Unit – III: Law of Agency

Dr. B. Satyavani
Introduction

 Since it is not always possible for a person to do everything by

himself, it becomes necessary to delegate some of the acts to be
performed by another person.
 Such another person is called an agent. The person represented is
called the principal
 The law relating to agency is contained in Chapter X (Sections
182 to 238) of the Indian Contract Act, 1872
Contract of Agency

 Contract of the agency is a legal relationship, where one person

appoints another to perform on the transactions on his behalf.
 The person who appoints the other to take care of his transactions
is the principal.
 Whereas, the person who looks after the transaction of the
principal is the agent.
 The Contract of the agency is a special contract under the Indian
Contract Act, 1872.
 AGENT - Meaning of an Agent (Section 182):

 An agent is a person employed to do any act for another person or to

represent another person in dealings with third persons. Thus, an
agent establishes a contract between such another person and third
person
 Who may be an Agent (Section 184):
 As between the principal and third persons, any person (whether he
has contractual capacity or not) may become an agent. Thus, a minor
or person of unsound mind can also become an agent.
 Agent’s responsibility to his Principal:
 An agent who is not of the age of majority and of sound mind is
not responsible to his principal
PRINCIPAL - Meaning of Principal (Section
182):

 The person for whom act is done by an agent or who is

represented in dealings with third persons by an agent is called
the Principal.
 Who may employ Agent (Section 183):
 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. Thus, a minor or a person of unsound mind cannot
appoint an agent. It has been held that a guardian of a minor can
appoint an agent to minor
 Essential Requirements of Agency

 Principal Must be Competent to Contract

 Any person of sound mind and with the age of majority by law can
employ an agent.
 Competence of Agent is not Mandatory
 Any person can become an agent between the principal and the third
person. Generally, an agent does not have any personal liabilities
towards the principal while contracting. Therefore the agent doesn’t
need to be competent to contract.
 No Consideration is Necessary
 No remuneration is necessary while appointing an agent. The agent
receives payment by the way commission for the rendered services.
Creation of Agency
 Expressed
 Any competent principal person can appoint an agent as his
representative through a contract. The appointment contract can
be in oral or also in written form.

 Implied
 The principal person can appoint an agent indirectly, and an
implied agency will be created. The formation of the implied
agency can be through relationships or certain situations.

 By Subsequent Ratification of Unauthorised Act

 If the principal does not authorise the act of the agent initially but
later the agent authorises it, then the principal accepts the act as
done on behalf of him. Such authorisation is the ratification.
 RULES OF AGENCY
 There are two important rules of an agency:
 Whatever a person can do personally, he can do through an agent:
 This rule is of course subject to certain well-known exceptions as when
the act to be performed is personal in character. Eg. The principal cannot
ask his agent to become insolvent on his behalf or to marry on his behalf
 He who does an act through another does it by himself: What a person
does by another, he does by himself. Thus, the acts of the agent are the
acts of the principal.
 Types of Agents
 Universal Agent :
 A Universal agent is one who is authorised to do all the acts which the
Principal can lawfully do and can delegate.

 Special Agent:
 A Special Agent is one who is employed to do some particular act or
represent his Principal in some particular transactions.
 For example, An agent employed to sell a Bike. If the special agent does
anything outside his authority, the principal is not bound by it and third
parties are not entitled to assume that the agent has unlimited powers.
 General Agent:
 A General Agent is one who is employed to do all acts connected with
particular business or employment.

 For example, A manager of a firm. He can bind the agent by doing

anything which falls within the ordinary scope of that business.
Whether he is actually authorized for any particular act or not, is
immaterial provided that third party acts bonafide.

