In modern-day society, there are drastic changes & advancement taking place in various field. The field of Law is no exception. Over time, a lot of changes have come up in the formation of a valid contract, as well as in the contract of agency. Law of agency is an area of Commercial Law which deals with contractual, non-contractual & quasi-contractual fiduciary(trustworthy) relationships. Chapter 10of the Indian Contract Act,1872 deals with the Laws if agency. It defines agency as the authority given to one party by another party to perform his actions on behalf of him, the relationship between them is known as Agency.
Law of agency is a vital aspect worldwide, as all the transactions across the globe are carried out with the help of agency. Every corporation, whether big or small carries their work with the help of agency. Therefore laws related to agency are considered to be crucial areas of Business Laws. A contract of agency has three fundamental constituents, namely a Principal, an Agent & a Third-party.
Who is an agent?
According to Section 182 of the Indian Contract Act,1872, an agent is defined as a person that is employed to do any work or act for a person while dealing with a third party. The agent is authorized to act on behalf of another person called Principal, to create a legal relationship with a third party. An agent plays an essential role as it is the agent who has the power to affect the legal relationship of the principal with the third party.
In one of the case laws P. Krishna Bhatta V. Mundila Ganpathi Bhatta the Madras High Court tried to explain the concept of agency. In this case, Justice Ramaswami attempted to clarify that in legal terms & phraseology, any person who acts for another is not termed as an agent. He explained that if such is the scenario that any person working for another is termed as an agent, then a servant who is rendering his services to his master’s or a person working in someone’s shop or factory would be considered as their agent.
He termed an agent to a person who acts as a representative of another person in business dealings & negotiations in front of a third party. That person can be termed legally an agent of the person on whose behalf he is acting.
The same observations were made in the case of Syed Abdul Khader V. Rami Reddy by the Supreme Court. The Apex Court justified an agent as a position where one person has an authority to create legal relation between Principal and a third party.
In the case of National Textile Corporation V. NareshKumar Badrikumar Jagad, the supreme court termed an agent to be simply an extended hand of the principal & considered that he could not claim independent rights.
Who is a Principal?
Section 182, of the Indian contract act, defines principal as a person for whom such act is done or the person who is represented by the agent. The person who had delegated his authority is known as Principal.
Section 183 of the Indian Contract Act sets up the guidelines for a person to take up the role of a principal. The person should have attained the age of majority and is of sound mind. Minors & any person who is of unsound mind cannot appoint an agent on their behalf. In simple terms, a person who is capable of making the contract can legally be considered as the principal.
However, there are certain exceptions to this, in cases where minors are capable of binding themselves by the contract, they may appoint an agent on their behalf to enter into a contract. In the case of Madanlal Dhariwal V. Bherulal, the High Court of Karnataka held that there is nothing in the contract act that prevents the guardian of a minor from appointing an agent for him. Hence guardian can appoint an agent for a minor.
In furtherance, according to Section 185 of the Indian Contract Act, no consideration is necessary for a contract of agency.
- Ram appoints Hari to deal with his bank transaction. In this case, Ram is the principal, Hari is the agent, and the bank is the third party.
- Rishi lives in Ahmedabad & he owns a shop in Delhi. He appointed a person known as Shivam as the caretaker of the Shop. In this case, Rishi has provided his authority to Shivam to look after the dealings of the shop. Here Rishi is the Principal whereas Shivam becomes an agent to Rishi.
- Radhey, a businessman who owns a shop in Jaipur, appoints Lucky to buy goods on his behalf from the factory. Here Radhey is the Principal & Lucky is the agent whereas the factory from where the goods are purchased is known as the third party.
Authority of an Agent
An agent can be both express as well as implied.
According to Section 187, of the Indian Contract Act, express authority is said to be the one where the authority is given either by words or in writing. Example of a written contract of agency is a power of attorney, which gives the right to an agency to act on behalf of its Principal, in accordance to the terms & conditions mentioned in the attorney.
According to Section 187, authority is said to be implied when the authority is inferred from the circumstances & facts of the case.
Creation of Agency
A contract of agency can be either express or implied. Consideration is not considered to be an essential element in the contract of agency. Contract of agency may also arise by various other factors such as by estoppel, by necessity, by ratification etc.
Agency by estoppel (Section 237 of Indian Contract Act)
An agency can be created by estoppel. It can be stated as a situation where the Principal by his words or conduct has led the other contracting party into an honest belief that the said agent has authority to the dealing. The principal is bound by such act or obligation, and he will be stopped from denying his agent’s authority, although the agent might not possess any authority in the first place.
For example, in a situation where ‘A’ allows a third party to believe that ‘B’ is acting as his authorized agent. In such a case ‘A’ will be stopped from denying the agency if the third party relying on such circumstances makes a contract with ‘A’ even in the scenario where ‘B’ had no authority at all in the first place.
Agency of necessity ( Section 188 & 189 of the Act)
In the case of agency of necessity, a person who is entrusted with someone’s else’s property may have to incur unauthorized expansion to preserve or protect it. This is called the Agency of necessity.
