AGENCY (UNIT-2)

Introduction

A contract of the agency is a legal relationship, where one person appoints another to perform the
transactions on his behalf.

When a person employs another person to do any act for himself or to represent him in dealing
with the third persons, it is called a ‘Contract of Agency’.

Legal Provision
Section 182 of the Indian Contract Act, 1872 defines “agent” and “principle”.
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 “principle”.

What are the essentials of ‘Contract of Agency’?

Competence of the parties to enter a contract of agency-
Section183: Who may 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 an agent.
Section 184: Who may be an agent. - 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 became an agent, so as to be responsible to his principal according to the provisions in
that behalf herein contained.
Considerations not required-
As per Section 185 of the Indian Contract Act, 1872(ICA), contract of agency requires no
consideration. It comes under the category of those contracts which the law has declared to
be valid without consideration.
However, these provisions do not deprive the agent of his legal and justified remuneration
unless proven to be specified otherwise in the contract.”

Rights of an Agent
Right to claim reimbursement for expenses-
Section 217 of ICA provides that an agent had the right to retain, out of the money received
on behalf of the principal, money advance or expenses properly incurred in conducting the
agency business.
Right to receive remuneration-
According to Section 19, an agent also has a right to claim remuneration as may be
payable to him for acting as an agent.
Right to indemnification against consequences of all lawful acts-
 Under Section 222 of the Indian Contract Act, 1872, enables the agent to have a right to be
indemnified by the principal against the consequences of all lawful acts done in exercise of
his authority.
In Sheikh Farid Bakhsh v. Hargulal Singh (1936), the Allahabad High Court said that the
principal must pay the remuneration as soon as the agent has substantially performed all
the tasks, they have contracted him to perform.
Right to Compensation-
According to Section 225 of the Indian Contract Act, 1872, it entitles the agent to
compensation in the event of any injury or loss he suffers because a principal lacks skill or
competency.
Right of Lien-
Section 221 of the Indian Contract Act, 1872 says that where the agent is not paid lawful
charges, remunerations, or expenses by his principal and the goods are under his control.
He can keep the goods until the principal pays the lawful charges.

Duties of Agent
Duty to Execute the Mandate-
Section 211 of the Indian Contract Act, 1872 bounds an agent to conduct the business of
his principal according to the principal’s directions or in the principal’s absence, according
to the custom of trade.
In Pannalal Janakidas v. Mohanlal (1950), the Supreme Court held the agent liable to
compensate the principal. Here, the principal told the agent to get the goods insured. The
agent charged the premium from the principal but never got the insurance.
Duty to Act with Care and Skill-
Section 212 of the Indian Contract Act, 1872 covers another role of the agent. This law
requires an agent to conduct agency business with due care and caution.
In Jayabharathi Corporation v. PN Rajshekara Nadar (1991), the Supreme Court said that
where the agent misinforms the principal, and the loss occurs because of his misconduct, he
is liable to the principal.
Duty to Render Proper Account-
Section 213 of ICA, 1872 binds the agent to render proper accounts to the principal on
demand. He must explain those accounts to the principal and produce the vouchers in
support of the entries.
Duty to Communicate with the Principal-
As per Section 214 of the Indian Contract Act,1872, in cases of difficulty, it is the agent’s
duty to use all reasonable diligence in communication with his principal and seeking to get
his instructions.
Duty Not to Deal on His Account-
If the principal wishes to deal on his behalf in the agency’s business, the agent must disclose
all material circumstances that have come to his knowledge. He must also get consent from
the principal. Non-observance of this duty may lead to:
Under Section 215 of the Contract Act, the principal may repudiate the transaction and
disclaim all losses.
Under Section 216 of the Contract Act, the principal may claim from the agent any
benefit which may have resulted in him from the transaction.
Duty Not to Delegate His Authority-
 An agent must not delegate his authority to a sub-agent.
Duty to Protect and Preserve the Interest-
Under Section 209 of the Indian Contract Act, when the principal’s death or
unsoundness causes the termination of the agency, the agent must protect and preserve
the interests entrusted to him on behalf of the representative of the deceased principal.
Duty to Pay Sums Received-
As per Section 218 of the Indian Contract Act, the agent must pay his principal all sums
received on his account after retaining all money due to him regarding advances made or
expenses properly incurred by him while conducting the business.

Termination of Agency (12 Marks)

Agency is a relationship where one person (the agent) is authorized to act on behalf of
another (the principal). When this relationship ends, it is known as termination of agency.
Sections 201 to 210 of the Indian Contract Act, 1872, deal with this concept.

