PROBLEM SOLVING ASSIGNMENT

FACTS

There is a shop selling antique goods whose owner is Mr. Patel. He often goes to attend
auctions and in his absence he asks his friend Mr. Shah to run the shop. Mr. Patel always
instructs Mr. Shah to never sell an article below 80% of the displayed price and in addition
to that, Mr. Shah also has no authority to purchase stocks for the shop in Mr. Patel’s
absence.
In the absence of Mr. Patel, Mr. Shah made two deals according to the given facts:
1. He sold an antique wall piece to Mrs. Khurana at 65% of the displayed price and she
bought it under the presumption that Mr. Shah was the owner of the shop.
2. He sold antique jewellery to Mrs. Neha (a good friend of Mr. Patel) at 60% of the
displayed price. Mr. Neha thinking of it as a bargain bought the article though knowing
the fact that Mr. Patel never intends to sell any article below 80% of the displayed price.
After returning from the auction, Mr. Patel came to know about both these transactions and
asked both Mrs. Khurana and Mrs. Neha to return the products stating that Mr. Shah didn’t
have any authority to sell the aforementioned articles.

INTRODUCTION

The question of contention in the immediate case is whether Mr. Shah was working as an
agent of Mr. Patel or not. Keeping in mind all the relevant facts of the aforementioned
scenario, it is evident that there existed a master-agent relationship between the two
individuals. There are several ways of creation of this kind of relationship but here in this
case, it is an impliedxagency as there was no express contract to enter into a master-agent
relationship. The hire and fire test gives a clear indication whether this kind of relationship
exists between two individuals or not. In this test, if the duration of the employment is as
per the will of the employer, it is said to be a master-agent relationship. Another simple
check for an agency is when an individual puts another person in a position where the
person representing the original person may logically be believed to be the same person
(original person). The Apex court in the case of Delhi Electric Supply Undertaking v
Basant Devi (1999)x8xSCCx229 held that when a company authorises one of its employee
to collectxpremium and forwardsxthexcollection backxto thexcompany, the collecting
employee automatically becomes an agent of the above company. The mode of creation of
this type of agency is by conduct.

I. Explain in detail the liability of Mr. Shah towards Mr. Patel.

As we have proved that Mr. Shah was indeed acting as an agent for Mr. Patel and an implied
agency existed between the both of them, now we must fix the liability of the former.
According to the facts, Mr. Patel explicitly instructed Mr. Shah to not to sell any article at a
price which is below 80% of the displayed price. The duties of an agent are fixed by the law
and the foremost duty of an agent is to execute mandate and any failure in executing the
mandate would makexthe agent absolutelyxliable for the eventual damagesx(if any). Now,
since Mr. Shah didn’t execute the mandate and sold the articles to both Mrs. Khurana and
Mrs. Neha at a price which was 65% and 60% of the displayed price respectively, he is
definitely liable to compensate Mr. Patel for the losses so caused.
The courts in similar instances where an agent acted disobediently gave decision in favour
of the principal and made the dissenting agent absolutely liable for his conduct. One of such
landmark judgements is the one given in the case of Bostock v Jardine (1865)x3xH&C
700. Furthermore, Section 211 of the Indian Contract Act, 1872 also says that an agent is
bound to conduct business according to the directions given by the principal.
In the case of Mutsaddi Lal v Kishan Chand Ramji Das (1925) 7 Lah LJx84 it was held
that if an agent working under the authority of the principal, sells the latter’s goods below
the limit set by the him, thexactualxlossxis thexloss the principalxsufferedxand not
thexlossxwhichxisxsustained. Thisxalsoxindicates that Mr. Shah is liable to compensate for
the losses suffered by Mr. Patel in both of the transactions and these losses are 15% and
20% of the displayed price.
II. Can Mr. Patel claim the goods back from the customers under the provisions of
Contract of Agency?

The circumstances in both the transactions with Mrs. Khurana and Mrs. Neha are different.
In the first case i.e. the transaction with Mrs. Khurana, he was not aware of the fact that Mr.
Shah was not the real owner of the shop thus this would be dealt under Sectionx231xofxthe
Indian Contract Act, 1872. This section deals with the situationxofxundisclosedxprincipal.
When an agent neither discloses thexpresencexof a thexprincipal nor about his
representative capacity, in such contract if the third party doesn’t have a reasonable
groundxtoxbelievexthatxthere is actually a principal and the agent isxactingxinxa
representativexcapacity, the contract stands valid and for the third party, the agent becomes
principal. This doctrine was showcased in the case of J Thomas (P) Ltd. & Co. v Bengal
Jute Bailing Company Ltd. AIR 1979 Cal 20. In this case, it was held that if the presence of
the principal remained undisclosed, the contract exists betweenxthe agent and thexthird
party. The agent becomes bound by this contract and inxsuchxaxcasexinxthexeyesxof the
third party, thexagentxisxactuallyxthexprincipalxandxaccordingxtoxtheirxperception, the
transactionxtookxplacexbetweenxthemxandxthe principal. Hence, Mr. Patel has no power to
recover the articles from Mrs. Khurana.

The second case, which deals with the transaction made with Mrs. Neha, also has a similar
outcome. According to law, if a principal by his conduct places his agentxinxsuch a
positionxwhere a reasonable man wouldxthinkxthatxthexagent isxauthorisedxtoxdo a
particularxactxandxthusxthe xthird personxdealsxwith the agent,xthe principal is barred
from defying his agent’s work if any anomaly occurs in the later stages. This doctrine was
laid in the landmark judgment of Johnson v Milwaukee (1895)x46 Neb 480.

Mr. Patel’s action to hand over his shop to Mr. Shah during his absence and giving him
authority to sell goods can make any reasonable person to believe that it is Mr. Shah who
owns the shop, given the fact that such person is unaware of the master-agent relationship
that existed between Mr. Patel and Mr. Shah. By the conduct of Mr. Patel, Mrs. Neha
believed that Mr. Shah has the authority to sell goods at any desired price and truly believed
that she is getting a bargain deal for the desired article.
Hence, Mr. Patel has no authority to recover his goods from either of them (Mrs. Khurana
and Mrs. Neha) as Mr. Shah was his agent and though he exceeded the purview of his duty,
neither of the customers were at fault and the philosophy of the law of agency first protects
the interest of the third party then only that of the principal. Mr. Patel has the right to
recover damages from Mr. Shah as discussed above.