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contract_laws:part-2:agency

Contract of Agency

An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal.

Section 182 of Indian Contract Act, 1872 defines agent and principal. An agent is one who is:

  1. employed by another (the principal);
  2. to do any act for that principal; or
  3. to represent him in dealings with third persons.

Principal: The person for whom such act is done, or who is so represented, is called the “principal”. Therefore, the person who has delegated his authority will be the principal.

Chapter X of Indian Contract Act, 1872 provides for - appointment of agents (sections 182-185); authority of an agent (sections 186-289); appointment of sub-agent (sections 190-193) and substituted agent (sections 194-195); ratification of acts done without authority (sections 196-200); revocation and renunciation of authority and its consequences (sections 201-207, 209-210); when termination of authority takes effect (section 208); effect of termination, agent's duties to the principal (sections 211-216); agent's rights (sections 217-221); the principal's duties, ie, the agent (sections 222-225); the effect of agency on contracts with third persons (sections 226-230); and presumptions of personal liability of the agent (section 230); and presumptions in such cases (sections 231-238). The chapter is not exhaustive of the principles and provisions affecting the contract of agency.

Nature of Agency

Agency is the relationship which exists where one person (the principal) authorizes another(the agent) to act on its behalf and the agent agrees to do so. Agency in law connotes the relation which exists where one person has an authority or capacity to create legal relations between a person occupying the position of principal, and third parties. Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly consents that the other should act on his behalf so as to affect his relations with third parties, and the other of whom consents so to act or so acts.

The essential feature of an agent is his power of making the principal answerable to third persons, viz. enabling the principal to sue third parties directly, or render him liable to be sued directly by the third party. The test of agency is whether the person is purporting to enter into transactions on behalf of the principal; i.e., to create, modify or terminate contractual obligations between his principal, whom he represents, and some third person. In order to constitute an agency, it is not necessary to have a formal agreement. An agent, though bound to exercise his authority with all lawful instructions given to him, is not subject to the direct control or supervision of the principal.

Agency is not transferable or assignable. It is personal in character, depending on the terms of the contract between the principal and the agent. An agency does not have the effect of transferring property. Agency may be created either by express appointment by principal or by implication of law or by subsequent ratification.

Who can Employ Agent?

Any person who is of the age of majority according to the law to which he is subject and who is of sound mind, may employ agent (S.183). No qualifications as such are prescribed for a person to be agent except that he has attained majority and is of sound mind. Thus, a minor or a lunatic cannot contract through agent since they cannot contract themselves personally either. If agent acts for a minor or lunatic, he will be personally liable to the third party. Association or group of persons may also appoint agent; for instance, a partnership firm may, transact business through agent. Certain group of persons, because of the very nature of their organisation, must act through agent, e.g., a company, which is an artificial person and thus can transact business only through agent.

T.C. Mathai v. District and Sessions Judge1) : Every person who is sui genris has a right to appoint an agent for any purpose whatsoever, and that he can do so when he is exercising a statutory right no less than when he is exercising any other right. This rule is subject to certain well-known exceptions. As per the exceptions mentioned by the Supreme Court in that case, a person's right to appoint an agent does not extend to the following acts:

  1. Where the act to be preformed is personal in character, or
  2. Where the act to be performed is annexed to a public office, or
  3. Where the act to be performed is annexed to an office involving any fiduciary obligation, or
  4. Where the law requires that a particular act should be done by a party in person.

Who may be Agent?

Since agent is a mere connecting link or a ‘conduit pipe’ between the principal and the third party, it is immaterial whether or not the agent is legally competent to contract. Thus, there is no bar to the appointment of a minor as agent. However, in considering the contract of agency itself (i.e., the relation between principal and agent), the contractual capacity of the agent becomes important. Thus, no person who is not of the age of majority and of sound mind can become agent, as to be responsible to his principal (S.184). Thus, if the agent happens to be a person incapable of contracting, then the principal cannot hold the agent liable, in case he misconducts or has been negligent in the performance of his duties.

Example: Japhin appoints Anjana, a minor, to sell his ring for not less than Rs.10,000 Anjana sells it for Rs.8000. Japhin will be held bound by the transaction and further shall have no right against Anjana for claiming the compensation for having not obeyed the instructions, since Anjana is a minor and a contract with a minor is void-ab-initio.

