10/10/2020

Contract of Agency

Definition of agent and principal
• A person who has capacity to contract may enter into a contract
with another either :
a. By himself, or
b. Through another person.

• An “agent” is a person employed to do any act for another, or to

represent another in dealings with third persons (Sec. 182).

• The person for whom such act is done, or who is so represented is

called the “principal”.

• The function of an agent is to bring his principal into contractual

relations with third persons.

• This means that an agent is merely a connecting link between the

principal and third parties.

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Essentials of relationship of agency
• There are two essentials of the relationship of agency :

1. Agreement between the principal and the agent

Agency depends on agreement but necessarily on contract.
As between the principal and third parties, any person can
become an agent (Sec. 184).
As such, even a minor or a person of unsound mind may be an
agent.
The principal is, however, liable for the acts of such an agent.

2. Intention of the agent to act on behalf of the principal

Whether a person does intend to act on behalf of another
person is a question of fact
Where a person does intend to act on behalf of another,
agency may arise although the contract between the parties
provides that there is no such relationship.

Rules of agency
• There are two important rules of agency :

1. Whatever a person can do personally, he can do through an

agent.
Two exceptions are : personal performance and public office.

2. He who does an act through another does it by himself.

Subject to exceptions, all acts of agent are acts of the
principal.

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Creation of agency
• The relationship of principal and agent may arise :

1. by express agreement
2. byy implied
p agreement
g
3. by ratification
4. by operation of law

Agency by express agreement
• The agent in this case, is appointed either by word of mouth or by
an agreement in writing (Sec. 187)

• Agreement in writing is usually through a Power of Attorney (POA).

• POA is a formal document on a stamp paper through which one

person empowers another to represent him, or act in his stead, for
certain purposes.

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Agency by implied agreement
• Implied agency arises from the conduct, situation or relationship of
parties.

• It may be inferred from the circumstances of the case and things

spoken or written or the ordinary course of dealing.

Example :
A and P are brothers. A lives in Delhi while P lives in Meerut. A with
the knowledge of P leases P’s lands in Delhi. He realises the rent
and remits it to P. A is the agent of P though not expressly
appointed as such.

• Implied agency arises when the principal conducts himself in such

a manner as if he has appointed that person as an agent.

Agency by implied agreement
• It includes :

1. Agency by estoppel
Where a person by his conduct, or by words spoken or written,
leads wilfully another person to believe that a certain state of affairs
exists
and induces him to act on that belief so as to alter his previous
position,
he is precluded from denying subsequently the fact of that state of
affairs.

Example :
A tells T within the hearing of P that he is P’s agent. P does not
object to that statement of A. Later T supplies certain goods to A who
pretends to act as an agent of P. P is liable to pay the price to T. By
keeping quiet, P had led T to believe that A is really his agent.

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Agency by implied agreement
2. Agency by holding out
Agency by holding out is a branch of agency by estoppel. In
this case, a prior positive or affirmative act on the part of the
principal is required to establish agency subsequently.

Example :
P allows his servant habitually to purchase goods for him on
credit from T, and pays for them. On one occasion, he pays his
servant cash to purchase the goods. The servant misappropriates
the moneyy and ppurchases ggoods on credit from T. T can recover the
price from P as he had held out his servant as his agent on prior
occassions.

Agency by implied agreement
3. Agency by necessity
In certain urgent circumstances the law confers an authority on a
person to act as an agent for the benefit of another, there being no
opportunity of communicating with that other, such agency is called an
“agency of necessity”. It arises in the following cases :

(i) Agent exceeding his authority in an emergency (Sec. 189)

When an agent exceeds his authority in an emergency,
there arises agency of necessity provided the agent was :
a. not in a position to communicate with the prinicipal.
b. had taken all reasonable and necessary steps to protect the
interests of the principal, and
c. had acted bona fide.
In such a case the principal is liable for the acts of the agent.
Example :
P consigns provisions to A at Kolkata with directions to send them
immediately to T at Cuttack. A may sell the provisions at Kolkata, if they
will not bear the journey to Cuttack without spoiling.

