CONTRACT OF AGENCY

Special Contracts
 MEANING OF PRINCIPAL AND AGENT

• Sec 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”.
• The three parties involved are
• Principal
• Agent
• Third party

• Agent acquires a representative character and all his actions as agent make his principal liable as if they have
been done by the principal only.
• An agent establishes privity of contract between the principal and third party.
 BASIC PREMISES FOR DOCTRINE OF
AGENCY
1. Representative Character: Whatever a person can do himself, he can do through an agent except
in case of personal nature contracts such as marriage, judge, etc
2. in general, the acts of the agent are deemed to be the acts of the principal (Sec.226).
Example: A, being B’s agent with authority to receive money on his behalf, receives from C a sum of
money due to B. C is discharged of his obligation to pay the sum in question to B.

Normally, the principal would be allowed to do himself whatever he has asked the agent to do. If
the principal does it himself, the agent will not be entitled to get any remuneration.
 ESSENTIALS FOR CONTRACT OF AGENCY

• Section 183: 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 persons, 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 principal according to the provisions in that behalf herein contained.
• Section 185: Consideration not necessary.—No consideration is necessary to create an agency.
• Section 186: Agent’s authority may be expressed or implied.—The authority of an agent may be expressed or
implied.
• Section 187: Definitions of express and implied authority.—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.
KINDS OF AGENTS

Extent of Nature of
Authority Work

Universal Mercantile
agent Agents

Non-
Special
mercantile
agent
Agents

General
agent
 KINDS OF AGENTS

From the Point of View of Extent of Authority

• a) Universal agent. An agent granted nearly unlimited power to do things on behalf of the
principal in all fields would be called a universal agent.
• b) General agent. An agent granted authority to do everything necessary for a particular
business or venture would be called a general agent. Such an agent, e.g. a managing director of a
company, would wield wide authority.
• c) Special agent. An agent appointed to do a particular act would be a special agent. Examples: a
lawyer appointed to handle a case in court, a broker to purchase a property.
 KINDS OF AGENTS

a) Mercantile agents. According to Sec. 2(9) of the Sale of Goods Act, 1930, ‘mercantile agent’ means an agent having in the
customary course of business as such agent authority either to sell goods, or to consign goods for the purposes of sale, or to buy
goods, or to raise money on the security of goods.
There are several kinds of mercantile agents as mentioned below:
• Factor.
• Commission agent. A commission agent is one who buys or sells goods for a distant or foreign principal and performs his duty in his
own name. Even if the fact of agency is known to the third party, there is no privity of contract between the principal and the third party
unless otherwise agreed . Such an agent is personally liable to the third party and also to his principal.
• Broker.
• Auctioneer.
• Del credere agent. a ‘factor’, entrusted with principal’s goods to find customer for them, may give a personal guarantee to the principal
that the buyer shall pay the price for goods and if he defaults, the agent himself would make payment to principal. an agent is called a
del credere agent. For the risk that he undertakes, he takes some extra remuneration also which is called del credere commission.

b) Non-mercantile agents. There would be numerous types of agents performing non-mercantile duties for their principals. These
may include legal duties by lawyers, financial duties by bankers, technical duties by engineers or architects etc.
 CREATION OF AGENCY

An agency can be created in any one of the following ways:

1) Agency by express agreement or express agency
2) Agency implied from circumstances or implied agency
3) Agency by ratification
 CREATION OF AGENCY

• 1. Agency by express agreement or express agency

• An authority is said to be express when it is given by words spoken or written.

• 2. Agency implied from circumstances or implied agency

• 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.
 CREATION OF AGENCY
An implied agency may be created under several circumstances as follows:
• Agency by estoppel. It would mean that when a person has led another person to believe by his words or conduct that a certain
person is his agent, then, even if it is false, he is bound by the acts of the agent in the given circumstances (Sec.237).
• Example: A tells B that he is C’s agent. This he does in the presence of C and within his hearing. C does not object to the statement of A
although A is actually not his agent. Later, B makes a deal with A as agent of C. C shall be bound by this deal under estoppel caused by his
silence.