Distinction between an Agent and Servant

An agent may have, and often has,in fact, a large discretion, but he is bound in law to follow the principal's instructions, provided they do not involve anything unlawful. To this extent, an agent may be considered as a superior kind of servant; and a servant who is entrusted with any dealing with third persons on his master's behalf is to that extent an agent.

An agent Servant
He has the authority to create contractual relationship between the principal and a third party. He ordinarily has no such authority.
He may work for several principals at a time. He ordinarily works only for one master.
An agent is bound to follow all the lawful instructions of the principal but he is not subject to the direct control and supervision of the principal. A servant acts under the direct control and supervision of his employer and is bound to follow all reasonable orders given to him in the course of his employment.
A principal is liable for the wrongs of his agent done within the scope of his Authority. A master is liable for the wrongs of the servant if they are committed in the course of his employment.
An agent as such is not a servant.A servant is generally, for some purposes, his master’s implied agent.
He usually gets commission.He usually gets salary or wages.

Distinction between an Agent and Independent Contractor

An agent differs from an Independent Contractor in the following respects:

An agent Independent contractor
He works under the control and supervision of the principal. He works independently of the control of the person for whom he does the work.
He is not personally liable for all acts done by him within the scope of his authority.He is personally liable for all acts done by him.
He usually gets commission. He usually gets the fixed contracted amount or amount at a fixed contracted rate.

Consideration For Agency

Is Consideration for Agency Necessary?

Section 185: No consideration is necessary to create an agency. Thus, a contract of agency constitutes an exception to the general rule contained in Section 25 that no contract can be valid unless it is entered into for a consideration. It means that there can be a gratuitous contract of agency and a gratuitous agent will be as much bound by his acts as a paid agent.

Test of Agency

The true test of agency lies in answering the question whether a person has the capacity to create contractual relationship between the principal and a third party and to bind the principal by his acts. If the answer to this question is yes, there exists the relationship of agency otherwise not.

General Rule of Agency

  • Consideration is not essential
  • Delegation of Authority
  • Contractual capacity
  • Agent can appoint sub agent with the permission of Principal
  • If the agent is removed, subagent is automatically terminated.

Modes of Creation of Agency

There are various ways or methods by which the relationship of principal and agent may arise.

  1. By actual authority being conferred on the agent to act on behalf of the principal. Such authority may be either express or implied.
  2. By agent’s authority to act on behalf of the principal in a situation of emergency.
  3. By the conduct of the principal, which creates an agency on the basis of the law of estoppel.
  4. By ratification of the agent’s act by the principal, even though the same has been done without the principal’s prior authority.
  5. By presumption of agency in husband-wife relationship.

Express authority

Express authority is given by the principal to the agent by express words, spoken or written2). A statement by a person, who has acted outside his authority, that he was acting within it, does not give authorisation to his unauthorised acts. Actual authority results from a manifestation of consent made by the principal to the agent that he should represent or act for the principal. The authority may be express if it is in writing or by words or it may be implied. The authority is apparent when it results from a manifestation made by the principal to third parties. Under this doctrine where a principal represents or is regarded by law as representing that another has authority, he may be bound as against a third party by the acts of that other within the authority which that person appears to have though in fact he had no such authority.

Implied Authority

According to Section 187, an authority is said to be implied when it is to be inferred from the circumstances of the case. Implied authority is that which is inferred from the conduct of the parties, or from the nature of the employment. Where the authority is not express, the question whether an agent had authority to act in a particular matter on behalf of the principal, is to be decided according to the circumstances of the case. Implied authority is stated to be divided into four types:

  1. incidental authority, i.e., authority to do that which is ordinarily or necessarily incidental to the due performance of the express authority;
  2. usual authority, i.e., the authority to do whatever is usually done by persons occupying positions in particular trades or businesses;
  3. customary authority, i.e., an authority to act in accordance with the customs and usages of the places where the agent acts; and
  4. authority derived from circumstances of the case, being a residuary category.

Agency by Estoppel

Agency by estoppel arises where a person by his words or conducts induces third persons to believe that a certain person is his agent. The person who induces as such is estopped or prevented from denying the truth of agency. Section 237 of the Act deals with agency by estoppel.