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Agency by implied agreement
(ii) Agent entrusted with another’s property
An agency of necessity also arises when a person is
entrusted with some property of another which he has to protect
or preserve. In such a case, although the person who is entrusted
with
i h the
h property has
h no express authority
h i to dod the
h act necessary
to preserve it, yet because of the necessity such an authority is
implied.
Example :
A horse was sent by a train. When it arrived at the
station of destination, nobody took its delivery. The railway
company, therefore, had to feed the horse. Held the railway
company was an agency of necessity and could recover the
amount spent on feeding the horse.

Agency by implied agreement
(iii) Husband and wife
A husband is bound to maintain (ie., to supply necessaries
of life) his wife, and
if he does not make adequate provision for her
maintenance she is entitled to pledge his credit for necessaries..
maintenance, necessaries
Necessaries does not mean bare necessaries but such goods
and services as are commensurate with the couple’s joint style of living.
Where the husband and wife are living together, the wife is
presumed to have implied authority to pledge the husband’s credit for
necessaries.
The husband can escape liability if he can prove :
a. He has expressly forbidden his wife to pledge his credit.
b. The goods purchased are not necessaries.
c. He has allowed sufficient funds for purchasing the articles she
needed to the knowledge of the trader.
d. The trader has been expressly told not to give credit to the wife.

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Agency by implied agreement
Where the wife lives apart.
A wife who is deserted by her husband for no fault of
her, has authority to pledge her husband’s credit for necessaries.
The husband cannot escape liability by :
a. telling his wife not to pledge his credit
b. By telling the trader not to supply necessaries or credit.
The wife enjoys the right only if her husband does not
provide for her maintenance.

Butt where
B h she
h lives
li apartt off her
h own will
ill and
d without
ith t
any justification, she is not the agent of her husband and cannot
pledge his credit even for necessaries.
The husband is not bound to maintain her in such
circumstances.

Agency by ratification
A person may act on behalf of another without his knowledge
or consent.
If the other person accepts the act done without his consent,
he is said to have ratified that act and it places the parties in
exactly
l the
h same position
i i in
i which
hi h they
h would ld have
h b
been, as if the
h
act had been done with prior consent.
Likewise, when an agent exceeds the authority bestowed
upon him by the principal, the principal may ratify the
unauthorised act.

Example :
A insures P’s goods without his authority. If P ratifies A’s act, the
policy will be as valid as if A had been authorised to insure the
goods.

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Agency by ratification
Ratification may be expressed or may be implied in the conduct of the person on
whose behalf the acts are done (Sec. 197)

Example :
a. A, without authority, buys goods for P. Afterwards P sells them to T on his
own account. P’s conduct implies a ratification of the purchase made for him by
A.
b. A let P’s property without the latter’s consent. A received rent for many years
and P sued him for an account of the rents. Held, P’s action constituted
ratification of such receipts.

Effects of ratification :
The effect of ratification is to render the acts done by one person (agent) on
behalf of another (principal) without his knowledge or authority, binding on the
other person (principal) as if they had been done by his authority (Sec.
(Sec 196)

Ratification is tantamount to prior authority

It relates back to the date when the act was done by the agent.
This means the agency comes into existence from the moment the agent first
acted and not from the time when the principal ratified the act.

Agency by ratification
Requisites for a valid ratification

1. The agent must purport to act as an agent for a principal who

is in contemplation and is identifiable at the time of contract.

Example :
A was authorised by P to buy wheat at a certain price.
Acting in excess of his authority , A purchased wheat from T at a
higher price in his own name.
He did not profess to buy wheat on behalf of P.
Subsequently P ratified the act of A but later refused to take
delivery of the wheat.
T brought an action against P.
Held the contract could not be ratified because A did not purport
to act as an agent of P.

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Agency by ratification
2. The principal must be in existence at the time of contract.
A company, for example, cannot ratify the contracts entered into by
the promoters on its behalf before its incorporation.

3. The principal must have contractual capacity both at the time of

contract and at the time of ratification.

4. Ratification must be with full knowledge of facts.

No valid ratification can be made by a person whose knowledge of
facts is materially defective (Sec. 198)

EExample
l :
A has authority from P to buy certain goods at the market rate.
He buys at a higher rate but P accepts the purchase.
Afterwards, P comes to know that the goods purchased by A for P
belonged to A himself.
The ratification is not binding on P.