• Agency by holding out. To ‘hold out’ means to project or to show up. ‘Agency by holding out’ means creation of agency by
projecting a person as agent without actual words to that effect.
• Example: A child purchases goods from a shop and desires the shopkeeper to collect payment from his parents later. The parents, though not
bound to pay, make the payment. After a few days, the child again makes purchases from the shop on the credit of the parents. The parents
would be bound this time because, by making payment previously without any objection, they had held out their child as their agent for
making such purchases and, in other words, given an implied authority for such an act.

• Agency by necessity. When a person is compelled by circumstances to act as agent of another, he becomes an agent by necessity. In
such a situation, the agent so acting has no means of communication and acted an a bonafide way to save the principal from losses.
Following situations are generally cited to illustrate ‘agency by necessity’:
a) Where authorised agent faces an emergency and exceeds authority to protect the principal’s interests.
b) A non-agent acts as agent to protect a person from any loss.
c) A wife deserted by husband.
 CREATION OF AGENCY

• 3. Agency by ratification
• 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 ratify them, the same effects will follow as if
they had been performed by his authority.
• If PRINCIPAL disowns it, he will not be liable under it. But, if he chooses to grant approval or ratification
to the unauthorised act, that would make it an authorised act.
• Such an agency is referred to as agency by ratification
• If the declared principal refuses to own the act, the unauthorised agent becomes liable to compensate the
third party for any loss caused to him by this fraud.
• Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are
done.
• Example: A, without B‟s authority, lends B‟s money to C. Afterwards B accepts interest on the money from C.
B‟s conduct implies a ratification of the loan.
 RETROSPECTIVE EFFECT OF
RATIFICATION
• The act is authorised not from the date of ratification but from the earlier date of doing the act.
• Thus ratification is retrospective in nature.
• ‘ratification tantamounts (is equivalent) to prior authority’.
• Case law: Bolton vs Lambert
P gave an offer for a deal with a company to its managing director. The managing director accepted the offer although it was
beyond his authority to do so. Sensing that this acceptance was unauthorised, P withdrew the offer. The company however,
later ratified the acceptance.
It was held that there was a contract between P and the company on the date it was made although P pleaded that he had
withdrawn the offer before ratification. But, the ratification had retrospective effect and so the unauthorised act became
authorised from the date before the withdrawal of acceptance. Since the contract exists between P and the company, if P
refuses to honour it, he will be guilty of beach.
 ESSENTIALS OF A VALID RATIFICATION

• On behalf of an identifiable person. Ratification can be given only by the specific person on whose behalf
the unauthorized act was done. The agent should not have acted in his own name.
• Existence of principal must be there when the act was done.
• Competence of the principal. The ratifying principal must be competent to contract at the time the act was
done by the agent.
• The act must be capable of ratification. Ultra-vires acts cannot be ratified.

• Full knowledge of facts. Ratification should be based on knowledge of all relevant facts (Sec.198). If the
agent conceals from the principal some vital information while seeking ratification, such ratification by the
principal shall not bind him.
 ESSENTIALS OF A VALID RATIFICATION

• Absolute and unconditional.

• Within proper time.
• Ratification must not cause damage to third party. If the unauthorised act could cause damage to
the third party or affect his interests, then such an act cannot be ratified (Sec.200).
• Example: A holds a lease (property on rent) from B, terminable on three months’ notice. C, an
unauthorised person, gives notice of termination to A. The notice cannot be ratified by B, so as to be
binding on A (attached to Sec. 200). C’s notice to A to vacate B’s premises would have removed A’s
tenancy. Law desires that an act of this kind that hurts another person should be done either by the
principal himself or only by an authorised agent and not by a person without authority.
 EXTENT/SCOPE OF AGENT’S AUTHORITY

• Authority of an agent means his capacity to bind the principal. If an agent does any act within his
authority, he is said to have acted within the scope of his authority.
• These acts will not require any ratification from principal. But, if agent crosses this limit, then his
acts would become unauthorised requiring ratification from the principal.
• Sec 188 defines the scope of agent’s authority.
Extent of agent’s authority.—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.
 EXTENT OF AGENT’S AUTHORITY