Example X tells Y in the presence and within the hearing of Z that he (X) is Z's agent. Z does not contradict this statement. Later on Y enters into a contract with X believing that X Is Z's agent. In such a case Z is bound by this contract and in a suit between Z and Y, 2 cannot be permitted to Shy that X was not his agent, even though X was not actually his agent.

Agency by Holding Out

Agency by holding out is almost similar to agency by estoppel. Such agency arises when a person by his past affirmative or positive conduct leads third person to believe that person doing some act on his behalf is doing with authority.

Example X allows Y. his servant to purchase goods for him on credit from Z and later on pays for them. One day X pays cash to Y to purchase goods. Y misappropriates the money and purchases goods on credit from Z. Z can recover the price of his goods from X because X had held out Z as his agent on earlier occasions.

Similarly, where any person is held out by another as his agent, the third-party can hold that person liable for the acts of the ostensible agent, or the agent by holding out. Partners are each other’s agents for making contracts in the ordinary course of the partnership business.

Agency by Necessity

Agency by necessity arises under the following two conditions:

  1. There is an actual and definite necessary for acting on behalf of the principal, and
  2. It is impossible to communicate with the principal and obtain his consent.
  3. The act must have been done in the best interest of the principal.

Example I: X consigned some vegetables from Delhi to Bombay by a truck. The truck met with an accident. The vegetable being perishable were sold by the transporter. This sale is binding on X. In this case, the transporter became an agent by necessity3).

Example II: X stored some furniture In Y's house free of charge. Atter three years, Y needed the space occupied by the furniture. He obtained Ks address from his bank and wrote two letters to him but he received no reply. Y then sold the furniture. It was held that the sale was not binding on the owner because there was no emergency which required the sale of furniture4).

Agency by ratification

When an act is done by the agent on behalf of the principal without his knowledge or authority, the principal may elect to ratify or disown such acts. When he ratifies, the legal consequence is that the act is as good as done with previous authority, and the principal becomes liable. If he refuses, he is no liable. Thus, when the principal approves an act of the agent who never had the authority to undertake such an act, it is called Ratification. It is also known as ex-post facto agency i.e. agency arising after the event. Ratification may be express or implied.

Example: A agrees without authority and buys goods for P. Afterwards P sells them to C. There is implied ratification.

Husband and Wife

Where a husband and wife are living together, we presume that the wife has her husband’s authority to pledge his credit for the purchase of necessaries of life suitable to their standard of living. But the husband will not be liable if he shows that:

  1. he had expressly warned the tradesman not to supply goods on credit to his wife; or
  2. he had expressly forbidden the wife to use his credit; or
  3. he already sufficiently supplies his wife with the articles in question; or
  4. he supplies his wife with a sufficient allowance.

Conditions for Valid Ratification

The agent must expressly contract as agent for a principal who is in existence and competent to contract.i.e., The principal must be named. Ratification must be done by the person to whom act is done.

The principal must be competent to contract not only at the time the agent acts but also when he ratifies the agent’s act. Ratification must be by a person competent to have authorized the transactions. The principal at the time of ratification has full knowledge of the material facts and must ratify the whole contract, within a reasonable time. Ratification must be done by a person (principal) with full knowledge of material facts or with intent to take the risk of any irregularity.

Ratification cannot be made so as to subject a third-party to damages, or terminate any right or interest of a third person. Only lawful acts can be ratified, Void or illegal contract cannot be ratified by the principal

  1. Ratification is not valid if the knowledge of the principal is materially defective about the facts.
  2. There is no ratification of a criminal or illegal act of the agent.
  3. The act must have been purported to be in the name of the principal, then only he may ratify.
  4. Ratification of a part of the transaction operates to confirm the whole transaction.
  5. Ratification must be within a reasonable time.
  6. Ratification must not injure the right or interest of third parties.

Example: P is the owner and A is the agent. B is the lease holder. The lease is terminable with 3 months notice. A without authority gives notice to B. Later P ratifies. Held: The ratification is invalid as it has affected the right of the lease-holder B.