Agency by ratification
If however, the principal is prepared to take the risk of what
the purported agent has done, he can choose to ratify without full
knowledge of facts.

5. Ratification must be done within a reasonable time of the act

purported to be ratified.

6. The act to be ratified must be lawful and not void or illegal or

ultra vires in case of a company.

7. The whole transaction can be ratified.

There can be ratification of an act in toto (entirely, wholly) or
its rejection in toto. The principal, cannot ratify a part of the
transaction which is beneficial to him and reject the rest.

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Agency by ratification
8. Ratification must be communicated to the party who is sought to be
bound by the act done by the agent.

9. Ratification can be of the acts which the principal had the power to
do.
An act which a principal is incapable of doing cannot be ratified.

10. Ratification should not put a third party to damages.

Ratification, which has the effect of subjecting a third party to
damages or of terminating any right or interest of a third party cannot be
made (Sec. 200).

Example :
A, not being authorised by P, demands on behalf of P the delivery of a
property (belonging to P) from T who is in possession of it.
The demand cannot be ratified by P, so as to make T liable for damages
for his refusal to deliver.

Agency by ratification
11. Ratification relates back to the date of the act of the agent.

Example :
A who ppurports
p to act as an agent
g of P,, but without P’s authority,
y,
accepts an offer from T.
T withdraws the offer before P comes to know of it.
P subsequently ratifies A’s acceptance.
The ratification results in a contract and as such T is bound by the
contract.

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Agency by operation of law
Sometimes an agency arises by operation of law.

When a company is formed, its promoters are is agent by

operation of law.

A partner is the agent of the firm for the purpose of the business
of the firm, and the act of a partner, which is done to carry on, in
the usual way, business of the kind carried on by the firm, binds
the firm (Secs. 18 and 19 of the Indian Partnership Act, 1932).

In all these cases, agency is implied by operation of law.

Classification of agents
Agents can be classified from the point of view of :

1. extent of their authority

2. nature of work performed by them.

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Classification of agents – Extent of authority
1. Special agent

A special agent is one who is appointed to perform a

particular act or to represent his principal in some particular
transaction.
transaction

Example :
Agent appointed to sell a house or to bid at an auction.

Such an agent has limited authority and as soon as the act is

performed his authority comes to an end.
performed, end
He cannot bind his principal in any matter other than that for
which he is employed.
The persons who deal with him are bound to ascertain the extent
of his authority.

Classification of agents – Extent of authority
2. General agent

A general agent is one who has authority to do all acts connected with a
particular trade, business or employment.

For example, the manager of a firm has an implied authority to bind his
principal by doing anything necessary for carrying on the business of the
firm or which falls within the ordinary scope of the business.

Such authority of an agent is continuous until it is put to an end.

If the principal, by secret instructions, limits the authority of the general

agent, and the agent exceeds the authority, the principal is bound by the
agent’s acts, unless the third parties dealing with the agent have a notice
of the curtailment of the authority of the agent.

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Classification of agents – Extent of authority
3. Universal agent

A universal agent is one whose authority to act for the principal is

unlimited.

He has authority to bind his principal by any act which he does

provided that act is :
a. Legal,
b. Is agreeable to the laws of the land.

Classification of agents – Nature of work
1. Commercial or mercantile agent

A mercantile agent is one who “has authority either to sell

goods , or to consign goods for the purpose of sale, or to buy
goods or to raise money on the security of goods.”

This definition does not include :

a. Factor
b
b. A ti
Auctioneer
c. Broker
d. Commission agent
e. Del credere agent

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Classification of agents – Nature of work
a. Factor

Factor is a mercantile agent entrusted with the possession of

goods for the purpose of selling them.
H has
He h authority
th it to
t do
d such h things
thi as are usuall in
i the
th conduct
d t
of business.
He sells the goods in his own name as an apparent owner
upon such terms as he thinks fit.
He can sell the goods on credit as well.
He also has the authority to receive the price and give a good
discharge to the purchaser.
purchaser
A factor has a general lien on the goods of his principal.
If he is in possession of goods, or of the documents of title to
goods, with the consent of the owner, any sale, pledge or other
disposition of them made by him in the ordinary course of business
is binding on the owner, whether or not the owner authorised it.

