The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships that engage a person, called the agent, that is allowed to act on behalf of the additional person (called the principal) to create legal relations with a third party and carry out day to day business operations.
In our day to day life, we many times give our work to be done by someone else on our behalf. But here now a question arises that if a person who was asked to do a task makes a mistake or fails to perform his / her duty, then who will be liable? Who is accountable for the non-performance of the work? The answers to these questions will be clear in the following article.
Here the concept of Agency arises and its provisions guide the fulfillment of the rights and duties of all the persons involved in it. We shall discuss all the aspects of the “Concept of Agency” one by one.
What is the concept of agency in law?
Chapter X of the Indian Contract Act, 1872 deals with all the laws relating to the Concept of Agency. In simple terms when a party delegates some authority to some another party to execute some work on behalf of it, the party who acts on behalf of someone else is called an Agent, and the party who delegates the work is called the principal. This is known as the concept of agency.
This concept is very important as almost all the business transactions worldwide are carried out through agency and all the big corporate, firms, and businesses work out through an agency. Therefore, all the laws relating to the agency are an important area of Business Law.
Who is an agent?
The definition of an Agent is defined under Section 182 of the Indian Contract Act, 1872. It says “a person employed to do any act for another or to represent another in dealing with third persons”.
Now here a soon arises that who can appoint an Agent and who can be an Agent? So, the answer to these questions is clearly stated under Section 183 of the Indian Contract Act, 1872 which says- “any person who has attained the age of majority and has a sound mind can appoint an agent”. This means that any person who is capable of contracting can legally appoint an agent but persons with unsound minds and the minors cannot appoint an agent.
Also, the Section184 of the Indian Contract Act, 1872 states about the eligibility to become an agent, it says- “the person who has attained the age of majority i.e. 18 and has a sound mind can become an agent.” It is necessary to be of a sound mind as well as a mature age because an agent has to be answerable to the principal.
Types of Agents
There are various kinds of agents, On the point of view of the extent of their authority and the nature of the work performed by the agents may be classified under the following heads:-
- Universal Agent- A universal agent is a person who is authorized to do all the tasks and acts which the principal can lawfully do and can also delegate the same to an agent to act on behalf of him.
- Special Agent- A person who is employed to do a particular act or represent his principal in some particular business transactions is called a Special Agent.
For example, an agent is appointed to only sell a car and if that special agent does anything outside the authority of the principal, then the principal is not bound by it.
- General Agent- A General Agent is a type of agent which is employed to perform all the tasks connected with a particular business or any type of lawful employment.
For example, General Manager, a general manager is appointed to do anything which falls within the ordinary scope of that business.
- Broker- A broker is the one who is appointed to make some contracts for the purchase or sale of the goods. The broker may not be entrusted with the possession of goods. He simply acts as a connecting link between the buyer and the seller to bring them together. If the deal gets final then the broker is entitled to get the reward in the form of commission or fees.
- Factor- A factor is a mercantile agent to home goods that are entrusted for sale. He enjoys wide discretionary powers about the sale of goods. A Factor is an agent who is entrusted with the possession and the contract of the goods to be said by him for his Principal. He has the possession of goods, the authority to sell them in his name, and a general discretion as to this sale. He may also sell on the usual term of credit and may receive the price and give a good discharge to the buyer.
- Auctioneers- An agent is said to be an Auctioneer when he sells any property at a public auction. He is an agent for the seller as well as the agent of the buyer. He is a mercantile agent within the meaning of Section 2(9) of the Sale of Goods Act.
- Del Credere Agent- A Del Credere agent is an agent who ensures or guarantees the principle that the creditors of goods will pay for the goods they buy from them for extra remuneration. In the case of failure to pay the money back by the third party, the agent needs to pay the full amount to his principal.
- Bankers- The relationship between the banker and the customer is basically of a debtor and a creditor. However, when a banker buys or sells the securities or collects a cheque, dividends, interests, bills of exchange or promissory notes, etc. on behalf of his customers, then he becomes the agent of his customer. Hence, he has a general lien on all the securities in his possession regarding the general balance due to him by the customer.
- Partners- The partners in a business firm are also called as the agents of the firm. As per the Indian Partnership Act, “every partner is an agent as well as the principal of every other partner of the partnership firm.
- Commission Agent- A commission agent is a type of mercantile Agent who buys or sells goods for his principal on his name, and he also receives a commission for his labors. He may or may not have possession of the goods.
Agent’s Duties to principal
An Agent has many duties towards his principal which are needed to be followed by an agent, and they are:-
- Duties to execute mandate- The very first important duty on each agent is to carry out the mandate of his principal. An agent must perform the work in which he has been appointed to do so and any failure in that might led to hold the agent liable for the principal’s loss incurred. This duty is well prescribed in Section 211 of the Indian Contract Act, 1872.