Types of Agents

Agents are classified in various ways according to the point of view adopted. From the viewpoint of the authority they have, they can be classified as special agents, general agents and universal agents. They are classified as mercantile or commercial agents and non-mercantile or non-commercial agents. There are different various types of kind agents are as follows.

Sub-agent

Section 190 provides that an agent cannot delegate his authority for acts which he has expressly or impliedly undertaken to perform. He may do so when:

  1. the nature of the agency demands it or permits it; or
  2. the ordinary custom of trade in a particular business allows it.

Section 191 defines a sub-agent, and provides for the relationship between the principal, agent and sub-agent where the sub-agent is properly appointed, and section 193 describes their relationship where the sub-agent is not properly appointed. Section 194 deals with a substituted agent, i.e., a person appointed by the agent to act for the principal, and section 195 casts a responsibility upon the agent of exercising due care and prudence in selection of such a person.

The principal in appointing an agent expects him to act personally and not through others.The general rule that an agent cannot further delegate is founded, under the maxim delegatus non potest delegare. A delegated authority cannot be delegated further. “One who has a bare power or authority from another to do an act must execute it himself and cannot delegate his authority to another”. This maxim debars the agent from delegating his powers beyond the limit fixed by the principal. A principal is not bound by the act of a sub-agent in absence of his express or implied assent empowering the agent to delegate his authority.

There are three main exceptions to this rule that an agent must not delegate his duties to another. These are:

  1. The agent may delegate his duties where there is an express or implied authority to delegate such as by professional or trade usage.
  2. The agent may delegate purely ministerial acts such as the signing of a letter or the giving of a notice where such act requires no personal skill or confidence.
  3. If the delegation is ratified or approved by the principal, then obviously it will be valid. In De Bussche v Alt, the agent took the precaution of obtaining the approval of the principal for the appointment of a sub-agent. It was held that the delegation was valid and binding on the principal.
Properly appointed sub-agent Not properly appointed sub-agent
Section 192 Section 193
The principal is bound by the acts of sub-agent. The principal is not bound by We acts of sub-agent.
The principal is responsible for the acts of sub-agent. The principal is not responsible for the acts of sub-agent.
The original agent is responsible to the principal for the acts of sub-agent. The original agent is responsible for the acts of sub-agent both to the principal and to the third persons.
The sub-agent is responsible for his acts to the original agent but not to the principal except in cases of fraud or wilful wrong. The sub-agent is responsible for his acts to the original agent but not to the principal even in cases of fraud or wilful wrong.

Substituted Agent

According to section. 194, if an agent who has authority to name a person to act for his principal in doing business, names another person, such a person is called substituted agent and not sub-agent. He becomes an agent of the principal for that part of business.

The authority of substituted agent may be express or implied. P directs his advocate A, to sell his property by auction and to name an auctioneer for this purpose. A names X and W to conduct auction. Here, X and W are substituted agents and not sub-agents. There is a clear and marked line of difference between ordinary sub-agent and substituted agent. The Supreme Court in Union of India Vs. Amar Singh,held that when the exigencies or circumstances demand, the rule delegatus non protest delegate is relaxed, and a sub-agent may be appointed. But, when the agent has the authority to name a person, he may duly name a substituted agent. The agent is bound to exercise his discretion, as a man of ordinary prudence would, in his own cause. If he so selects, then he is not responsible for acts of negligence of substituted agent, to the principal.

Example

  1. A asks B, a merchant to buy a ship for him. B employ's a qualified surveyor S for the selection of ship. S does his job negligently. A buys but the ship was un-seaworthy and was lost. Here, B is not liable. But S is liable to A.
  2. A sends goods to B to sell by auction. B appoints reputed K and W auctioneers to auction. K and W auction, collect proceeds but become insolvent. Here B is not liable to A.

Distinction between Sub-agent and Substituted Agent

Sub-agent Substituted agent
He works under the control of original agent. He works under the control of Principal.
There is no privity of contract between a sub-agent and principal and hence both cannot sue each other except that in case of fraud or wilful wrong committed by a properly appointed sub-agent, the principal can sue sub-agent. There is a privity of contract between a substituted agent and principal hence both can sue each other.
The original agent is responsible for the acts or negligence of the sub-agent.The original agent is not responsible for the acts or negligence of the substituted agent if in selecting such agent he has exercised the same amount of diligence as a man of ordinary prudence would exercise in his own case.