Classification of agents – Nature of work
b. Auctioneer

An auctioneer is an agent appointed by a seller to sell his

goods by public auction for a reward generally in the form of a
commission.
He is primarily the agent of the seller, but after the sale has
taken place he becomes the agent of the purchaser also.
An auctioneer has only a particular lien on the goods for his
charges.
He has authority to receive the price of the goods sold.
He can also sue for the price in his own name.
The principal is liable to the third parties for the acts of the
auctioneer, if the auctioneer acts within the scope of his apparent
authority even though he disobeys instructions privately given to
him.

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Classification of agents – Nature of work
Example :

P instructed A to sell a pony by auction, subject to a reserve price

of Rs. 25. A, at the time of sale inadvertently stated that there was
no reserve price and sold the pony to T at Rs. 16. Held the sale was
binding on P.

If the auctioneer states that the sale is subject to a reserve

price, but by mistake knocks the article down at a price below the
reserve pprice, the sale is not bindingg on the owner.

In such a case, the buyer knows that there is a limitation on

the auctioneer’s authority, and therefore bids can only be accepted
provided the reserve price can be reached.

Classification of agents – Nature of work
c. Broker

A broker is an agent who is employed to buy or sell goods on behalf

of another.
He is employed primarily to bring about a contractual relation
between the principal and third parties.
parties
He is not entrusted with the possession of goods in which he deals.
He cannot act or sue in his own name.
As he has no possession, he has no right of lien.

The usual mode of dealing by a broker is to put the terms of the

contract in writing in a book, sign it and send the particulars of the
contract to both the parties.
parties
The document sent to the buyer is called the “bought note”.
The document sent to the seller is called the “sold note”.
If these two documents agree, the terms of the contract are
defined.
If they do not agree, there is no binding contract.

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Classification of agents – Nature of work
d. Commission agent

A commission agent belongs to an indefinite class of agents.

p y to buyy and sell ggoods or transact business
He is employed
generally for other persons.
For his labour and trouble, he receives a commission.

e. Del credere agent

A del credere agent is one who, in consideration of an extra

commission, guarantees his principal that the person with whom
he enters into contract on behalf of the principal, shall perform
their obligations.
He occupies the position of both a guarantor and an agent.

Classification of agents – Nature of work
2. Banker

The relationship between a banker and his customer is that of

a debtor and creditor.
But there is a super‐added obligation on the part of the
banker to pay when called upon to do so by the draft or order (in
the form of cheque) of the customer.
To this extent, a banker is an agent of his customer.

3 Non‐mercantile
3. Non mercantile agents

These include attorneys, solicitors, insurance agents, clearing

and forwarding agents, wife, etc.

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Duties of agents
1. To carry out the work according to the directions given by the
principal.

In the absence of any such directions, he must act according to the

custom which prevails in doing business of the same kind at the
place where he conducts such business.

When he acts otherwise, if any loss be sustained, he must make it

good to the principal, and, if any profit accrues, he must account
for it ((Sec. 211))

If the agent’s disobedience is material, the principal may even

terminate the agency.

Duties of agents
Example :

a. A, an agent in carrying on P’s business, in which it is the custom

to invest from time to time, at interest, the moneys which may be
in hand, omits to make such investments. A must make good to P
the interest usually obtained by such investment.

b. A, a broker, in whose business it is not the custom to sell on

credit, sells goods of P on credit to T whose credit at that time was
veryy high.
g T, before p payment,
y becomes insolvent. A must make
good the loss to P.

c. An agent instructed to insure goods, neglects to do so. He is

liable to the principal for their value in the event of their loss.

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Duties of agents
An agent may disobey his principal’s directions where his authority
is coupled with interest, ie., where he is privileged to protect his
interest.

Example :

A, a factor, has a lien on P’s goods in his possession to the extent of

moneys advanced by A to P.
P directs A to return the goods or sell them on credit.
A is not bound to comply with P P’ss orders until P has repaid all
advances made by A.

Duties of agents
2. To carry out the work with reasonable care, skill and diligence

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 his want of skill.