Thus, an agent’s authority can be of the following types

i) Actual or real authority: This is the authority that the principal has actually delegated to the
agent. This will include the express as well as the implied authority.
• Sec.188, referred to above, mentioned that the authority to do an act has authority do every lawful
thing which is necessary in order to do such act. This ‘necessary’ authority is the implied authority.
• Example: A appoints B his agent to carry on his business of a shipbuilder. B may purchase timber and
other materials, and hire workmen, for the purpose of carrying on the business.
 EXTENT OF AGENT’S AUTHORITY

ii) Ostensible or apparent authority. Ostensible authority is the authority which seems to be possessed by
the agent, keeping in mind the nature of agency and relevant trade practices. This is in addition to the express
and implied authority. The principal shall be bound by such acts if the third party acted in a bona fide manner.
• The extent of an agent’s authority is always understood to include all the ‘necessary and usual means’ of
accomplishing the task entrusted to him. The word ‘necessary’ refers to the implied authority as described above
and the word ‘usual’ refers to the ostensible authority discussed in the present point.
• However, sometimes there might be a private restriction on the ostensible authority of the agent which might not
be known to the third party, in such a situation, the principal will be bound to the third party.
Case Law: Watteau vs Fenwick
• C had forbidden T, the manager of his hotel, from buying cigars on credit. T bought cigars on credit from J who
had reasons to feel that T was the main functionary of the hotel. When T refused to pay, J sued C. It was held that
since purchase of cigars was a usual thing in such establishments, C was bound to pay as T’s act was within his
ostensible authority.
 EXTENT OF AGENT’S AUTHORITY

Restriction on ostensible authority:

• In case the principal has put private restrictions on the ostensible authority of the agent, these restrictions do not bind the
third party, as happened in Watteau vs Fenwick case mentioned above, unless the third party knows about the restrictions or
a notice is given by the principal about it. Any secret curtailment of the agent’s authority by principal would not be known
to the third party and therefore shall not bind him.
Difference between implied authority and ostensible authority:
• Implied authority is for the necessary act while the ostensible authority is for the usual act.
• Implied authority of agent, being the actual authority of agent, is enforceable between the principal and the agent and also
between the principal and the third party. The ostensible authority, on the other hand, would be enforceable between the
principal and the third party but it may not be binding between the principal and the agent if it is contrary to the actual
authority granted by the principal.
 EXTENT OF AGENT’S AUTHORITY

iii) Agent’s authority in emergency: An agent would always have some 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 to meet
emergency situations (Sec.189). This would be the authority in necessity described earlier under
the ‘Types of agency’.
 EXTENT OF AGENT’S AUTHORITY

To conclude, the total authority of the agent, consists of the actual authority granted expressly or
impliedly by the principal, the ostensible or apparent authority interpreted from circumstances and
the authority to meet emergency conditions.
Every act within this limit is binding upon the principal.
An act beyond this limit would require principal’s ratification to bind him.
Any private curtailment of the authority of agent not known to the third party will not be
enforceable against the third party.
 DELEGATION OF AUTHORITY

• Delegation of authority means appointment of a sub-agent by the agent.

• General Rule: A delegate cannot further delegate.
• In general, the agency is a personal relationship based on mutual trust and confidence between the principal
and the agent.
• The agent is only a delegate of the principal and not the original source of authority. Therefore, an agent
cannot appoint a sub-agent by delegating the authority that was given to him by the principal. This rule is
based on a well-known maxim of law ‘Delegatus non potest delegare’ (A delegate cannot further delegate).

• Section 190. When agent cannot delegate.—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.
• Section 191. “Sub-agent” defined.—A “sub-agent” is a person employed by, and acting under the
control of, the original agent in the business of the agency.
 DELEGATION OF AUTHORITY-EXCEPTIONS

Proper appointment of sub-agent:

• a) Principal’s consent
• b) Trade custom
• c) Nature of work
• d) Emergencies
• e) Routine acts
In other cases, the appointment of sub-agent shall not be proper.
 DELEGATION OF AUTHORITY