Special and General Agents

A special agent is a person appointed to do some particular act or enter into some particular contract. A special agent, therefore, has only a limited authority to do the specified act. If he does anything beyond the specifi ed act, he runs the risk of being personally liable since the principal may not ratify the same. A general agent, on the other hand, is one who is appointed to represent the principal in all matters concerning a particular business, e.g., manager of a firm or managing director of a company.

Universal Agent

A universal agent has a universal or an unlimited power to act on behalf of his principal. A universal agent is one whose authority is unlimited and who any act on behalf of his principal can do provide such act is legal and is agreeable to the law of land. A universal agent is practically substituted for his principal for all those transactions wherein his principal cannot participate. A Universal agent is one who is authorised to do all the acts which the Principal can lawfully do and can delegate.

Example: When a person leaves his country for a long time, he may appoint his son, wife or friend as his universal agent to act on his behalf in his absence.

Co-Agent

Co-Agents are agents together appointed to do an act jointly. When a principal appoints two or more persons agents jointly or severally, such agents are known as co-agents. Their authority is joint when nothing is mentioned about the exercise of their authority. It implies that all co-agents concur in the exercise of their authority unless their authority is fixed. But when their authority is several, any one of the co-agents can act without the concurrence of other.

Factor

An agent who is remunerated by a commission (one who looks like the apparent owner of the things concerned). A factor is a mercantile agent to home goods is entrusted for sale. He enjoys wide discretionary powers in relation to the sale of goods. A Factor is an agent who is entrusted with the possession and contract of the goods to be said by him for his Principal. He has possession of the goods, authority to sell them in his own name and a general discretion as to this sale. He may sale on the usual term of credit may receive the price and give a good discharge to the buyer.

Broker

An agent whose job is to create a contractual relationship between two parties. He is one who is employed to make contracts for the purchase and sale of goods. He is not entrusted with the possession of goods. He simply act as a connecting link and bring it to parties together to bargain and if the circumstances materialise he becomes entitled to his commission called brokerage. He makes a contract in the name of his Principal. Thus, a broker is an agent primarily employed to negotiable a contract between two parties where he is a broker for sale he has no position of the goods to be sold.

Auctioneer

An agent who acts a seller for the Principal in an auction. An auctioneer is a mercantile agent who is appointed to sell goods on behalf of the principal i.e., seller and for this function, an auctioneer get a reward in the form of a commission. An auctioneer conducts auction on behalf of a seller, as he is primarily the agent of the seller. However, after the sale, he also becomes of the purchaser who gives the highest bid. An auctioneer has no authority to sell the goods of his principal by private contract or contracts. An auctioneer is an agent to sell property at a public auction. He is primary an agent for the seller, but upon the property being knocked down he becomes also the agent of the buyer. He is mercantile agent within the meaning of Section 2(9) of the Sale of goods Act.

Commission Agent

He is appointed to buy and sell goods (make the best purchase) for his Principal. Commission Agent is a mercantile Agent who buys or sells goods for his Principal on the best possible terms in his own name and who receives Commission for his labours. He may have possession of course or not.

Del Credere

He is an agent who acts as a salesperson, broker and guarantor for the Principal. He guarantees the credit extended to the buyer. He is one who in consideration of an extra commission guarantee his Principal that the third person with whom he enters into contracts on behalf of the principal shall perform their financial obligations that is, if the buyer does not pay, he will pay. Thus, he occupies the position of a surety it as well as an Agent. He is not answerable to his principle for the failure of the third person to perform the contract.A del credere agent constituted an exception to this rule.

Besides the above-mentioned agents, there are other types of agents also such as brokers, bankers, clearing agents, forwarding agents, underwriter, estate agents, etc.

They also play an important role and perform various functions for and on behalf of their principals. Bank and Bankers is the agent of the customers because the relationship between banker and customer is generally creditor and debtors. The bankers collect cheque, draft or bills or buys and sales securities on behalf and get commissions from the customer as considerations for services.

Non-Mercantile Agent: The agent who is unrelated with business activities. It includes estate agent, house agent, election agent, promoter, insurance agents, solicitors, clearing and forwarding agent etc. These include attorneys.

