+

Law of Contract II - Week 8 to 10

By: Nitin Gomber Esq.
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Introduction to Chapter X of ICA

n Chapter X of the Contract Act has been stated to be not

exhaustive, but to lay down general principles in wide and
general times.

n The Supreme Court of India in Narandas Morardas Gajiwala v.

SPAM Papammal AIR 1961 SC 3 categorically noted that the
ICA is not exhaustive of the rights of an agent against the
principal.

n The Law Commission of India in its 13th Report also

suggested several measures to make the concept of Agency
under the ICA to be more comprehensive, in essence
suggesting the statute is not exhaustive.
+
Who is an “Agent”?
(Generally speaking)

n 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.

n The essential feature of an agent is his power of making the

principal answerable to a third person, viz. enabling the
principal to sue third parties directly, or render him liable to
be sued directly by the third party.

n Certain persons are referred to in common parlance as

“agents” even though they may not really have this power of
changing their principal’s relations with third parties.
Therefore, to carry on the business of an “agent” is not always
the same thing as saying that you are contracting as an
“agent.”
+
Who is an “Agent”?
(As per the ICA)

Section 182

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.’
+
Test of Agency

n 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. To
reframe, the true test of agency is whether a person could
represent this another person to a third party so as to bind
this another person.

n Note: Just because the parties have called their relationship

as that of an “agent” and “principal” is not conclusive. You
must examine the true nature of the relationship.

n Note: Also, the fact that a person is paid “commission” for his
work is not by itself enough to constitute agency.
+
Test of Agency

n Example: A finds an old Apple I computer lying in his house

that was released by the then Apple Computer (now Apple
Inc.) in 1976. He approaches an auction house to sell the said
antique on his behalf. The auction house demands a
commission of 5% of the total sale proceeds. A agrees. The
Apple I is put to auction. Is the auction house an agent of A?
+
Test of Agency

Example: A Pvt. Ltd. appointed B Pvt. Ltd. as a distributor for the

sale of Diesel Engines, Pumps and Pumpsets. Under the
agreement between the two, B Pvt. Ltd. would first purchase
Diesel Engines, Pumps and Pumpsets from A Pvt. Ltd. and then
sell it off to a third person at a margin. Is there a relationship of
agency between A & B?
+
Test of Agency
(Difference between “a servant” and “an agent”)

Lakshminarayan v. Govt. of Hyderabad AIR 1954 SC 364 (Facts

of this case are not relevant to the course of your study. The
relevance of this case is merely to figure the principles the SC
applied in order to distinguish between “a servant” and “an agent”)

n The SC in this case referred to and quoted, two authors. The

first author is Powell. The SC quoted the following paragraph
from Powell’s Law of Agency:

(a) Generally, a master can tell his servant what to do and how to
do it; (b) Generally, a principal cannot tell his agent how to carry
out his instructions; (c) A servant is under more complete control
than an agent;
+
Test of Agency
(Difference between “a servant” and “an agent”)

n The Court further quoted from Powell’s Law of Agency:

Generally, a servant is a person who not only receives instructions

from his master but is subject to his master’s right to control the
manner in which he carries out those instructions. An agent
receives his principal’s instructions but is generally free to carry
out those instructions according to his own discretion.

Generally, a servant has no authority to make contracts on behalf

of his master. Generally, the purpose of employing an agent is to
authorise him to make contracts on behalf of his principal.

Generally, an agent is paid by commission upon effecting the

result which he has been instructed by his principal to achieve.
Generally, a servant is paid by wages or salary.
+
Test of Agency
(Difference between “a servant” and “an agent”)

n The SC then referred to and quoted from Halsbury’s Laws of

England. The SC quoted the following paragraph:

A principal has the right to direct what work the agent has to
do; but a master has the further right to direct how the work is
to be done.

An agent is to be distinguished… from a servant… A servant

acts under the direct control and supervision of his master, and
is bound to conform to all reasonable orders given to him in the
course of his work;
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Test of Agency
(Difference between “a servant” and “an agent”)

n An agent, though bound to exercise his authority in

accordance with all lawful instructions which may be given to
him from time to time by his principal, is not subject in its
exercise to the direct control or supervision of the principal.
An agent, as such is not a servant, but a servant is generally
for some purposes his master’s implied agent, the extent of
the agency depending upon the duties or position of the
servant.
+
Who may employ an agent?

Section 183

Any person who is of the age of majority according to the law

which he is subject, and who is of sound mind, may employ an
agent.

n This section provides that a person can employ an agent only

if: (1) he is a major, and (2) of sound mind.

n Refer to your Law of Contract I slides to further figure the

details of ‘age of majority’ and ‘sound mind.’
+
Who may be employed as an agent?

Section 184

As between the principal and third person, any person may

become an agent, but no person who is not of the age of
majority and of sound mind can become an agent, so as to be
responsible to his principle according to the provisions in that
behalf herein contained.

n This section provides that any person can become an agent

provided: (1) he is a major, and (2) of sound mind.

n Refer to your Law of Contract I slides to further figure the

details of ‘age of majority’ and ‘sound mind.’
+
No consideration required

Section 185

No consideration is necessary to create an agency.

n Lack of consideration will not void an agency. Once an agent

accepts the employment of agency, he immediately becomes
liable for the agent’s duties.

n The very fact of employment and the credit gained thereby

on the one hand, and the promise to act on the other are
sufficient to constitute the employment of agency.
+
The authority of an agent
(Express or implied)

Section 186

The authority of an agent may be expressed or implied.

Section 187

An authority is said to be express when it is given by words

spoken or written. An authority is said to be implied when it is to
be inferred from the circumstances of the case; and things spoken
or written, or the ordinary course of dealing, may be accounted
circumstances of the case.

Note: The authority of an agent is his power to affect his principal’s

position by doing acts on his behalf. His power to affect the legal
position of the principal rests upon his authority.
+
The authority of an agent
(Express or implied)

n An agency may be created by an express or implied

agreement of principal and agent. Therefore, it need not be in
writing. However, please note that other statutes may
prescribe formalities for certain types of agency.

n An express agency may be effected in a formal agreement (by

way of a Power of Attorney or a Letter of Appointment).

n Agency can also be inferred from the circumstances and the

conduct of the parties (including of course the correspondence
between them). The question of agency is one of intention, to
be gathered from the terms of the contract, if any, and
surrounding circumstances.

n Agency may also arise by operation of law, by estoppel, by

ratification, among others.
+
What can an agent do?

Section 188

An agent having an authority to do an act has authority to do

every lawful thing which is necessary in order to do such act.

An agent having an authority to carry on a business, has

authority to do every lawful thing necessary for the purpose, or
usually done in the course, of conducting such business.

Illustration: A is employed by B, residing in London, to recover

at Bombay a debt due to B. A may adopt any legal process
necessary for the purpose of recovering the debt, and may
give a valid discharge for the same.
+
What can an agent do?

n Generally speaking, the authority of an agent will extend not

only to acts expressly authorised, but also to subordinate acts
which are necessary or ordinarily incidental to the exercise of
the express authority.

n Both general and special agents who are authorised to act for
the principal have implied authority to do what is incidental to
the ordinary conduct of such a trade or business or is within
the scope of that class of acts, and also whatever is necessary
for the proper and effective performance of duties.

n If the act is not lawful or is not necessary or is not usual in such

matters, that would fall outside his authority.
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What can an agent do?

n Further, an authority is generally construed in case of doubt

according to the usual course of dealing in the business to
which it relates, partly because this may be presumed to
have been really intended, and partly because third persons
may reasonably attribute to an agent such authority as agents
in the like business usually have.
+
What can an agent do?