Modes of Termination of Agency

As per Section 201, an agency can be terminated in two ways:

A. By Act of the Parties

1. Mutual Agreement:

The agency can be ended anytime by the mutual consent of both the principal and the agent.

2. Revocation by Principal:

The principal may revoke the agent’s authority before it is exercised. Reasonable notice must
be given.

Illustration: A appoints B to lease his house. Later, A leases it himself. This is implied
revocation of B's authority.

3. Renunciation by Agent:

As per Section 206, an agent can terminate the agency by giving proper notice. If not, he is
liable for losses suffered by the principal.

B. By Operation of Law

1. Completion of Work:

Once the purpose of the agency is fulfilled, the agency ends.

Example: X appoints Y to sell a car. When the car is sold, the agency ends.

2. Expiry of Time:

If the agency was for a fixed term, it ends after the period is over.

Example: A hires B as a manager for 1 year. After 1 year, the agency ends automatically.

3. Death or Insanity:
According to Section 209, the death or unsoundness of mind of either party terminates the
agency.

4. Insolvency of Principal:

An insolvent principal cannot continue the agency, hence it ends.

5. Destruction of Subject Matter:

If the object of the agency no longer exists, the agency is terminated.

Example: A hires B to sell his factory. The factory burns down. The agency ends.

6. Principal Becomes a Foreign Enemy:

If war breaks out and the principal becomes an enemy, the agency ends.

7. Winding Up of Company:

If the principal is a company and it is dissolved, the agency ends.

Case Laws

1. R. Sayani v. Bright Bros (1980):

An agent was dismissed before the expiry of a fixed-term contract without notice. Court
awarded compensation and held that reasonable notice is necessary before termination.

2. Carter v. White (1883):

A principal gave his agent a blank bill to complete. The principal died before it was filled. The
court held the authority had not ended, as the act was incomplete.

3. Sukhdev v. Command of the Command (1998):

Where a gas agency was for a fixed time, the court held the agent had no right to continue
after the term ended.

4. Truman v. Lauder (1840):

The court held that until third parties are notified of revocation, the principal remains bound by
the agent’s actions.

Conclusion

Termination of agency is a vital concept in contract law. It protects the interests of both the
principal and the agent. It may occur through agreement or legal events. Proper notice,
duties, and liabilities must be fulfilled to avoid disputes. Case laws and illustrations emphasize
the importance of formal procedures in ending agency relationships

Features of contract of agency

The contract of agency is a special type of contract under the Indian Contract Act, 1872
(Sections 182–238). It establishes a legal relationship where one person (the agent) is
authorized to act on behalf of another (the principal). Here are the key features:
1. Legal Relationship

It creates a legal relationship where the agent acts on behalf of the principal and can bind the
principal in contracts with third parties.

2. Consent of Parties

The agency relationship is based on mutual consent. Both the principal and the agent must
agree to the arrangement.

3. No Consideration Required

A contract of agency can be valid even without consideration (Section 185 of the Indian
Contract Act).

4. Competency of Principal

The principal must be competent to contract (i.e., of sound mind and of majority age). The
agent, however, need not be competent to contract.

5. Authority of Agent

•The agent must act within the scope of authority granted by the principal. Authority can be:

•Express (clearly stated)

•Implied (inferred from conduct or situation)

6. Binding Nature

The principal is bound by the acts of the agent done within the scope of authority, as if the
principal did them themselves.

7. Fiduciary Relationship

The agent must act in good faith, in the best interest of the principal, and avoid conflict of
interest.

8. Can be Created Formally or Informally

It can be created by a formal contract, orally, or even by conduct.

9. Termination

Agency can be terminated by:

Mutual agreement

Revocation by principal

Renunciation by agent

Death, insanity, or insolvency of either party

Different Kinds of Agents

Depending on the authority given to the agent, agents are classified as follows:

1. Auctioneer

•A mercantile agent who sells goods or property by public auction (open sale).

•Authority: Only to sell goods, not to give warranties unless expressly authorized.

•Legal Status: Covered under Section 2(9) of the Sale of Goods Act.

•A bona fide buyer can obtain a good title even if the auctioneer sells below the reserve price.

2. Factor

A mercantile agent entrusted with possession of goods for the purpose of sale.

Authority:

•Can sell goods on credit.

•Can receive payment.

•Even if unauthorized to sell, a bona fide buyer gets a good title if the factor is in possession.

•Has a general lien under Section 171 of the Indian Contract Act for the balance of account.