Duties Of An Agent

Section 209 to 218 of Indian contract Act, 1872 deals with the duties of an agent.

  1. To conduct the business in accordance with the directions given by the principal.
  2. To work with reasonable diligence, care and skill.
  3. To render proper accounts to the principal on demand.
  4. To communicate with his principal in case of difficulty and seek his instructions.
  5. Not to deal on his own account unless all the material facts have been disclosed to the principal and consent of the principal has been obtained. If the agent, without the knowledge of the principal, deals in the business of agency on his own account, the principal has the following rights:
    1. He may repudiate the transaction, if the agent dishonestly conceals any material facts or the dealings of the agent prove to be disadvantageous to him.
    2. He may claim from the agent the agency business other than the agreed remuneration.
  6. Not to make any secret profit out of the agency business other than the agreed remuneration.
  7. To remit to the principal all the sums received in the principal’s accounts in accordance with the terms and conditions of contract of agency.
  8. Not to delegate authority or appoint sub–agent.
  9. To protect and preserve the interest on behalf of the principal’s representative in case of his death or insolvency of the principal.
  10. Not to use information obtained in the course of the agency against the principal.

Rights of an Agent

Section 217 to 225 of Indian contract Act,182 deals with rights of an agent.

  1. To retain money out of the sums received in agency business for advances made or expenses incurred and remuneration due to him.
  2. To receive the agreed remuneration. If the remuneration is not fixed, then he has the right to recover such remuneration as is usual and customary in such business.
  3. Right of lien on principal’s goods, papers and other property until the amount due to him in respect of the same is paid.
  4. An agent has the right to be indemnified by the principal against the consequences of all lawful acts done in exercise of the authority conferred on him.
  5. An agent has the right to be indemnified by the principal against consequences of acts done in good faith that caused an injury to third person.
  6. To claim compensation for injury caused because of principal’s neglect or want of skill.

Principal’s duties to Agent

  • The Principal is bound to indemnify the agent against any lawful acts done by him in the exercise of his authority as an agent.
  • The Principal is bound 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 not liable to the agent if the act that is delegated is criminal in nature. The agent will also in no circumstances be indemnified against criminal acts.
  • The Principal must make compensation to his agent if he causes any injury to him because of his own competence or lack of skill. Compensation: must pay the agent for services rendered, & do so in a timely manner.
  • Liability of Principal for Agent’s Fraud or Misrepresentation. According to Section 238, The Principal is liable for any fraud or misrepresentation made by his agent during the course of his business, as if the fraud or misrepresentation was done by the Principal himself.
  • Reimbursement & indemnification: must reimburse agent that disburses money at principal’s request. Must compensate (indemnify) agent for any costs incurred as a result of principal’s failure to perform the contract.
  • Cooperation: must cooperate with & assist an agent in performing his duties Provide safe working conditions. Agent’s Rights & Remedies: has a corresponding right for every duty of the principal.
  • Liability of Principal to Third Parties For The Acts Of Agent (Sec. 226 to 228) Principal is liable for the acts of agent, The principal is liable for all the acts of an agent which are lawful and within the scope of agent’s authority. The contracts entered into by the agent on behalf of the principal have the same legal consequences as if these contracts were made by the principal himself. When agent exceeds his authority: Whether the acts done within the authority are separable from the acts done beyond authority. If yes – The principal is not bound for excess acts done by the agent. If no – The principal is not bound by the transaction and the principal can repudiate the whole transaction.

Rights of Principal

  • Right to repudiate the Transaction
  • To claim any resulted benefit from Agency
  • Right to Recover Damages
  • To Resist Agent’s claim for Indemnity
  • Normal contract & tort remedies, Principal’s Rights & Remedies; has contract remedies for breach of fiduciary duties & tort remedies for Main actions available.
  • Constructive trust: imposed by courts when agent withholds monies that belong to principal, allows principal to get what he deserves.
  • Avoidance: principal may avoid any contract entered into with agent if agent breaches agency duties.
  • Indemnification: principal can be sued by a third party for an agent’s negligent conduct, & in certain situations the principal can turn around & sue agent for an equal amount of damages.