Example: A (an agent of LIC) collected premium from B (a policy

holder of LIC) by way of a cheque before the due date. However,
he deposited the cheque after the due date, by which time the
policy had lapsed. The rules framed by LIC prohibited agents
from collecting premium. The policy holder claimed and proved
on trial that this in fact was the prevailing practice, whereby
agents of LIC would collect the premium from some policy
holders and then deposit it with the LIC account. B is now suing
LIC to revive the policy arguing that A had an authority to do
every lawful thing which is necessary (collecting premiums) in
order to do such act (getting more and more policy holders on
board). What do you think about the validity of this argument?
+
What can an agent do?

Example: A is founder and CEO of company XYZ Pvt. Ltd. He is

terminally ill and now wants to take a few months off.
Accordingly, he appoints B (his trusted employee for several
years) as his agent by executing a POA in his favour. This POA
essentially gives B the general authority to carry on A’s
business and to receive and expend money therein. Few
months after taking over, XYZ Pvt. Ltd. starts running into
losses. B takes a loan in the name of XYZ Pvt. Ltd. to keep the
business running. When A returns, he argues that B was not
entitled to borrow money under the POA and therefore the
Bank ought not to have granted the loan. Do you think Section
188 will come to the rescue of the Bank / B under the
circumstances?
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What can an agent do?

Section 189

An agent has authority, in an emergency, to do all such acts for

the purpose of protecting his principal from loss as would be
done by a person of ordinary prudence, in his own case under
similar circumstances.

n In an emergency, an agent has the power to do all acts as may

be necessary only for the purpose of protecting his principal
from loss, such acts being done prudently, as an ordinary
prudent man may do in his own case under similar
circumstances.
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What can an agent do?

n This section is meant to protect the agent. It categorically lays

down that if the agent, for the purposes of safeguarding the
interest of his principal, does certain acts without any
express instructions from the principal, then in such a case
he is exempted from liability if his acts are those of a man of
ordinary prudence, and are performed at a time of an
emergency.

n Note: This section only deals with a situation where there is

an existing relationship of principal and agent.
+
What can an agent do?

Example: A (a wholesaler of fruits in Chandigarh) appoints B

(A’s long term employee) as his agent. A authorizes B to deliver
10 tons of apples to a retailer in Delhi and take payment (Rs. 5
lakhs) from him. Due to the ongoing Jat agitation, B’s truck is
stuck on the NH in Panipat for 10 days. There’s no charge in his
phone, as well and he doesn’t recall A’s phone number
otherwise. Given that the Jat agitation was likely to continue for
a few more days, B somehow manages to reach Panipat City
and sells the apples to another retailer for Rs. 3 lakhs as the
apples had started to rot. B duly pays Rs. 3 lakhs to A. A,
however, is now suing B claiming Rs. 2 lakhs with interest. Can B
defend himself successfully under Section 189 of ICA?
+
Agent’s duty to principal
(To act in accordance with the principal’s directions)

Section 211

An agent is bound to conduct the business of his principal

according to the directions given by the principal, or in the
absence of any such directions, according to the custom which
prevails in doing business of the same kind at the place where
the agent conducts such business. When the agent acts
otherwise, if any loss be sustained, he must make it good to his
principal, and if any profit accrues, he must account for it.

n This section essentially tells us how an agent should act in his

dealings with the principal. Ideally, the agent should follow
the directions given by the principal. If however, the agent
does not follow the directions of his principal, because of
which the principal suffers some loss, the agent must make it
up to him.
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Agent’s duty to principal
(To act in accordance with the principal’s directions)

n The section further adds that in the absence of directions

from the principal, the agent may follow local customs in his
dealings. Such customs will have to be successfully proved
on trial!

n Note: In the absence of instructions, or any custom or usage,

the agent may use his own discretion, and must be guided by
the honest exercise of his own judgment, and the interest of
the principal.

n Note: The relationship of agency has often been described as

one of a fiduciary nature because the principal places
confidence in the agent. Generally speaking, fiduciary duties
in such a relationship may be varied in accordance with the
terms and conditions of the contract and the prevalent
circumstances.
+
Agent’s duty to principal
(To act in accordance with the principal’s directions)

Example: A employed B as his agent (under a valid contract of

agency) for the specific purpose of completing his part of the
contract with C. A, in his contract with C had to deliver some
goods to him. Accordingly, A instructed B to send the goods to
C via train. However, B sent those goods to C by truck. The
goods were lost in transit. Is B liable to compensate for the
losses of A?
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Agent’s duty to principal
(To act in accordance with the principal’s directions)

Example: A employed B as his agent (under a valid contract of

agency) for the specific purpose of completing his part of the
contract with C. A, in his contract with C had to deliver some
goods to him. Accordingly, A instructed B to immediately send
the goods to C via train. A, after issuing such instruction
boarded a plane to the US so that he was unreachable for the
next 24 hours. Before B could dispatch the goods via train, he
saw on TV that a rail roko protest had been planned by some
people the very next day on the route of his interest. In keeping
with the interest of the principal, B sent those goods to C by
truck. The goods were lost in transit. Is B liable to compensate
for the losses of A even though he was acting in the interest of
the principal?
+
Agent’s duty to principal
(To act in accordance with the principal’s directions)

Example: A employed B as his agent (under a valid contract of

agency) for the specific purpose of completing his part of the
contract with C. A, in his contract with C had to deliver some goods
to him. Accordingly, A instructed B to immediately send the goods
to C via train. B went to the train station to figure the availability of
space in the goods train that leaves for the city in which C lives, in
the evening. He was told by the official at the railway station that in
order to book the space for the goods at this last moment, he’ll
have to pay Rs. 10,000 of which no receipt will be issued. B calls up
A to make sure he can pay the Rs. 10,000 demanded by the railway
official. A consents. However, B’s conscience does not allow him to
pay bribe and he does not dispatch the goods on that day. B
dispatches the goods the next day, so that A is in breach of
contract with C for not delivering the goods in time. Is B liable to
compensate for the losses of A?
+ Agent’s duty to principal
(To use as much skill as is generally possessed by
persons engaged in a similar business)

Section 212

An agent is bound to conduct the business of the agency with as

much skill as is generally possessed by persons engaged in
similar business unless the principal has notice of this want of skill.

The agent is always 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 own
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.

Note: Read this section with Section 220.