He is always bound to act with reasonable diligence, to use skill as

he possesses, and to make compensation to his principal in respect
of the direct consequences of his neglect, want of skill or
misconduct..

But he is not liable to his principal in respect of loss or damage

which is indirectly or remotely caused by such neglect, want of skill
or misconduct (Sec. 212).

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Duties of agents
Example :

a. P, a merchant in Kolkata, has an agent A, in London, to whom a

sum of money is paid on P’s account with orders to remit.
A retains
t i the
th money forf a considerable
id bl time.
ti
P, in consequence of not receiving the money, becomes insolvent.
A is liable to P for the money and interest from the day on which it
ought to have been paid according to the usual interest rate but
not beyond that.

b. A,
b A an agent for the sale of goods,
goods having authority to sell goods
on credit, sells to T on credit, without making the proper and usual
enquiries as to the solvency of T.
T, at the time of sale, is insolvent.
A must make compensation to his principal in respect of any loss
sustained.

Duties of agents
3. To render proper accounts to his principal.

An agent is bound to render proper accounts to his principal

on demand (Sec. 213)

4. To communicate with the principal in case of difficulty

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 (Sec.
(Sec 214)

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Duties of agents
5. Not to deal on his own account

An agent must not deal on his own account in the business of

agency without first obtaining the consent of the principal and
acquainting him with all the material circumstances which have
come to his knowledge.

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

business of the agency on his own account, the principal may
a. 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 (Sec. 215)
b. Claim from the agent any benefit which may have resulted to
him from the transaction (Sec. 216)

Duties of agents
6. To pay sums received for the principal

An agent is bound to pay to his principal all sums received on his

account (Sec. 218).

He may deduct therefrom 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 for acting
as agent (Sec. 217).

7. To protect and preserve the interests of the principal in case of his

death or insolvency.

When an agency is terminated by the principal dying or becoming of

unsound mind, the agent is bound to take, on behalf of the
representatives of his late principal, all reasonable steps for the
protection and preservation of the interests entrusted to him (Sec. 209)

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Duties of agents
8. Not to use information obtained in the course of the agency
against the principal.

It is the duty of the agent to pass on any information which he

receives in the course of the agency to the principal.

When he uses any such information against the interests of

the principal and the principal suffers a loss, he is bound to
compensate the principal.

The principal may also restrain the agent from using such
information by an injunction.

Duties of agents
9. Not to make secret profit from agency

An agent occupies fiduciary position.

He must not, except with the knowledge and assent of the principal, make
any profit beyond the agency commission or remuneration.

Example :
a. An auctioneer received commission from the buyer in addition to what he
received from the principal.
Held, he was bound to hand over the total commission to the principal.
b. P employed A to buy a house for him.
A bought a house for Rs.2,000 in the name of a nominee.
A then entered into a contract with the nominee to purchase the house for
Rs. 4,500.
A, resold it to P for Rs. 5,000
A is liable to P for Rs. 3,000

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Duties of agents
10. Not to set up an adverse title

An agent must not set up his own title or the title of a third person
(unless he proves a better title in that person) to the goods which he
receives from the principal as an agent.

If he does so, he will be liable for conversion.

11. Not to put himself in a position where where interest and duty
conflict.

A agent is
An i under
d a duty,
d i allll cases, to act in
in i the
h interest
i off the
h
principal.

He must not put himself in a position where his duty to his principal
and his personal interest conflict unless he has made full disclosure of his
interest to the principal, and obtained his assent.

Duties of agents
12. Not to delegate authority

An agent must not, as a general rule, depute another person

to do what he himself has undertaken to do.

This is however, subject to exceptions (Sec. 190).

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Rights of agents
1. Right of retainer

The agent may retain, out of any sums received on account of the
principal, all moneys due to himself in respect of his remuneration and
advances made or expenses properly incurred by him in conducting such
business (Sec. 217).

2. Right to receive remuneration

The agent is entitled to his agreed remuneration, or if there in no

agreement, to a reasonable remuneration.

But 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 (Sec. 219).

When the act is completed, depends on the terms of the contract.