Personal Liability of Agent

Agent is only a connecting link between the principal and third parties. Being only a medium, he can, in the absence of a contract to the contrary, neither personally enforces contracts entered into by him on behalf of his principal, nor is he personally bound by them. From the above discussion, it may be inferred that agent can enforce contracts personally and be held bound for contracts entered into on behalf of his principal, if there is an agreement to the effect, express or implied. Section 230 enlists the following cases where a contract to this effect shall be presumed to exist:

  1. Where the contract is made by agent for the sale or purchase of goods for a merchant resident abroad
  2. Where the agent does not disclose the name of his principal
  3. Where the principal, though disclosed, cannot be sued, for instance, where principal is a minor.

Besides, agent incurs a personal liability in the following cases:

  1. Breach of warranty: Where agent acts either without any authority or exceeds his authority, he is deemed to have committed breach of warranty of authority in such a case. He will be held personally liable if his acts are not ratifi ed by the alleged principal. Further, agent will be guilty of warranty of authority even where his authority is terminated without his knowledge, e.g., by death or lunacy of the principal.
  2. Where the agent expressly agrees to be personally bound: This sort of stipulation may be provided particularly where principal does not enjoy much credit-worthiness and the third parties wish to ensure the payment or performance.
  3. Where agent signs a negotiable instrument in his own name: In case agent signs a negotiable instrument without making it clear that he is signing it as agent only, he may be held personally liable on the same. He would be personally liable as the maker of the note, even though he may be described in the body of the note as the agent (s.28 of Negotiable Instrument Act, 1881).
  4. Agent with special interest or with a benefi cial interest, e.g., a factor or auctioneer, can sue and be sued personally.
  5. When agent is guilty of fraud or misrepresentation in matters which do not fall within his authority (s.238).
  6. Where trade usage or custom makes agent personally liable.
  7. Where the agency is one coupled with interest.

Liability of Principal to Third Parties for the Acts of Agent

Section 226 to 228 of Indian Contract Act deals with the liability of principal to third parties.

  • Principal is liable for the acts of agent.
  • The principal is liable for all the acts of an agent which are lawful and within the scope of agent’s authority.
  • The contracts entered into by the agent on behalf of the principal have the same legal consequences as if these contracts were made by the principal himself.
  • When agent exceeds his authority Whether the acts done within the authority are separable from the acts done beyond authority.
    • If yes – The principal is not bound for excess acts done by the agent.
    • If no – The principal is not bound by the transaction and the principal can repudiate the whole transaction.

Revocation of Agency

All agency agreements, other than those under which an agent has an interest, are terminable or revocable.

An agency may be terminated

  1. by the principal revoking his authority,
  2. by the agent renouncing the business of the agency,
  3. by the business of the agency being complete,
  4. by either the principal or agent dying or becoming of unsound mind,
  5. by the principal being adjudicated insolvent or
  6. on the expiry of the period fixed for the agency.

An agency will also terminate in all those circumstances in which a contract may be discharged viz, mutual agreement, destruction of subject matter of agency, agency becoming unlawful, or dissolution of the principal partnership firm.

An agency is deemed to continue in the absence of anything that would prove termination of the agency on one or the other of grounds mentioned above. The principal may also revoke the authority given to the agent at any time before it has been exercised so as to bind the principal, however, he cannot revoke the authority after it is partly exercised, with regard to acts and obligations as arise from acts already done in the agency.

For example, if A authorises B to buy 1,000 bales of cotton on account of A, and to pay for it out of As money remaining in Bs hands, and B buys 1,000 bales of cotton in his own name so as to make himself personally liable for the price, A cannot revoke Bs authority with regard to the payment for the cotton. However, if B had bought the bales in As name so as not to render himself personally liable for the price, A can revoke B's authority to pay for the cotton. Revocation by one of the many principals may not necessarily have the effect of revocation by all principals.

Termination of Agency by Act of the Parties

  1. By Mutual Agreement An agency is terminated if the principal and agent mutually agree to do so.
  2. By Revocation of Authority by the Principal An agency is terminated if the principal revokes the authority of his agent. It may be noted that the principal may revoke the authority of his agent at any time before the authority has been exercised so as to bind the principal.
  3. By Renunciation of Agency by the Agent The agency is terminated if the agent himself renounces the business of agency.