+ Agent’s duty to principal
(To use as much skill as is generally possessed by
persons engaged in a similar business)

n Whenever an agent is employed, there is, on his part, an implied

warranty that he is of a reasonably competent skill to the work
he undertakes;

n Such an implied warranty will have no impact if the principal is

aware of his agent’s qualifications and limitations.

n The sum of Section 212 is that an agent is always bound to act

with as much reasonable diligence as a reasonable man with his
qualification would act under similar circumstances.

n If loss to the principal occurs in spite of the agent using such

reasonable diligence, the agent is not liable.

n Note: There is no distinction wrt. the standard of care for

gratuitous and non-gratuitous agents.
+ Agent’s duty to principal
(To use as much skill as is generally possessed by
persons engaged in a similar business)

n Compensation for direct consequences only: The measure of

damages would be based on the actual loss sustained by the
principal, provided that it was the natural and probable
consequence of the breach, or it was such a loss as in the
particular circumstances, as the agent might have reasonably
expected to result from such negligence or breach of duty.

n Note: For a further discussion on direct / indirect damages,

please See Section 73 of ICA.
+ Agent’s duty to principal
(To use as much skill as is generally possessed by
persons engaged in a similar business)

Example: A employs an advocate (under a valid contract of

agency) for filing a law suit in a State Consumer Disputes
Redressal Commission. The property with respect to which
‘deficiency of service’ is being claimed by A is located in
Mohali, Punjab. The office of the builder is also in Punjab and
all payments / correspondence are made at the builder’s office
in Mohali. However, the advocate who is based in Chandigarh,
files the petition in Chandigarh. The petition is rejected for
want of jurisdiction. The Advocate calls on A and asks him to
pay his fees and the court fees again as the matter was rejected
and will have to be filed in another court. Can A hold the
Advocate liable under Section 212?
+ Agent’s duty to principal
(To render accounts to principal, on demand)

Section 213

An agent is bound to render proper accounts to his principal

on demand.

n The right of a principal to have an account taken rests upon

the trust and confidence reposed in the agent – the fiduciary
relationship that exists between them.

n Note: The duty to account may also arise after a reasonable

time since the termination of agency.

n Note: The accounts must be produced in a manner in which a

reasonable person in the principal’s position is able to
understand all entries.
+ Agent’s duty to principal
(To render accounts to principal, on demand)

n Example: A valid contract of agency exists between X and Y.

It was agreed under the term of agency that the Statement of
Accounts is to be kept with the principal and that the agent is
not responsible to keep accounts of any transactions. It was
also agreed that the agent’s commission will be 5% of the
profits accrued to the principal at the end of the financial
year. At the end of the said financial year, the agent asks the
principal for the statement of accounts to calculate his
commission. However, the principal refuses to give him the
statement of accounts. Can the agent sue the principal for a
statement of accounts?
+ Agent’s duty to principal
(To use reasonable diligence in cases of difficulty)

Section 214

It is the duty of an agent, in cases of difficulty, to use all

reasonable diligence in communicating with his principal, and
in seeking to obtain his instructions.
+ Agent’s duty to principal
(Not to act at his own accord)

Section 215

If an agent deals on his own account in the business of agency,

without first obtaining the consent of his principal and
acquainting him with all material circumstances which have
come to his own knowledge on the subject, the principal may
repudiate the transaction, if the case shows, either that any
material fact has been dishonestly concealed from him by the
agent, or that the dealings of the agent have been
disadvantageous to him.

n The gist of this section is that the agent should not deal in the
business of agency without the consent of his principal.
+ Agent’s duty to principal
(Not to act at his own accord)

n This Section postulates two circumstances in which the

principal can repudiate the transaction:

(a) Where the agent acts in the business without obtaining

prior consent from the principal and some material
circumstances have been dishonestly concealed from the
principal by the agent.

(b) Where the agent acts in the business without obtaining

prior consent from the principal, conceals material
circumstances and the transaction is disadvantageous to
the principal.
+ Agent’s duty to principal
(Not to act at his own accord)

Example: On January 01, 2016, A employed B as his agent to sell

his flat located in Delhi as soon as possible. A wanted to sell the
flat as his business was in trouble and needed an urgent
injection of funds. Now, B sells off the flat to C at a price which
is less than prevailing market rate. This was duly approved by A
prior to the transaction when B called A to seek his permission
for the same. After the transaction, B is paid the agreed upon
1% commission. Now, as it turns out, A and C are friends and
during a conversation, C tells A that B had charged him 1%
commission as well for the sale. Can A repudiate the
transaction?
+ Agent’s duty to principal
(Duty not to convert himself into a principal)

Section 216

If an agent, without the knowledge of his principal, deals in the

business of the agency on his own account instead of on account of
his principal, the principal is entitled to claim from the agent any
benefit which may have resulted to him from the transaction.

n This section imposes a penalty on the agent who converts

himself into a principal, without due disclosure to the principal.

n The principal has a right to obtain an account and payment of

secret and illicit profits which have come to the hands of the
agent as an agent.

n Note: The operation of this section does not depend upon the
principal having suffered any loss. This is because the agent
holds a fiduciary position in relation to the principal and if he
makes any profit in that capacity, he must make it good to the
principal.
+ Agent’s duty to principal
(Duty not to convert himself into a principal)

Example: A acting as B’s agent, agrees with C for the sale to

him of 100 tons of wheat for future delivery. A delivers his own
wheat to C as against the contract and made a profit of 15%.
When he receives the wheat from B, he sells it in the open
market at a profit of 10% and gives the profits back to B. Can B
sue A to claim the difference in profits that accrued to A?
+
Agency
(Regarding payment of the Agent for his services)

Section 217

An agent may retain, out of any sums received on account of the

principal in the business of the agency, all moneys due to
himself in respect of advances made or expenses properly
incurred by him in conducting such business, and also such
remuneration as may be payable to him from acting as agent.

Section 218

Subject to such deductions, the agent is bound to pay to his

principal all sums received on his account.

Note: Read Section 221 along with Section 217 and understand
the difference between the two.
+
Agency
(Regarding payment of the Agent for his services)

n The agent has a right over the principal’s money in his hands for:
(a) moneys due to the agent in respect of advances made or
expenses incurred in the business of agency; and (b) moneys
payable to him as remuneration for the work in the agency.

n Note: The word ‘business’ in this section means the same business.
Hence, money received by an agent in one business cannot be
retained by him on account of remuneration alleged to be due to
him in a different business.

n Section 218 further builds upon Section 217. It lays down that the
agent must pay to the principal all moneys received on his account
after the appropriate deductions are made.
+
Agency
(Regarding payment of the Agent for his services)

Section 219

In the absence of any special contract, payment for the

performance of any act is not due to the agent until the
completion of such act; but an agent may detain moneys
received by him on account of goods sold, although the whole
of the goods consigned to him for sale may not have been sold,
or although the sale may not be actually complete.

n No remuneration will be due to the agent until the

completion of the act for which the payment is to be made,
unless there is a special contract to that effect.
+
Agency
(Regarding payment of the Agent for his services)

n However, the agent may retain moneys received by him for

partial sale of goods, though all the goods have not been
sold, or sale is not fully complete.

n Note: The question whether an agent is entitled to

remuneration at all, depends on the terms of the agreement
between the principal and the agent. The said agreement
could be either express or implied. The mere fact of
employment of a professional agent itself raises the
presumption of a contract to remunerate him;

n Note: The words ‘special contract’ in this section include a

contract arising by implication from custom or usage.
+
Agency
(Regarding payment of the Agent for his services)

n Note: Where the terms of remuneration are contained in a

writing, the agent is not entitled to remuneration, unless all
conditions imposed by the writing have been fulfilled.

n Meaning of “completion of such act”: In order to entitle the

agent to receive his remuneration, he must have carried out
all that he had agreed to do under the agency, and all
conditions imposed by the contract must have been fulfilled.