3. Broker

•An agent authorized to negotiate the sale or purchase of goods.

•Does not possess the goods.

Role: Connects the principal and third party, facilitating the contract.

Earns commission when a deal is finalized.

4. Del Credere Agent

A mercantile agent who guarantees the performance of a contract between the principal and
third party.

For this extra risk, receives a del credere commission.

Liability: If the third party defaults (e.g., doesn’t pay), the del credere agent is liable like a
surety.

Liability of principal for agent's wrongful act

Under the Indian Contract Act, 1872, the principal can be held liable for the wrongful
acts of the agent if such acts are done within the scope of the agent’s authority (express
or implied). This principle is based on vicarious liability, where one person is held
responsible for the actions of another.

Here are the main liabilities of the principal for the agent’s wrongful acts:

1. Acts Within the Scope of Authority

 If the agent commits a wrongful act (e.g., fraud, misrepresentation, negligence) while
acting within their authority, the principal is legally bound.
Section 238: Misrepresentation or fraud by the agent in the course of business binds the
principal.

Example: If an agent fraudulently misrepresents facts to a customer while selling goods for
the principal, the principal is liable.

2. Misrepresentation and Fraud by Agent

Section 238states:
Misrepresentation or fraud committed by the agent during the course of the agency
and within the scope of authority affects contracts as if done by the principal.
If committed outside the scope, the principal is not liable.

3. Negligent Acts of Agent

If the agent's negligence (like not following safety protocols) causes loss to a third party
while acting within authority, the principal is liable.

4. Torts Committed by Agent

If the agent commits a tort (civil wrong) like assault, trespass, or conversion during
employment and within the scope of authority, the principal is vicariously liable.

5. Criminal Acts
Generally, the principal is not liable for criminal actsof the agent unless:
The principal authorized the act, or
The act was closely connected to authorized duties and caused harm to third parties.

6. Unauthorized Acts
If an agent acts outside their authority, the principal is not liable, unless:
The principal ratifies the act later (Section 196–200)
Case law

1. Lloyd v. Grace, Smith & Co. (1912 AC 716)

Facts:

A firm’s clerk fraudulently induced a client to transfer property to him and then
misappropriated it.

Held:

The House of Lords held that the principal (firm) was liable because the agent committed the
fraud in the course of his employment.

Principle:

A principal is liable for fraud committed by the agent within the scope of authority, even if done
for the agent’s personal gain.

CAN A PRICIPAL IS BOUND BY LAW OF ESTOPPEL

Yes, a principal can be bound by the law of agency. In fact, the law of agency is based on the
principle that a principal is legally bound by the acts of their agent, provided the agent acts
within the scope of their authority.

Here's how it works:

1. Agency Relationship: When a principal appoints an agent, either expressly or impliedly,

they authorize the agent to act on their behalf in dealings with third parties.

2. Binding Nature: If the agent acts within the scope of their authority, any agreement or
contract entered into by the agent binds the principal as if the principal had done it
themselves.

3. Types of Authority:

•Actual Authority: Express or implied authority given by the principal.

•Apparent/ostensible Authority: If a third party reasonably believes the agent has authority
(based on the principal’s conduct), the principal may still be bound.

4. Liability:

•The principal is liable for the lawful acts of the agent within their authority.

•The agent is not personally liable if they act within their authority and disclose they are acting
on behalf of a principal.

Example:

If A appoints B as an agent to purchase goods, and B buys goods from C within that authority,
A (the principal) is bound by the contract, even though A never dealt directly with C.

Principal’s Duties to the Agent

1. Indemnification for Lawful Acts:

The principal must indemnify the agent for all lawful acts done within their authority.

2. Indemnification for Good Faith Acts:

If the agent, acting in good faith, violates third-party rights, the principal must indemnify the
agent.

3. No Indemnification for Criminal Acts:

The principal is not liable to indemnify the agent for any illegal or criminal acts.

4. Compensation for Injury:

If the agent is injured due to the principal’s incompetence or lack of skill, the principal must
compensate him.

5. Liability for Agent’s Fraud or Misrepresentation (Sec 238):

The principal is liable for fraud or misrepresentation committed by the agent during business
as if done by the principal.
6. Reimbursement & Indemnification:

•Must reimburse for expenses incurred at the principal’s request.

•Must indemnify for losses due to principal’s failure to fulfill the contract.

7. Cooperation:

Principal must assist the agent and provide safe working conditions.

8. Liability to Third Parties (Sec. 226–228):

•Principal is liable for all lawful acts within the agent’s authority.

