaken to perform personally,eg.acts requiring personal or professional skill.But the agent may delegate acts which are purely ministerial in nature,e.g.,authority to sign.

Principal Consent- The principal may expressly allow his agent to appoint a sub-agent.His consent may also be implied from the conduct of the parties.The principal may ratify his agent’s unauthorized delegation.

TERMINATION OF CONTRACT OF AGENCY

An agency can be terminated by following ways:

1. Mutual Agreement

The agency may be terminated at any time and at any stage by the mutual agreement between the principal and his agent. Therefore, the authority of an agent terminates, when the principal and the agent agree to terminate it.

Example: A appointed B, as his agent in order to collect the loan lent to C and D. B collected the loan lent to C. Subsequently, A and B agreed to put an end to the agency relationship between them. Here the agency is terminated.

2. Revocation of the Agent’s Authority by the Principal

The principal may revoke the authority of his agent before it has been exercised by the agent so as to bind the principal.

Example: A appointed D, as his agent to purchase certain goods. Any time before, he purchases the goods, A may revoke D’s authority. However, the revocation of agent’s authority is subject to the following conditions:

1. If the agent has exercised his authority partly, the principal may revoke the agency for future acts only.

2. If the agency is created for a fixed term and if there is some sufficient cause, the principal may revoke it before the expiry of the said term.

3. If the agency is created for a fixed period or continuous, the principal must give a reasonable notice of revocation of agency to the agent.

4. If the agent has some interest in the subject-matter, the agency can be revoked only when there is an express contract permitting the termination.

3. Revocation by the Agent

Agent, after giving a reasonable notice to the principal, may renounce the business of agency. If the contract of agency is entered into for a fixed period, agent should pay compensation to the principal for the earlier renunciation of the business of agency.

Termination of Agency by Operation of Law

An agency can be terminated by operation of law in any of the following cases:

1. Performance of the Contract: When the agency is for a particular object, the agency terminates when the object is fulfilled.

2. Expiry of Time: When an agency is created for a particular period of time, it comes to an end on the expiry of that period even if the work is not completed.

3. Death or Insanity of Either Party: The agency is terminated when the agent or principal dies or becomes insane. On the death of either the agent or the principal, the agency is automatically terminated because a person cannot act on behalf of non-existent person. Thus, where a client dies, his pleader’s authority also terminates. Similarly, the relationship between agent and principal comes to an end when principal or agent becomes insane, for a person of unsound mind cannot contract.

4. Insolvency of the Principal: When the principal is declared as insolvent, the agency is terminated. This is because the insolvent is disqualified from entering into contract in respect of his property.

5. Destruction of Subject-Matter: When the subject-matter in respect of which agency was created has been destroyed, the agency is terminated. Thus, if an agent is asked to sell a house, and the house is destroyed by fire, there is a cessation of the agency.

6. Principal becoming an Alien Enemy: When the war breaks out between the countries of the principal and the agent, the contract of agency is terminated.

7. Dissolution of a Company: When a company, whether it is of principal’s or agent’s dissolved, the contract of agency between them comes to an end.

8. Termination of Sub-Agent’s Authority: The sub-agents authority is terminated automatically, as and when the authority of the agent is terminated.

9. Subsequent event Rendering the Agency Unlawful: It maybe that an act is lawful when the agency was created but if it is declared by law to be unlawful subsequently, agency cannot continue, as that would be unlawful. An agency that is lawful may become unlawful due to declaration of war when the principal or agent is deemed an alien enemy.

Termination of Sub-agency and Substituted Agency

The authority of sub-agent will be terminated as and when the main agency is terminated. However, the substituted agency will not be terminated automatically if the authority of the main agent is terminated.

CONCLUSION

An agency is the creation of a contract entered into by mutual consent between a principal and an agent. By agency, a principal grants authority to an agent to act on behalf of and under the control of the principal. The relation between a principal and an agent is fiduciary and an agent’s actions bind the principal. An agent is liable to a principal when he/she acts without actual authority, but with apparent authority.

An agent is liable to indemnify a principal for loss or damage resulting from his/her act principal owes certain contractual duties to his/her agent. Correlative with the duties of an agent to serve a principal loyally and obediently, a principal’s primary duties to his/her agent include:

To compensate the agent as agreed; and To indemnify and protect the agent against claims, liabilities, and expenses incurred in discharging the duties assigned by the principal.

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