n Note: The agent is entitled to his remuneration after the

completion of his duties, irrespective of the fact that the
transaction was beneficial or not to the principal.
+
Agency
(Regarding payment of the Agent for his services)

Example: A wants to sell his flat located in Gurugram. The asking

price he’s expecting is Rs. 3 Crore. A also wants to make sure that
the buyer is not a business man as he’s had a bad experience
earlier. Accordingly, A calls up B, a property broker and entrusts
him with the responsibility to sell the flat on his behalf (under a
valid contract of agency) at an agreed commission of 1% with the
understanding that his demands will be fulfilled. B finds a service
professional who is willing to pay Rs. 3 Crore for A’s flat.
Accordingly, an Agreement to Sell is signed between B and the
service professional with an understanding that the sale will take
place within 3 months. Immediately after the Agreement to Sell is
signed, A directs B not to sell the flat. The service professional
doesn’t want to force A to sell and he decides to not sue him for
breach. Can B claim his 1% commission under Section 219 of ICA?
+
Agency
(Regarding payment of the Agent for his services)

Section 220

An agent who is guilty of misconduct in the business of the

agency, is not entitled to any remuneration in respect of that
part of the business which he has misconducted.

n The principle underlying this section is that a principal is

entitled to have an honest person as his agent, and not a
person whose actions are calculated to prejudice his interest,
and it is only such agent who can claim commission.

n Therefore, an agent cannot claim from the principal any

remuneration if he’s acted totally contrary to the principal’s
instructions or where the agent did not exercise proper skill
and diligence.
+
Agency
(Regarding payment of the Agent for his services)

Section 221

In the absence of any contract to the contrary, an agent is

entitled to retain goods, papers, and other property, whether
movable or immovable of the principal received by him, until
the amount due to himself for commission, disbursements and
services in respect of the same has been paid or accounted for,
to him.

n This section confers on the agent a right of particular lien on

the property of the principal until the amounts due in respect
of: (1) commission; (2) disbursements; and (3) services; are
paid to him, or accounted for.
+
Agency
(Regarding payment of the Agent for his services)

n Note: The agent’s lien does not give unrestricted authority to

the agent to deal with the property in any manner the agent
may like. The right of lien only enables the agent to RETAIN
the property till the dues are paid by the principal.

n Note: This section does not give an agent a right to sell the
property in his possession. However, in exceptional
circumstances, where an agent has spent money from his own
pocket in purchasing the goods on behalf of the principal,
some courts have held the agent to be in the position of a
tacit pledgee, who can recover as much of his outlay as
possible by selling the goods which are in his custody;
However, as under Section 176, a “reasonable notice” of sale
must be given to the principal.
+
Agency
(Regarding payment of the Agent for his services)

n Note: In order to have a lien, the agent must have some

possession, custody or control over the said property.

n Note: The scope of the agent’s lien is not vast enough to

include his right to retain property which were the subject of
different and separate transactions.

n Note: A lien cannot be acquired by a wrongful act! The

possession of the property must be obtained by the agent
lawfully in order for a lien to attach. If the agent obtains the
property by misrepresentation or without the principal’s
authority, he has no lien on the said property.
+ Principal’s duty to agent
(To indemnify for all lawful acts)

Section 222

The employer of an agent is bound to indemnify him against

the consequences of all lawful acts done by such agent in
exercise of the authority conferred upon him.

n The primary duty of the principal is to indemnify the agent

against the consequences of his lawful acts.

n This right of an agent to be indemnified by his principal

flows from the principle that an agent, as the representative
of his principal and acting wholly on his behalf, is entitled to
be indemnified for such liabilities incurred and losses
suffered.

Note: To be read with Section 223.

+ Principal’s duty to agent
(To indemnify for all lawful acts)

n The only two conditions that the agent must fulfill in order to
claim indemnification from the principal are: (a) he must have
acted within the bounds of his authority, (b) he must have
done something lawful, within the bounds of his authority.

n The only reason for the foregoing limitation is that the

principal cannot be entitled to indemnification for all and
every loss. The agent can only claim indemnification, where
neither the actions of the agent are unlawful, nor he has
exceeded the bounds of his agency.
+ Principal’s duty to agent
(To indemnify for all lawful acts)

Example: A employed B as an agent under a valid contract of

agency. A instructed B to purchase goods worth Rs. 10 lakhs
from Kolkata and deliver it to C in Delhi on his behalf. B
purchased the goods from Kolkata and immediately thereafter
sent the goods to Delhi. However, the goods were lost in transit.
B is not at fault. Can the agent sue the principal to recover his
losses under Section 222?
+ Principal’s duty to agent
(To indemnify for all acts done in good faith)

Section 223

Where one person employs another to do an act, and the agent does the
act in good faith, the employer is liable to indemnify the agent against the
consequences of that act, though it caused an injury to the rights of third
persons.

n On the face of it, it appears that this section deals with the consequences
of unlawful acts done in good faith. As a corollary to this, it is obvious
that if the agent knows about the unlawful nature of the act, he will not
be able to claim indemnity under this rule.

n The Illustrations appended to this section indicate that this section is

applicable where the Principal induces the agent to believe what he’s
doing is lawful, which eventually turned out to be unlawful though.

n This section is usually applicable where the purported act is not prima
facie unlawful to a person of ordinary prudence out there.
+ Principal’s duty to agent
(To indemnify for all acts done in good faith)

Example: A hires B as his agent to sell certain goods on his

behalf. B goes ahead and sells off all the goods on behalf of A.
Turns out, A was not the true owner of the goods and B is sued
by the true owner C. B is then forced to shell out damages to C.
Can B claim indemnification from A?
+ Principal’s duty to agent
(No indemnification in certain cases)

Section 224

Where one person employs another to do an act which is

criminal, the employer is not liable to the agent, either upon an
express or an implied promise to indemnify him against the
consequences of that act.

n This section in essence says that where an agent has been

employed to do a criminal act, the agent will not be entitled
to indemnification from the principal.

n Illustration: A employs B to beat C, and agrees to indemnify

him against all consequences of the act. B thereupon beats C,
and has to pay damages to C for so doing. A is not liable to
indemnify B for those damages.
+
Agency
(Delegation by an agent to a sub-agent)

Section 190

An agent cannot lawfully employ another to perform acts which

he has expressly or impliedly undertaken to perform
personally, unless by the ordinary custom of trade a sub-agent
may, or from the nature of the agency, a sub-agent must, be
employed.

n As a general rule, a delegated authority cannot be delegated

further. The reason is fairly obvious: the risks of agency are
substantial, and a person has a right not to be represented,
save at his own election and by an agent of his choice.

n This section lays down the scenarios in which such

delegation is allowed.
+
Agency
(Delegation by an agent to a sub-agent)
n This section provides that an agent cannot delegate his authority
for acts which he has expressly or impliedly undertaken to
perform. He may do so when: (a) the nature of the agency
demands it or permits it; or (b) the ordinary custom of trade in a
particular business allows it.

n Note: Where the principal has reposed trust and confidence in

the agent, then such delegation is not permitted.

n Note: The principal may authorize the agent to further delegate

the work either in express terms or in implied terms! When no
personal confidence or skill is reposed by the principal in the
agent and the duties are capable of being equally well
discharged by any person, then such an implied authority could
be construed. Therefore, an authority to delegate may be
implied from the nature of the task of agency, custom or usage of
trade, and the conduct of the parties.
+
Agency
(Delegation by an agent to a sub-agent)

Example: A employs B as his agent under a valid contract of

agency for effectuating the sale of a ship at any port where the
ship may, from time to time happen to be. There’s no other
instruction from A to B. Can B further delegate?