•If acts beyond authority are inseparable from authorized acts, the principal is not bound and
may repudiate the transaction.

Principal’s Rights

1. To Repudiate Contract (Sec 215):

If the agent acts on his own account dishonestly, the principal can repudiate the transaction.

2. To Claim Benefit (Sec 216):

If the agent gains a benefit without the principal’s knowledge, the principal can claim that
benefit.

3. To Ratify or Disown Acts (Sec 196):

If someone acts without authority, the principal may choose to ratify or reject those acts.

4. To Revoke Authority (Sec 203):

•The principal can revoke the agent’s authority with reasonable notice before it is exercised.

5. To Claim Loss or Profit (Sec 211 & 212):

•The principal can claim compensation if the agent:

•Acts against instructions

•Causes loss due to negligence or misconduct

6. To Demand Accounts (Sec 213):

The principal can ask the agent to submit proper account statements.

7. To Refuse Remuneration (Sec 220):

If the agent is guilty of misconduct, the principal can refuse to pay remuneration.
RATIFICATION (Sections 196–200, Indian Contract Act, 1872)

Section 196 – Right to Ratify Acts Done Without Authority

When an act is done without a person’s authority, he may either:

1. Disown the act; or

2. Ratify it.

•If ratified, the act is treated as if done with prior authority.

•A person falsely claiming to be an agent is personally liable if the alleged principal does not
ratify.

ESSENTIALS OF A VALID RATIFICATION

1. Act must be done on behalf of another (Sec. 196)

Ratification is valid only if the act was done on behalf of the person who seeks to ratify.

•Case: Keighley, Maxsted & Co. v. Durant – Ratification failed because the act wasn’t done on
their behalf.

2. Principal must be in existence and competent to contract

•The principal must be existent and capable of contracting at the time the act was done.

•Case: Kelner v. Baxter – Company not in existence at the time of contract; thus, ratification
was invalid.

3. Ratification may be express or implied (Sec. 197)

•Express: Clearly stated.

•Implied: Inferred from conduct.

Illustration: Accepting benefits or performing acts consistent with the unauthorised act.

4. Ratification must be with full knowledge of facts (Sec. 198)

•A person can’t validly ratify an act if unaware of material facts.

•Case: Savery v. King – Ratification without knowing the agreement was invalid.

5. Ratification must be of the whole transaction (Sec. 199)

Cannot ratify in parts. Must accept entire transaction, including unfavourable parts.

6. Ratification must not injure third parties (Sec. 200)

Ratification is invalid if it causes loss or harm to a third person.

Illustrations:

•Demand of delivery by unauthorised person cannot be ratified to hold third person liable.

•Unauthorized notice of lease termination cannot be ratified to bind lessee.

7. Ratification must be within a reasonable time

Delay may cause prejudice to third parties and makes ratification invalid.

Effect of Ratification: The Doctrine of Relation Back

When a principal ratifies an act done on their behalf without prior authority or knowledge, the
legal effect is the same as if the act had been originally authorised. This principle is known as
the Doctrine of Relation Back, meaning the act becomes valid from the date it was originally
done, not from the date of ratification.

Key Legal Principles:

1. Relation Back of Authority: Once ratified, the agent’s act is treated as if it had been
authorised from the beginning.

2. Agent's Liability Ceases: The agent is no longer personally liable once ratification occurs,
as they are retrospectively treated as a properly authorised agent.

3. Contract Valid from Date of Original Act: The contract binds the principal and third party
from the original date of the agent’s act, not the ratification date.

Case Law:

1. Risbourg v. Bruckner

•The agent entered into a contract without the principal’s authority.

•The principal ratified the act later.

Held: The contract became valid from the original date; the agent was not personally liable.

2. Badri Prasad v. State of Madhya Pradesh

•Date of Auction: 24th December 1956.

•Highest bid made by A; B stood surety for the remaining instalments.

•Ratification: Done by the Chief Conservator of Forests on 3rd May 1957.

•Issue: Before ratification, the goods were destroyed by fire. B claimed he was not liable as
there was no valid contract on 3rd May.

•Held:

The ratification related back to 24th December 1956 — the date of auction.

•The goods were in a deliverable state, and property passed to A when his bid was accepted
(as per Section 20 of the Sale of Goods Act).

•B was liable as surety for the remaining instalments since the contract was valid from the
auction date.

Conclusion:

The Doctrine of Relation Back ensures that once an act is ratified, it is treated as if it had
been done with full authority from the outset. This doctrine protects third parties and clarifies
the liabilities of principals and agents.