Consequences of Appointing Sub-agent

When the appointment is proper: Sec.192 provides following consequences for such a case:
• The principal is liable to the third parties for the acts of sub-agent since the agent’s acts become the acts of his own principal,
i.e. the agent, and the agent’s acts are the acts of the principal.
• There is no privity of contract between the principal and the sub-agent. So, principal shall have a right of enforcement only
against the agent and not the sub-agent. If principal has to make any recoveries from the sub-agent, he can sue only the agent
and not the sub-agent.
• The sub-agent cannot hold the principal liable for any claims such as his commission. He can sue his own principal i.e., the
agent only.
• For his negligence or breach of duty, the sub-agent is directly liable not to the principal but to his own principal i.e. the agent.
However, the sub-agent is liable to the principal directly for his fraud or willful wrong which causes loss to the principal.
 DELEGATION OF AUTHORITY

When the appointment is improper: Sec.193 provides for following consequences when the
appointment of sub-agent is improper:
• The principal is not liable to third parties for sub-agent’s acts who does not represent him.
• The agent is liable to the third parties and also to the principal for acts of the sub-agent.
• The sub-agent is not liable to the principal at all, even for his fraud or willful wrong. He is liable
only to the agent.
• It may be mentioned that the principal may take suitable action against his agent for wrongfully
appointing a sub-agent.
 SUBSTITUTED AGENT
• Sec 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.
• The person so appointed becomes a full agent of the principal and not a sub-agent because a privity
of contract is established between them.
• Such an agent has been called substituted agent.
Examples (attached Sec.194):
• a) A directs B, his solicitor, to sell his estate by auction and to employ an auctioneer for the purpose. B
names C as auctioneer for the sale. C is not a sub-agent but is a full agent of A for the conduct of sale.
• b) A authorised B, a merchant in Kolkata to recover the moneys due to A from C. B instructs D, a solicitor,
to take legal proceedings against C. D is the solicitor of A. D is not a sub-agent, but is solicitor for A.
princpal

Agent

Sub-agent
 principal

Substituted
agent
agent
 SUBSTITUTED AGENT

• 195. Agent’s duty in naming such person.—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.
• Note: do the difference between sub-agent and substituted agent
 RELATIONS OF PRINCIPAL WITH THIRD
PARTIES
For Named Principal
1. When agent acted within his authority. principal is liable towards third parties.
2. When agent acted beyond authority. the principal shall be liable for such an unauthorised act to the third party only if he ratifies it.
• If the authorised part is separable from the unauthorised part and the principal does not ratify the unauthorised part, then he remains
liable only for the authorised part (Sec.227). If the two parts are inseparable, then the principal is free from liability for the entire act
(Sec.228).
• Example: A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of 6,000 rupees. A may repudiate
the whole transaction.
3. When agent committed fraud or misrepresentation. The principal shall be liable to that party as if the wrong act was done by him itself
(Sec.238). The rule will apply even when the principal had not authorized the wrong act. If the agent does something which was outside
his employment i.e. for which he was not appointed, then a wrongful act by him will not bind the principal.
• 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.
 RELATIONS OF PRINCIPAL WITH THIRD
PARTIES
4. Principal bound by notice given to agent
Illustrations
(a) A is employed by B to buy from C certain goods, of which C is the apparent owner, and buys them accordingly.
In the course of the treaty for the sale, A learns that the goods really belonged to D, but B is ignorant of that fact. B is
not entitled to set-off a debt owing to him from C against the price of the goods.
(b) A is employed by B to buy from C goods of which C is the apparent owner. A was, before he was so employed, a
servant of C, and then learnt that the goods really belonged to D, but B is ignorant of that fact. In spite of the
knowledge of his agent, B may set-off against the price of the goods a debt owing to him from C.
The requirements for the application of this rule are that the agent should have received the information in course of
agency.
 RELATIONS OF PRINCIPAL WITH THIRD
PARTIES
For Unnamed Principal
• The ‘Unnamed Principal’ is one whose existence is revealed by the agent to the third
parties but not the name.
• The principal so represented would be liable under the contract and the agent would have
no personal obligations.
• However, Where the agent refuses to disclose the name of the principal or fails to do so
or dies before doing so, then, the agent would become liable personally to pay for the
goods purchased, or in case of his death, his legal representative would be liable.
 RELATIONS OF PRINCIPAL WITH THIRD
PARTIES
For Undisclosed Principal

• An ‘Undisclosed Principal’ is one whose name and existence, both have not been revealed by the agent to the third parties. This would happen when the agent
makes the contract in his own name as if he himself is the principal.