Example: A employs B as his agent under a valid contract of

agency for effectuating the sale of a ship at any port where the
ship may, from time to time happen to be. At the time of hiring
him, A tells B that he’s hiring him for the sole reason that he’s of
the opinion that he’s the best negotiator and will get him the
best money for his ship. Can B further delegate?
+
Agency
(Who is a sub-agent?)

Section 191

A ‘sub-agent’ is a person employed by, and acting under the

control of, the original agent in the business of the agency.

n The relation of the sub-agent to the original agent is, as

between themselves, that of an an agent to principal.
+
Agency
(Relationship of the ‘ultimate’ principal with the sub-agent)

Section 192

Where a sub-agent is properly appointed, the principal is, so far as

regards third persons, represented by the sub-agent, and is bound by
and responsible for his acts, as if he were an agent originally appointed
by the principal.

The agent is responsible to the principal for the acts of the sub-agent.

The sub-agent is responsible for his acts to the agent, but not to the
principal, except in cases of fraud or wilful wrong.

Note: There is not privity of contract between the Original Principal and
the Sub-Agent.
+
Agency
(Relationship of the ‘ultimate’ principal with the sub-agent)

n Meaning of “properly appointed”: It appears that these words

are referring to the conditions laid down under Section 190.
The idea is that the principal is bound by a sub-agent only if
the conditions laid down therein are being complied with. No
other plausible interpretation of “properly appointed” has
been preferred.

Section 190

An agent cannot lawfully employ another to perform acts which

he has expressly or impliedly undertaken to perform
personally, unless by the ordinary custom of trade a sub-agent
may, or from the nature of the agency, a sub-agent must, be
employed.
+
Agency
(Relationship of the ‘ultimate’ principal with the sub-agent)

n The following are the takeaways from this section:

(a) As a general rule, the principal may take legal recourse

against the agent for the actions of the sub-agent. The principal as
a general rule may not take direct action against the sub-agent.

(b) As a general rule, the sub-agent is responsible to the agent

for his actions. The sub-agent is responsible to the ‘ultimate’
principal in cases of fraud or willful wrong.

Note: Do you think the principal should be able to sue the sub-
agent directly for all causes of action? Why or why not?
+
Agency
(Relationship of the ‘ultimate’ principal with the sub-agent)

n Note: The reason for the foregoing rule is that generally

speaking, there need not be any privity of contract between
the ‘ultimate’ principal and the sub-agent. Therefore, the sub-
agent is usually liable to his principal, which is the agent
appointed by the ‘ultimate’ principal.

n Note: If the principal is a party to the appointment of the sub-

agent or in some manner it is indicated that it was the
intention of the parties that privity of contract should be
established between them, this rule will not apply and the
sub-agent has both the rights and the liabilities of an agent
vis-à-vis the ‘ultimate’ principal.
+
Agency
(Relationship of the ‘ultimate’ principal with the sub-agent)

Principal sues the Agent for Agent sues the Sub-agent for
the acts of the Sub-agent the acts of the Sub-agent

Principal Agent Sub-agent

Principal sues the Sub-agent directly in cases

of Fraud & wilful wrong of the Sub-agent
+
Agency
(Relationship of the ‘ultimate’ principal with the sub-agent)

Example: A instructed HDFC Bank to pay money to Mr. X in

Mohabatabad. HDFC Bank has no branch in Mohabatabad,
however, OBC Bank does. HDFC Bank instructs OBC Bank to
pay money to Mr. X on their behalf. Now, as it turns out there
are two Mr. X’s in Mohabatabad and OBC Bank paid the money
to the wrong Mr. X because of an honest mistake. Now, A sues
OBC Bank. OBC Bank resists the action on the grounds that they
are the sub-agent and given that there’s no privity between
them and A, therefore, A cannot sue them. Is OBC Bank right?
+
Agency
(Relationship of the ‘ultimate’ principal with the sub-agent)

Example: A employed B as his agent to sell his property

located in New Delhi. A demanded that the property be sold at
market rate. Under the contract of agency, B was free to appoint
a sub-agent. B appointed C as his sub-agent to sell the
property of A. C sold off A’s property at Rs. 1 lakh less than the
market rate. A approved of the transaction and paid 1%
commission to B as agreed. Accordingly, part payment was
made to C by B. Few days later, A comes to know from the
buyer of his property ‘D’ that C took 1% commission from D as
well. Can A sue C for fraud / wilful wrong under Section 192?
+
Agency
(Relationship of the ‘ultimate’ principal with the sub-agent)

Section 193

Where an agent, without having authority to do so, has

appointed a person to act as a sub-agent, the agent stands
towards such person in the relation of a principal to an agent,
and is responsible for his acts both to the principal and to third
persons; the principal is not represented by or responsible for
the acts of the person so employed, nor is that person
responsible to the principal.
+
Agency
(Relationship of the ‘ultimate’ principal with the sub-agent)

n Where the sub-agent is NOT properly appointed, Section 193 provides

the following rules:

(a) The agent stands as a principal towards such a sub-agent;

(b) The agent is responsible to third persons for the acts of the sub-agent;

(c) The agent is responsible to his principal for the acts of the sub-agent;

(d) The sub-agent does not represent the principal;

(e) The principal is not liable to third persons for the acts of the sub-agent.

(f) The sub-agent is not responsible to the principal, but only to the agent.
+
Agency
(Substituted Agent)

Section 194

Where an agent, holding an express or implied authority to name

another person to act for the principal in the business of the
agency, has named another person accordingly, such person is not
a sub-agent, but an agent of the principal for such part of the
business of the agency as is entrusted to him.

n This section envisages a person called the “substituted agent”

who is nominated by the agent to act for the principal in the
business of agency with the knowledge and consent of the
principal. Therefore, there is an element of privity between the
principal and the substituted agent.

n With respect to a “substituted agent,” direct relations are

established between the principal and the substituted agent.

n The substituted agent becomes the agent of the principal.

+
Agency
(Substituted Agent)

n Primary difference between a sub-agent and a substituted

agent: The whole distinction in our law appears to turn upon
the original agent ‘naming’ the person he appoints to
represent the principal. In the case of a sub-agent, no such
naming is required. By way of this naming, privity of contract
arises between the principal and the substituted agent.

n Note: The naming should be to the principal himself so as to

bring privity of contract between them.