Rights of agents
Example :
a. A was appointed an agent to secure orders for advertisements in a
newspaper.
The commission was agreed to be paid when the advertisement was
published.
After A had obtained orders for certain advertisements, the agency was
terminated.
Held, he was entitled to commission on orders obtained by him although
the advertisements were not published.

b. An agent was appointed to introduce a customer to purchase P’s

property.
property
A introduced one customer.
The sale was settled and earnest money paid.
The sale fell through because of the customer’s inability to find money.
Held, the agent was entitled to his agreed commission.

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Rights of agents
If a transaction for which the agent claims remuneration is the
direct or indirect result of his services or efforts, he is entitled to
remuneration.

Example :
A was appointed to sell a house.
He held an auction but could not find a purchaser.
One of the persons attending the auction obtained from him the
principal’s address and finalised the purchase without the agent’s
intervention.
Held the agent was entitled to commission as the transaction was
Held,
the result of his efforts.

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

not entitled to remuneration in respect of that part of the business
which he has misconducted (Sec. 220).

Rights of agents
3. Right of lien.

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

to retain goods, papers and other property, whether moveable or
immoveable, of the principal received by him, until the amounts
due to him for commission, disbursements, and services in respect
of the same has been paid to him (Sec. 221).

This lien is a particular lien.

It is confined to claims arising in connection with the goods or

property in respect of which the right is claimed.

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Rights of agents
4. Right of indemnification

The agent has a right to be indemnified against the consequences

of all lawful acts done by him in exercise of the authority conferred
upon him (Sec. 222).

The right of agent to be indemnified does not extend to acts which

are known to the agent to be unlawful.

But, where a person employs another to an act,

But act and the agent
does the act in good faith, the agent has a right to be indemnified
against the consequences of that act, even though it causes an
injury to the rights of a third person (Sec. 223)

Rights of agents
5. Right of compensation

The agent has a right to be compensated for injuries sustained by

him by neglect or want of skill on the part of the principal (Sec.
225).
225)

6. Right of stoppage in transit

This right is available in the following two cases :

a. Where he has bought goods for his principal by incurring a
personal liability,
liability he has a right of stoppage in transit against the
principal, in respect of the money which he has paid or is liable to
pay.
b. Where he is personally liable to the principal for the price of
goods sold and can stop the goods in transit on the insolvency of
buyer.

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Duties of principal
1. To indemnify the agent against the consequences of all lawful
acts (Sec. 222).

2. To indemnify the agent against the consequences of acts done

in good faith.

3. To indemnify agent for injury caused by principal’s neglect.

4. To pay the agent the commission or other remuneration agreed.

Rights of principal
1. To recover damages.

2. To recover secret profits.

3. To resist agent’s claim for indemnity against liability incurred.

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Termination of agency
An agency can be terminated by :

a. By act of the parties

b. Byy operation
p of law.

Termination of agency – By act of parties
1. Agreement

2. Revocation of the principal

3. Revocation of the agent

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Termination of agency – By operation of law
1. Performance of the contract.

2. Expiry of time.

3. Death and insanity

4. Insolvency

5. Destruction of the subject‐matter.

6. Principal becoming an alien enemy

7. Dissolution of a company.

Problems
1. A enters into a contract with T for buying T’s car as agent for P
without P’s authority. T repudiates the contract before P comes to
know of it. P subsequently ratifies the contract and sues to enforce
it. Advise T.

2. P who owes Rs. 20,000 to A, appoints A as his agent to sell his

property in Meerut and after paying himself (A) what is due to him,
to hand over the balance to P. A invites offers.
a. Can P revoke the authority delegated to A.
b. Is A’s authorityy terminated if P dies or becomes insane?

3. D, a carrier, discovers that a consignment of tomatoes owned by

E has deteriorated badly before the destination was reached. He
therefore, sells the consignment for a third of the price of good
tomatoes. E sues D for damages. Advise D.

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Problems
4. P appoints A, a minor, to sell a bicycle for a price not less than
Rs. 400. A sold it to T for Rs. 280. Explain the position of A and T.

5. A, professing to act for a joint stock company about to be

incorporated, enters into a contract with B on its behalf as agent.
After incorporation, the company passes a resolution adopting A’s
transaction.
a. Is the company liable on the contract?
b. If not, is A liable to B?

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