- Duty of reasonable skill and care- Section 212 of the Indian Contract Act, 1872 Says,
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.
Thus, The Agent is bound to act with some reasonable diligence, and to use the skills as he possesses; and to make compensation to his principal in respect of the direct consequences of his negligence, want of skill or any misconduct, but not in respect to the loss or damage which are indirectly or remotely caused by such negligence, want of skill, or misconduct.
- Duty To Avoid Conflict Of Interest– An agent must avoid any conflict of interest between him and his principal i.e. he may not acquire a material benefit from a third party in connection with an agency transaction.
- Duty not to make a secret profit– It is a very basic but important duty of an agent to not to make any secret profits from the business transactions without the knowledge and consent of his principal. Hence, it is his moral duty to disclose all the material facts relating to all the business transactions happening with him.
- Duty to remit sums- According to Section 218 of the Indian Contract Act, an agent is under the duty to remit sum repay to the principal all sums received on his account. The agent is, however, entitled to deduce his lawful charges, the principal’s money must be remitted to him even if it has been received in pursuance to avoid or illegal contract.
Rights of an Agent
The following are the rights of an agent:-
- Right to Remuneration
As per section 219 of the Indian Contract Act, 1872, an agent has a right to receive the agreed remuneration or in absence of agreement, a reasonable remuneration for rendering the services to the principal that are not voluntary. Therefore he becomes eligible to receive the remuneration as soon as he completes the work that he undertook from his principal.
- Right of retainer
An agent has a right to retain any remuneration or any of the expenses which is incurred by him while conducting the Principal’s business.
- Right of Lien on Principal’s property
The agent has the right to hold (keep with himself) any movable or any immovable property of the Principal with him until his due remuneration is paid to him fully by the Principal.
- Right to be Indemnified
The agent has also a right to be indemnified against all the lawful acts done by him during conducting the Principal’s business transactions.
- Right to Compensation
The Agent has a right to be compensated for any injury or any loss suffered by him due to the lack of some skill and competency of the Principal in the course of a business transaction.
Who is a Principal?
Section 182 of the Indian Contract Act, 1872 defines the term “Principal”. It says, “The person for whom such act is done, or who is so represented, is called the “principal”.
Hence the person who has the power to delegate tasks and has delegated his authority is regarded as the principal.
For example, X, a businessman, delegates Y to buy some books on his behalf. Here, X is the principal, and Y is the agent, and the person from whom the books are bought is the ‘Third Person’.
Principal’s duties to Agent
The duties of a principal are:-
- The Principal must indemnify the agent against any lawful acts done by him in the exercise of his authority as an agent in the course of a business transaction.
- The Principal is also having to indemnify the agent against any act done by him in good faith, even if it ended up violating the rights of third parties.
- The Principal is never liable to the agent if the act that is delegated is criminal in the eyes of law. The agent will also in no circumstances be indemnified against such criminal acts.
- The Principal must make compensation to his agent if he/ she causes any injury to him because of his competence or some lack of any skill.
Rights of a Principal
- The various rights of a principal are:
- He may repudiate the transaction at any point in time.
- He may affirm the transactions and claim the benefits.
- He may claim the damages for the losses caused to him.
- To ratify or disown the agent’s any acts.
- To revoke the agent’s authority.
- To claim the losses or profits.
- To demand accounts.
- To refuse remuneration when the agent is guilty of misconduct.
Termination of an agency
There are certain rules regarding the revocation/ Termination of an agent’s authority in a business.
They are as follows:-
- The agency can be revoked any time before the authority has been exercised.
- If according to the terms of the contract between any of the two parties, the agency has to continue up to a certain period, any prior revocation by the Principal shall be remunerated to the agent.
- The termination of an agency shall not take effect before it has been communicated to the agent at any cost.
- The termination of authority of an agent terminates the authority of all the sub-agents under him in the contract or business.
The concept of agency is very important as almost all the business transactions worldwide are carried out through agency and all the big corporate, firms, and businesses work out through an agency. Therefore, all the laws relating to the agency are an important area of Business Law.
The various laws relating to the agency is well explained in the chapter-10 on the Indian Contract Act, 1872. An agency is formed when a person delegates his authority to another person, that is, appoints them to do some specific job or a number of them in specified areas of work.
A contract of agency is a kind of a general contract. As such, an agency may terminate in the same way as a contract is discharged except where the agency is irreversible. The relation of the principal and an agent can only be ended by the act or agreement of the parties to the agency or by the operation of law.