Illustration: A directs B, his solicitor, to sell his estate by auction,

and to employ an auctioneer for the purpose. B names C, an
auctioneer, to conduct the sale. C is not a sub-agent, but is A’s
agent for the conduct of the sale.
+
Agency
(Substituted Agent)

Illustration: A authorises B, a merchant in Calcutta, to recover

the moneys due to A from C & co. B instructs D, a solicitor, to
take legal proceedings against C & co. for the recovery of the
money. D is not the sub-agent, but is solicitor for A.
+
Agency
(Caution in appointing a Substituted Agent)

Section 195

In selecting such agent for his principal, an agent is bound to

exercise the same amount of discretion as a man of ordinary
prudence would exercise in his own case; and, if he does this,
he is not responsible to the principal for the acts or negligence
of the agent so selected.

n This section essentially sums up the liability of the agent for

the acts of the substituted agent.

n As a general rule, the burden on the agent in naming the

substituted agent is that of an ordinary prudent person.
+
Agency
(Caution in appointing a Substituted Agent)

Illustration: A instructs B, a merchant, to buy a ship for him. B

employs a ship-surveyor of good reputation to choose a ship
for A. The surveyor makes the choice negligently and the ship
turns out to be unseaworthy and is lost. B is not, but the
serveyor is, responsible to A.
+
Ratification by the Principal

Section 196

Where acts are done by one person on behalf of another, but

without his knowledge or authority, he may elect to ratify or to
disown such acts. If he ratifies them, the same effects will follow
as if they had been performed by his authority.

n This section is self explanatory. All it says is that an act which,

at the time it was entered into or done by an agent, lacked
the authority of a principal, may, by subsequent conduct of
the principal, become ratified by him. Such ratification is
equivalent to taking the authority of the principal
beforehand.
+
Ratification by the Principal

n Ratification in law, is equivalent to previous authority. It amounts

to endorsing the unauthorised act of the agent as authorised.

n An effective ratification places all the parties in a position similar

to that which they would have occupied at the material time if
the agent had actual authority to perform the acts ratified. Then,
the agent gets relieved from personal liability to the principal
for acting in excess of authority, and can recover his commission
and expenses, and becomes entitled to the indemnity.

n Note: Ratification once deliberately made upon full knowledge

of all material circumstances cannot be revoked.

n Note: When the acts of the agent are ratified by the principal, the
relation of principal, and agent is constituted retrospectively.
+
Ratification by the Principal

Section 197

Ratification may be express or may be implied in the conduct of

the person on whose behalf the acts are done.

n Ratification can be implied from any act which reflects the

conscious adoption of the transaction. It may sometimes also be
inferred from silence or mere acquiescence - taking the benefit
of the transaction is the strongest, and the most usual evidence of
tacit adoption.

n It may be sufficient ratification that the intended principal,

having all material facts, brought to his knowledge and knowing
that he is being regarded as having accepted the position of
principal, takes no steps to disown that character within a
reasonable time, or adopts no means of asserting his rights at
the earliest time possible.
+
Ratification by the Principal

Section 198

No valid ratification can be made by a person whose

knowledge of the facts of the case is materially defective.

n For the ratification to be effective, the person ratifying should

have had, at the time of ratification, knowledge of all material
facts in respect of the case.

n The burden of proof lies on the person who relies on the

alleged ratification to show that the principal had requisite
knowledge.
+
Ratification by the Principal

Example: A employs B under a valid contract of agency to sell

his flat in Delhi. There were clear instructions from A to B that B
could not sell this flat either to himself or to any of his family
members. Another clear instruction to B was to sell the flat only
at market rate of Rs. 1 crore. B floats a Company, the majority
shares of which are controlled by B’s family (A is not aware of
the shareholding of this Company). B sells the flat to this
Company for Rs. 99 lakhs. When B tells A about the sale to the
Company for 99 lakhs, A is happy and doesn’t show any
disagreement. After a few days, however, A comes to know of
the Company’s shareholding and wants to annul the sale to the
Company. B resists arguing that A ratified B’s actions in all
respects. Is B’s argument likely to prevail?
+
Ratification by the Principal
Section 199

A person ratifying any unauthorized act done on his behalf ratifies the
whole of the transaction of which such act formed a part.

n The essence of this section is that a contract cannot be ratified in

part and repudiated in part. Therefore, the general rule is that
where a ratification is established as to a part, it operates as a
confirmation of the whole of that particular transaction entered into
by the agent.

Example: X, without Y’s authority buys 100 bales of cotton from the
open market. Now, Y gets an order to supply 25 bales of cotton to a
third party. Y instructs X to supply 25 bales of cotton out of the 100
bales he bought without his authority, to A. X does so. Now, it rains and
the rest of the 75 bales of cotton are destroyed by flooding. X sues Y
claiming indemnification for the 75 bales of cotton. Y resists the action
saying that he merely ratified X’s transaction to buy 25 bales and not
100 bales. Is he right?
+
Revocation of Authority

Section 201

An agency is terminated by the principal revoking his

authority, or by the agent renouncing the business of the
agency; or by the business of the agency being completed; or
by either the principal or agent dying or becoming of unsound
mind; or by the principal being adjudicated an insolvent under
the provisions of any Act for the time being in force for the
relief of insolvent debtors.

Note: This section is not exhaustive. An agency may also be

terminated by mutual agreement, completion of the term of
agency, the agency becoming subsequently unlawful etc.
+
Revocation of Authority

An agency can be terminated by the following ways:

(1) Revocation of the agent’s authority by the principal;

- The principal may revoke his authority only before the agent
exercises such authority. (See Section 203)

- The principal may NOT revoke his authority after the authority has
been partly exercised. (See Section 204)

- The revocation may either be express or implied. (See Section 207)

- The revocation becomes effective only when it comes to the

knowledge of the agent or the third person respectively. (See Section
208)

- The termination of the agent’s services causes termination of the

services of the sub-agent. (See Section 210)
+
Revocation of Authority

(2) Agent renouncing the business of agency;

The agent may also choose to get out of the contract of agency at any
time before the completion of the task for which he was hired.

(3) Completion of the business of agency;

Where the contract of agency is entered into for a particular task, and
that task has been achieved, then the agency comes to an end.

(4) Death of the principal or the agent;

- The revocation becomes effective only when it comes to the knowledge

of the agent or the third person respectively. (See Section 208)

- The agent is bound to take reasonable steps for the protection and
preservation of the principals interests. (See Section 209)
+
Revocation of Authority

(5) The principal or the agent becoming of unsound mind;

See Section 12 of ICA for a further understanding of ‘unsound mind’.

(6) The principal being adjudicated an insolvent.

Note: A mere presentation of the petition in court to declare the

principal insolvent is not enough. The court must adjudicate / hold
the principal insolvent for this part of the section to kick in.

Note: The ICA does not contemplate the insolvency of an agent as a

ground for termination of agency.
+
Revocation of Authority

Section 203 [This is not the exact reproduction of the section]

The principal may… revoke the authority given to his agent at

any time before the authority has been exercised so as to bind
the principal.

Note: The term “authority has been exercised” connotes that

the agent has bound the principal into a legally binding
relation with another person. Therefore, the principal may
revoke an agent’s authority even if the agent has taken
preliminary steps towards the completion of the transaction,
but has not completed it.
+
Revocation of Authority

Section 204

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
agency.

n An agent who has already acted on his principal’s

instructions, and has thereby incurred a legal obligation to a
third party, is not bound on the command of the principal to
stop short and refuse to perform the obligation incurred.

n The agent is at liberty to carry out the instructions for which

he has incurred legal liabilities and it is necessary for him to
relieve himself of the same.
+
Revocation of Authority

Example: A employs B as an agent under a valid contract of

agency to buy 100,000 cans of pepsi from the open market. A
also instructs B to search the market and buy from a wholesaler
that gives him the best deal. B goes around in the market,
spending his time and money (petrol, phone, food) to find the
perfect wholesaler. B is still doing the rounds and hasn’t yet
finalized a wholesaler yet. Can A revoke?