Example, A sent a horse by railway. On its arrival at the destination, no one arrived to receive it. In such circumstances, the railway company is bound to take reasonable steps to keep the horse alive as the railway company was an agent of the necessity to A.
Agency by Ratification ( Section 169 to Section 200 of Indian Contract Act)
Agency by Ratification is created when a person acts on behalf of another without his knowledge and later is ratified by that person. In such a scenario, an agency by ratification is created between the two.
Wife as an Agent
In a situation where the husband & wife are living together, it is presumed that the wife has the authority overusing his husband’s name for credit for the purchase of necessaries of life suitable according to their standards of living.
But husband will not be liable in the circumstances where he shows that
- He had expressly forbidden his wife to use his credits
- In the situation where he had incredibly denied the tradesman to supply goods on credit to his wife
- Or in the situation where he already supplied his wife with the article in question
Different types of Agent
- General agent- An agent who is appointed to do all the acts related to a particular work.
- Specific agent- An agent who is appointed to do a particular specific act.
- Sub-agent- An agent appointed by another agent to work under his guidance is termed as sub-agent.
- Co-agent- When two or more agents are appointed jointly to do a specific act, they are known as co-agent.
- Commission agent – An agent appointed by the Principal to buy and sell goods.
- Del credere agent- A Principal-agent relationship where the agent not only acts as a salesperson or broker for the Principal. The agent also acts as a guarantor for the Principal. The agent guarantees the credit, which is extended to the buyer.
- Auctioneer- An agent who acts as a seller in an auction for the Principal.
- Broker- An agent who is authorized to create a contractual relationship between two parties.
Duties of an agent
Agent’s duty in conducting Principal’s business (Section 211)
An agent is bound to conduct the business of the principal according to the guidelines and directions provided by the Principal. In the absence of directions, the agent is bound to follow the customs which prevails in doing business of the same kind. If a loss is incurred, the agent must make it good to the Principal and in the case where profit accrues, he must account for it.
Diligence and skill required by agent (Section 212)
According to Section 212, of Indian contract act, an agent is required to conduct the business of the agency with as much skills as is generally possessed by a person in doing similar business. Unless the principal has asked to perform for different types of skills to complete the work. In cases where there is any direct consequence of negligence of the agent skills or misconduct on the business an agent is bound to make compensation to the Principal.
Duty to render proper accounts (Section 213)
According to Section 213 of the Indian Contract Act, an agent on the demand of his principal is bound to render accounts.
Duty to communicate with Principal (Section 214)
According to Section 214 of the Indian contract act, an agent has to communicate with his Principal in cases of difficulty to obtain his instructions.
Not to deal on his own account (Section 215)
Section 215 of the Indian contract act, states that in the cases where the agent deals with his own account during the term of agency, without obtaining the consent from the principal. The Principal may repudiate the transaction.
Not to make secret profits (Section 216)
According to Section 216 of the Indian Contract Act, an agent should not deal in business or agency on his own to make some secret profit. In such cases, the Principal is entitled to claim the benefit from the agent which he may have gained from the transaction.
Not to disclose secret
In a Principal-agent relationship, an agent must maintain the secrecy of the business and not reveal any confidential matters related to the business.
Rights of an agent
- Right to receive Remuneration (Section 219)
Section 219 of the Indian contract act, states that an agent is entitled to his remuneration. Furthermore, Section 220 of the act states that if the agent is guilty of misconduct in the business of the agency then he is not entitled to any remuneration in respect to that part of the business in which he had misconducted.
- Agent’s right to lien on Principal’s property (Section 221)
An agent is entitled to retain any movable or immovable property, goods & paper received by him in the cases where the amount is due to him for commission, disbursement & services.
- Agents Right to get compensation (Section 225)
According to Section 225, an agent is entitled to claim compensation for any injuries that he suffers as a consequence of Principal neglect or want of skill.
Termination of Agency
An agency can be terminated in the following circumstances:-
- When the authority of the agent is revoked by the Principal.
- In the situation where the business of the agency is fulfilled.
- In cases where either of the party dies or becomes mentally disabled.
- In the circumstances where the Principal is adjudicated as insolvent.
- In the cases where the agent renounces the business of the agency.
Who is liable for Agent’s Fraud or misrepresentation?
According to Section 238 of the Indian Contract Act, the Principal is liable for any kind of misrepresentation or fraud is done by the agent during his work. It is considered as if the act is done by the Principal himself.
The concept of “agency” is a legal term that is taken for granted in most of the world. In simpler terms, it merely is the appointment of another to act on our behalf for a specified purpose. But it is far more complicated than it. To know about the Principal-agent relationship, one need’s to be through with various sections of the laws.
As most of the things which a person faces in day to day life, it becomes so common for him that he fails to notice its complexity. But the person who is engaged in a business, agency is considered to be a central part of their legal business life as a contract or employment law. Good working knowledge is required for this purpose.
Frequently Asked Questions
- How do we define agency and principal?
- How does the authority of an agent has been defined?
- How does the creation of agency work?
- What are the duties of an agent?
- What are the rights of an agent/
 AIR 1955 Mad 648
1979 AIR 553
12 SCC 695
 AIR 1965 Kant 272