• In a situation like this, the third party would have made the contract believing the agent to be the principal; but the fact that there is actually another person as
principal is also a reality. In such a case, the relationship among the three parties is determined on the basis of both these facts.

Rules in case of undisclosed principal:

i) Agent’s liability (sec 231). The agent would be personally liable to the third party because he had made the contract as a principal himself. He would also be entitled
to enforce the contract against the third party.

ii) Principal’s liability. In addition to the agent, the principal may also be liable to the third party. According to sec 232, the principal, if he requires the performance
of the contract, can only obtain such performance subject to the rights and obligations subsisting between the agent and the other party to the contract.

Example: A, who owes 500 rupees to B, sells 1,000 rupees worth of rice to B. A is acting as agent for C in the transaction, but B has no knowledge nor reasonable
ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set-off A‟s debt.

According to Sec.231, the third party shall exercise all those rights against the principal which he had against the agent.

The third party has the option to sue either the agent or the principal or both of them, choice once made shall be binding.
 RELATIONS OF PRINCIPAL WITH THIRD
PARTIES
iii) Principal’s rights. The principal too has a right to intervene between his agent and the third
party and seek to enforce his rights under the contract himself. These rights, however, shall be
subject to the rights and obligations subsisting between the agent and the other party of the contract
(Sec.232).
iv) Third party’s right of non-performance (sec 231). If the principal discloses himself before the
contract is completed, the other contracting party may refuse to fulfil the contract, if he can show
that, if he had known who was the principal in the contract, or if he had known that the agent was
not a principal, he would not have entered into the contract.
 PERSONAL LIABILITY OF AGENT

• General rule: Sec 230 says, In the absence of any contract to that effect, an agent cannot
personally enforce contracts entered into by him on behalf of his principal, nor is he personally
bound by them.
• However, sec 230 itself provides certain exceptions to this rule.
• In cases where the agent is personally liable, a person dealing with him may hold either him or
his principal, or both of them, liable.
 WHERE AGENT IS PERSONALLY LIABLE

1. Where agent acts for a Foreign principal -where the contract is made by an agent for the sale or purchase of goods for a merchant resident
abroad;
2. Where agent acts for a unnamed principal -where the agent does not disclose the name of his principal;
3. where the principal, though disclosed, cannot be sued.
4. When agent acts for an undisclosed principal.
5. When agent himself agrees to that effect
6. Where trade usage provides for it.
7. When agent exceeds his authority.
8. When agent signs a document in his own name
9. Where an agent receives money by fraud
10. Where agent’s authority is ‘coupled with interest’
 AGENCY COUPLED WITH INTEREST

• A person may create an agency to secure for his agent some interest or benefit through the grant of authority to him. For example, P may owe Rs.30,000 to R. He
may authorize R to sell some of P’s goods and pay to himself his dues out of the proceeds received. This amount would be in addition to his remuneration for the
work of agency done for principal. Such an agency enables the agent to satisfy an interest of his own out of the agency work and is called ‘Agency coupled with
interest’.

• An ‘Agency coupled with interest’ can come into existence only if the interest of agent sought to be secured under it had existed prior to or had got created at the
time of creation of agency, and securing of that interest was the main purpose of agency and not incidental to it. An interest created after creation of agency
cannot give rise to such an agency.

Examples:

• a) B appointed S as his agent to enable him to build houses on his (B’s) land and then sell them on his behalf to recover his own previous dues. The agency was
held to be one coupled with interest.

• b) G appointed H to sell his goods. Later, H gave him some advances on the promise that H may recover his money out of the sale proceeds. It was held not to be
an agency coupled with interest even if G promised not to revoke the agency because, the agent’s interest had emerged after creation of agency.

Personal liability: Since in the case of an agency coupled with interest, the agent occupies the position of a principal to the extent of his interest, he becomes
personally liable also to the third party, in case need arises, along with the principal on contracts under that agency.