Example: (continuing from the previous example) B shortlists a

wholesaler and enters into a contract with him for the supply of
100,000 cans, with delivery to take place in the next 10 days.
Can A revoke his authority after this contract was executed?
+
Revocation of Authority

Section 207

Revocation or renunciation may be expressed or may be implied in the

conduct of that principal or agent respectively.

Conduct of the principal inconsistent with the continuance of the agency

will determine the agency. For example: A hires B to sell his house under a
valid contract of agency. B sells the same house himself. B’s agency here
stands revoked.

Section 208

The termination of the authority of an agent does not, so far as regards the
agent, take effect before it becomes known to him…

Illustration: A directs B to sell goods for him, and agrees to give B five
percent commission on the price fetched by the goods. A afterwards by
letter, revokes B’s authority. B after the letter is sent, but before he receives
it, sells the goods for Rs. 100. The sale is binding on A, and B is entitled to
5% commission.
+
Revocation of Authority

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.

n The circumstances of each case will determine what is

‘sufficient cause’. It will largely depend upon the nature of
the business to which the agency relates etc. No hard and fast
rule can be laid down for any class of cases. Misconduct on
part of the agent, non-indemnification by the principal are
some examples where sufficient cause may be found.
+
Revocation of Authority

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.

Section 210

The termination of the authority of an agent causes the

termination of the authority of all sub-agents appointed by him.
+
Miscellaneous

Section 226

Contracts entered into through an agent, and obligations

arising from acts done by an agent, may be enforced in the
same manner, and will have the same legal consequences as if
the contracts had been entered into and the acts done by the
principal in person.

Section 229

Any notice given to or information obtained by the agent,

provided it be given or obtained in the course of the business
transacted by him for the principal, shall, as between the
principal and third parties, have the same legal consequences
as if it had been given to or obtained by the principal.
+
Miscellaneous
(Breach of warranty by person purporting to be agent)

Section 235

A person untruly representing himself to be the authorized

agent of another, and thereby inducing a third person to deal
with him as such agent, is liable, if his alleged employer does
not ratify his acts, to make compensation to the other in respect
of any loss or damage which he has incurred by so dealing.

n Where any person purports to do any act or make any

contract as agent on behalf of a principal, he is deemed to
warrant that he has, in fact, authority from such principal to
do the act or make the contract in question. And if he has no
such authority, he is liable to be sued for breach of warranty
of authority by any third person who was induced by his
conduct.
+
Miscellaneous
(Breach of warranty by person purporting to be agent)

n This section equally applies to a situation where a man who

represents that he has authority from another when in fact he
has no authority whatsoever, and the case of a man who
represents that he has certain authority from another when
he has authority of another description. In neither case can
the man, who makes the representation, be said to be the
authorized agent of the other with reference to the matter on
which he has no authority. Therefore, Section 235 applies to
both classes of cases.
+
Miscellaneous
(Apparent authority / Ostensible authority)

Section 237

When an agent has, without authority, done acts or incurred

obligations to third person on behalf of his principal, the principal
is bound by such acts or obligations, if he (principal) has by words
or conduct induced such third persons to believe that such acts or
obligations were within the scope of the agent’s authority.

n Apparent / ostensible authority is the authority of an agent as it

appears to others. Such authority coincides with actual authority
as will be seen in further slides.
+
Miscellaneous
(Apparent authority / Ostensible authority)

n Generally speaking, this section encompasses a situation when

one person has clothed another, or allowed him to assume an
appearance of authority to act on his behalf, without actually
giving him any authority either express or implied, by which
appearance of authority a third party is misled into believing
that a real authority exists.

n The doctrine of apparent authority applies in the following

cases: (1) where a person allows another who is not his agent, to
appear as his agent; or (2) where a principal allows his agent to
appear to possess more authority than he actually has; (3) where
the principal reserves or limits the authority of an agent which
the agent would have in ordinary course of business, but does
not make this known to third parties; (4) where the principal
allows it to appear that the agent has authority although his
authority has been terminated.
+
Miscellaneous
(Apparent authority / Ostensible authority)

n In Hely Hutchinson v. Brayhead Ltd. (1967) 3 All ER 98 it was

held as follows, “… when the board of directors appoint one of
their members to be a managing director they invest him not
only with implied authority, but also with ostensible authority
to do all such things as fall within the usual scope of that office.
Other people who see him acting as managing director are
entitled to assume that he has the usual authority of a
managing director. But sometimes ostensible authority
exceeds actual authority. For instance, when the board
appoints the managing director, they may expressly limit his
authority by saying he is not to order goods worth more than
£500 without sanction of the board. In that case his actual
authority is subject to £500, but his ostensible authority
includes all the usual authority of a managing director. The
company is bound by his ostensible authority in his dealings
with those who do not know of the limitation…”
+
Miscellaneous
(Apparent authority / Ostensible authority)

n The liability under this section is an application of principle of

estoppel. Therefore, if a person allows another to act on his
behalf with other parties and makes them believe that the other
person is acting on his behalf, he will be bound by the
transactions entered into by the ostensible agent.

Section 115 of the Indian Evidence Act, 1872

When one person has, by his declaration, act or omission,

intentionally caused or permitted another person to believe a
thing to be true, and to act upon such belief, neither he nor his
representatives shall be allowed in any suit or proceeding
between himself and such person or his representatives to deny
the truth of that thing.

(This Section of the Evidence Act defines Estoppel. This is here for
your reference purposes only.)
+
Miscellaneous
(Apparent authority / Ostensible authority)

Example: A (an agent of LIC) collected premium from B (a

policy holder of LIC) by way of a cheque before the due date.
However, he deposited the cheque after the due date, by which
time the policy had lapsed. The rules framed by LIC prohibited
agents from collecting premium. The policy holder claimed
and proved that this in fact was the prevailing practice (and that
the LIC HQ was aware of such a practice), whereby agents of LIC
would collect the premium from some policy holders and then
deposit it with the LIC account. B is now suing LIC to revive the
policy within the t/c stated in the agreement. Can he succeed?
+
Miscellaneous
(Apparent authority / Ostensible authority)

Harshad J. Shah v. LIC of India (1997) 5 SCC 64

06 March, 1986 Policy subscribed

06 March, 1987 Due date for premium

Revival
of policy 04 June, 1987 Date of collection of premium by agent
possible

09 August, 1987 Death of insured

10 August, 1987 Deposit of premium by agent

+
Miscellaneous
(Apparent authority / Ostensible authority)

Facts:

n The insured took out four insurance policies for Rs. 25,000
each with double accidental benefits on March 06, 1986
through a general agent of LIC.

n On June 04, 1987, the general agent of LIC met the insured
and obtained from him a bearer cheque dated June 04, 1987.
The said cheque was encashed by the son of the general
agent on June 06, 1987. Thereafter, the said premium was
deposited by the general agent with LIC on August 10, 1987.
+
Miscellaneous
(Apparent authority / Ostensible authority)

n In the meanwhile, on August 09, 1987 (a day before the premium

was deposited with LIC), the insured died.

n The widow of the insured submitted a claim to LIC being the

nominee of the policy and LIC rejected her claim arguing that
the policy had lapsed due to non-payment of the premium and
that revival was not possible because the premium was
deposited after the death of the insured.