Provisions relating to Revocation or renunciation [Sections 205, 206 and 207]

  1. Compensation for Revocation by Principal, or Renunciation by Agent (Section 205): Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause [Section 206].
  2. Notice of Revocation or Renunciation [Section 206]: Reasonable notice must be given of such revocation or renunciation, otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made good to the one by the other.
  3. Revocation and Renunciation may be Expressed or Implied 5): Revocation and renunciation may be expressed or may be implied in the conduct of the principal or agent, respectively. Example A empowers B to let A's house. Afterwards A lets it himself. This is an implied revocation of B's authority.

Termination of Agency by Operation of Law

  1. On Completion of the Business of the Agency6). An agency is automatically terminated when the business of the agency is completed. Example X appointed Y to sell his goods. Y sold those goods as per terms of the agency. It was held that the agency is terminated on the completion of sate and the agent has no authority to alter the terms of sate after its completion 7). But in Babu Ram v. Ram Dayal, It was held that the agency continues until the payment of the sale proceeds to the principal.
  2. On Death/or on Becoming of Unsound Mind of Principal/Agent 8) An agency is automatically terminated when the principal or agent dies or becomes of unsound mind.
    • Duty of Agent 9): The agent is bound to take, on behalf of the representative of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him.
  3. On Insolvency of the Principal 10) An agency is automatically terminated when the principal becomes insolvent because an insolvent person is incompetent to enter into a contract.
  4. On Expiry of Fixed Period An agency is automatically terminated when the fixed term of agency expires even though the business of the agency has not yet completed.
  5. On Destruction of the Subject-matter An agency is automatically terminated when the subject matter of the contract ceases to exist.
  6. On Winding up of Company An agency is automatically terminated when the principal or agent is a company and the company is wound up.
  7. On Principal Becoming an Mien Enemy An agency is automatically terminated when the principal and agent are citizen of two different countries and a war breaks out between these two countries.

Compensation for early revocation or renunciation

Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause. There is no liability to compensate for termination of an agency if the appointment of the agent was contrary to statutory rules, or because the agent in a managing agency was inefficient.

Effective Time of Termination of Agent’s Authority

According to Section 208 termination of agent’s authority takes place

  • As regards the agent When the agent comes to know that his authority has been terminated.
  • As regards the third persons When they come to know that the agent’s authority has been revoked.
  • As regards the sub-agent When the original agent comes to know that his authority has been terminated.

Irrevocable Agency

Termination of agency, where agent has an interest in subject matter

Where the agent has himself an interest in the property which forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest.

Illustrations

  1. A gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts due to him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death.
  2. A consigns 1,000 bales of cotton to B, who has made advances to him on such cotton, and desires B to sell the cotton, and to repay himself out the price the amount of his own advances. A cannot revoke this authority, nor is it terminated by his insanity or death.

Where the Agent has Partly Exercised his Authority

The principal cannot revoke the authority given to his agent after the authority has been partly exercised; so far as regards such acts and obligations as arise from acts already done in the agency11).

Thus, the principal cannot revoke the agent's authority for the acts already done. Example A authorises B to buy 1,000 bales of cotton on account of A, and to pay for it out of A's money remaining in B's hands. B buys 1,000 bales of cotton in A's name, and so as not to render himself personally liable for the price. A cannot revoke B's authority to pay for the cotton.

Where the Agent has Incurred a Personal Liability

The principal cannot revoke the agent's authority for the authorised acts in respect of which the agent has already incurred a personal liability.

Example A authorises B to buy 1,000 bales of cotton on account of A, and to pay for it out of A's money remaining in B's hands. B buys. 1.000 bales of cotton in his own name, so as to make himself personally liable for the price. A cannot revoke B's authority so far as regards payment for the cotton.

1)
AIR 1999 SC 1385
2)
Section 187
3)
Sim & Co. v. Midland Rly Co.
4)
Sachs v. Milkos
5)
Section 207
6) , 8) , 10)
Section 201
7)
Venkatachalam v. Narayanan
9)
Section 209
11)
section 204


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Created on 2021/01/03 16:28 by Admin • Last modified on 2021/01/03 18:13 by LawPage