n The argument of the widow is that the collection of the premium

by the general agent was collection by LIC. Therefore, the policy
was validly revived by paying the premium to the agent during
the lifetime of the insured and within 5 years of non-payment of
a premium.

n The argument of LIC is that collection by general agent cannot

be said to be collection by LIC. Therefore, the policy stands
lapsed.
+
Miscellaneous
(Apparent authority / Ostensible authority)

n LIC substantiated its argument further by arguing that the

general agent was not authorized to collect the premium
amount. It cited the following paragraph from its Regulations, “…
nothing contained in these regulations shall be deemed to
confer any authority on an agent to collect any moneys… on
behalf of the Corporation…”

n LIC also pointed out to the terms and conditions of the

appointment of the general agent involved here, which stated,
“… you are not authorized to collect moneys.. Nor are you
authorized to advance premium to the Corporation on behalf of
policyholders… you are also not authorized to collect or pass
receipts for moneys paid towards premiums… In respect of any
unauthorized collection, you will be acting as an agent of the
party concerned… and you alone will be answerable to the
party for the consequences of such action…”
+
Miscellaneous
(Apparent authority / Ostensible authority)

Issue:

n Whether or not the premium was paid by the insured to LIC on June
04, 1987 when the bearer cheque was delivered to the general
agent OR on August 10, 1987 when the amount realized by
encashing the cheque was deposited with the LIC?

Decision:

n The Court ruled in favour of LIC for lack of evidence.

Rationale:

n No such case set up by the appellants in the lower courts that LIC,
by its conduct had induced policyholders to believe that the
general agent were authorised to receive premium on behalf of LIC.
+
Miscellaneous
(Apparent authority / Ostensible authority)

n The mere fact that LIC allowed the agent to deposit money on
behalf of the insured is not enough to prove that LIC induced
the insured to believe that the agent had authority to collect
premiums from the insured.
+
Miscellaneous
(Misrepresentation / Fraud by agent)
Section 238

Misrepresentation made or frauds committed, by agents acting in

the course of their business for their principals, have the same
effect on agreements made by such agents as if such
misrepresentations or frauds had been made or committed by the
principals; but misrepresentations made, or frauds committed, by
agents, in matters which do not fall within their authority, do not
affect their principals.

n If the agent, acting within the scope of his authority, is guilty of

fraud, or misrepresentation in the making of the contract, or has
concealed facts which must be disclosed to the other party, the
contract is voidable at the instance of that party, who may
rescind it as against the principal and recover from the principal
any benefit which has passed under the contract. This principle
applies irrespective of whether the principal has or has not been
party to such misrepresentation or fraud.
+
Miscellaneous
(Misrepresentation / Fraud by agent)
n Note: Although the particular act which gives the cause of
action may not be authorized, still, if the act is done in the
course of employment of the agent which is authorized, then
the employer is liable for the act of his agent. The reason for
the foregoing is that even though the principal has not
authorized the particular act, but he is the one who put the
agent in his place to do that class of acts, and he must be
answerable for the manner in which the agent conducted
himself in doing the business.

n Note: Such misrepresentation / fraud must be committed by

the agent during the course of his employment and not at any
other time.
+
Miscellaneous
(Misrepresentation / Fraud by agent)
National Bank of Lahore (NBL) v. Sohan Lal Saigal

Facts:

n The Head Office of the Bank had issued instructions to NBL

regarding operation of lockers. Some of the relevant instructions
were: (a) The strong room / vault had to remain under joint
control of the cashier and the manager; (b) The master key to all
lockers was also to remain under joint control of the cashier and
the manager;

n The respondent took up a locker on rent from the Bank for the
safe keeping of his jewelry.

n After some time, all the jewelry of the respondent was found
missing from the locker.
+
Miscellaneous
(Misrepresentation / Fraud by agent)
n Now, it was proved on trial that: (a) the keys of the strong
room were kept with the manager alone; (b) the master key
of all the lockers was also kept with the manager alone; (c)
the manager was given accommodation by NBL, right above
the Bank premises; (d) the manager, before giving the
lockers on rent had tampered with the locks so that the
lockers could have been opened by using the master key
alone; (e) the Head Office of the Bank had no idea what the
Manager of NBL was doing; (f) the Head Office of the Bank
never checked if the regulations laid down by it were being
followed in spirit and was guilty of gross negligence;
+
Miscellaneous
(Misrepresentation / Fraud by agent)
Issue:

n Whether or not the Bank can be held liable for the fraud
committed by its Manager, during the course of its
employment, even though the Bank per se was not aware of
the exact wrongdoings the Manager was involved in?

Decision:

n The court answered the foregoing question in the affirmative.

+
Miscellaneous
(Misrepresentation / Fraud by agent)
Rationale:

n Given that the lockers were given out on rent upon an

agreement, there was an implied condition that only such
lockers would be rented out which were safe and sound.
Where defective lockers were rented out by the agent of the
Bank, there was a breach of that condition.

n It doesn’t matter that the Head Office of the Bank was not
aware of the exact fraud that was being cooked up by its
Manager. It was enough that it was done during the course of
his employment. Therefore, applying Section 238 of ICA, the
court held the Bank liable.
+
Estate agent’s conflict of interest

Kelly v. Cooper [1993] AC 205

Facts:

n The plaintiff instructed the defendants, a firm of estate agents

to sell his house and agreed to pay them a percentage of the
selling price as commission. The plaintiff was seeking $3.5
million.

n The owner of another house (which is adjacent to where the

plaintiff’s house is) instructed the defendant to sell their
respective house, as well.

n The defendant showed both the houses to a prospective

purchaser and whose offer to purchase the adjacent house
was accepted for $2 million
+
Estate agent’s conflict of interest

n The same purchaser then offered to buy the plaintiff’s house for
$2.5 million. The agent sold the house after discussion with the
plaintiff to the same purchaser for the price offered.

n After the sale was completed, the plaintiff found out about the
sale of the adjacent house and alleges that the defendant should
have told him of the purchaser’s interest in both the properties, it
being material information relating to the sale of his property.
Accordingly, the plaintiff now refuses to pay the agreed upon
commission to the defendant.

n The defendant therefore sues the plaintiff for the commission.

On the other hand, the plaintiff counter sues the defendant for
breach of duty in failing to disclose material information to him
and placing themselves in a position of conflict of interest.
+
Estate agent’s conflict of interest

Issue:

n Whether or not an estate agent is liable to disclose information

to Principal 1, that comes to his knowledge from his dealings
with Principal 2?

Decision:

n The Privy Council answered this question in the negative.

Rationale:

n In the case of estate agents, it is their business to act for

numerous principals. Despite this conflict of interest, estate
agents must be free to act for several competing principals,
otherwise they will be unable to perform their function.
+
Estate agent’s conflict of interest

n It is the business of estate agents to act for numerous principals,

several of whom might be competing and whose interests would
conflict. Therefore, a term was to be implied in the contract with
such an agent that he was entitled to act for other principal’s
selling similar properties and to keep confidential information
obtained from each principal.

n Although the purchaser’s interest in acquiring both properties

was material information which could have affected negotiations
for the sale price of the plaintiff’s house, the defendants were not
in breach of their duty in failing to inform the plaintiff of the
agreement to buy the adjacent house, which was confidential to
the owner thereof.

n Note: It was not proved on trial that the purchaser had a special
interest in buying both properties and that it could have
influenced negotiations.
+

Thank you!