 De Credere Agent:
 He is one who in consideration of an extra commission guarantee his
Principal that the third person with whom he enters into contracts on
behalf of the principal shall perform their financial obligations that is,
if the buyer does not pay, he will pay. Thus he occupies the position
of a surety, as well as an Agent. He is not answerable to his principle
for the failure of the third person to perform the contract. A del
credere agent constituted an exception to this rule.
 Broker :
 He is one who is employed to make contracts for the purchase and
sale of goods. He is not entrusted with the possession of goods. He
simply acts as a connecting link and bring it to parties together to
bargain and if the circumstances materialize he becomes entitled to
his commission called brokerage. He makes a contract in the name of
his Principal. Thus, a broker is an agent primarily employed to
negotiate a contract between two parties where he is a broker for sale
he has no position of the goods to be sold.
 Factor :
 A factor is a mercantile agent to whom goods are entrusted for sale.
He enjoys Wide discretionary powers in relation to the sale of goods.
A factor is an agent who is entrusted with the possession and contract
of the goods to be sold by him for his Principal.
 He has possession of the goods, authority to sell them in his own
name and a general discretion as to this sale. He may sell on the usual
term of credit may receive the price and give a good discharge to the
buyer.
 Commission Agent:
 Commission Agent is a mercantile Agent who buys or sells goods
for his Principal on the best possible terms in his own name and
who receives Commission for his labours. He may not have
possession.

 Auctioneers :
 An auctioneer is an agent to sell property at a public auction. He
is primarily an agent for the seller, but upon the property being
knocked down he becomes also the agent of the buyer. He is
mercantile agent within the meaning of Section 2(9) of the Sale
of goods Act.
 Rights of Principal

 To repudiate the contract (Sec 215)

 If an agent deals on his own account in the business of the 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(Reject) 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.
 To claim benefit (Sec 216)
 If an agent, without the knowledge of the 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 from the transaction.

 To ratify or disown an agent’s acts (Sec 196)

 Where acts are done by one person on behalf of another but
without his knowledge or authority, he may elect to ratify or
disown such acts.

 To revoke the agent’s authority (Sec 203)

 The principal may revoke (Officially Cancel) the authority given
to his agent by giving reasonable notice of revocation at any time
before the authority has been exercised.
 To claim loss or profit (Secs 211 & 212)
 The principal is entitled to compensation for any loss sustained by
him or to any profits accrued:
1) Where the agent acts contrary to the directions given by the
principal; or
2) Where loss is caused due to agent’s neglect, want of
skill, or misconduct.

 To demand accounts (Sec 213)

 The principal is entitled to demand proper accounts from the agent.

 To refuse remuneration when the agent is guilty of misconduct

(Sec 220):
 The principal has a right to refuse remuneration to the agent who is
guilty of misconduct in the business of the agency.
 Duties of Principal
 To indemnify the agent
 Against consequences of the lawful act (sec 222): the employer is
bound to indemnify (Compensate for loss) against the consequences
of all lawful acts done by such agent in exercise of the authority
conferred upon him. It must be noted that the principal is liable only
for such damages as are direct and immediate and naturally follow
the execution of the agency.
 Against consequences of the acts done in good faith (Sec 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 causes an injury to
the third person.
 Compensate the agent for injury caused(Sec 225)
 The principal must make compensation to his agent in respect of
injury caused to the agent by the principal’s neglect or lack of skill
 To pay remuneration and dues (sec 217)
 It is the principal’s duty to pay his agent such remuneration as
may be payable to him as an agent, and also all money dues to
the agent in respect of advances made or expenses properly
incurred by the agent in conducting the principal’s business.
 Misrepresentations or fraud by agent (sec 238)
 Misrepresentations made, or frauds committed, by an agent
acting in the course of business for his principal, has the same
effect on an agreement made by such agent as if such
misrepresentations or fraud had been made or committed by the
principal. In order that a principal shall be made liable for the
misrepresentations and frauds committed by the agent, such
misrepresentations or frauds must be committed by the agent —
 1) In the course of the business of his principal; and
 2) The act must be within the scope of the agent’s authority.
Rights of Agent
 Remuneration
 The agent has the right to the agreed payment. The payment for
the performance will not become due until the completion of the
act. He can detain the money of the sold goods if the sale is
incomplete. If the agent causes any misconduct in the business,
then he will not receive any payment.
 Retain the Received Sums on Principal’s Account
 The agent has the right to retain the sums received by the
principal on account of business agency, all the due money in
respect to advances or the expenses to conduct the business. He
can also retain the payment for being an agent.
 Non-liability of Employer of Agent to do Criminal Act
 If a principal employs an agent to do a criminal act, then the
principal will not compensate for the agent for the damages.
 Lien(Possession) on Principal’s Property
 If the agent does not receive his commission and disbursement,
then he can retain the papers, goods and other property of
principal which were received by him until he gets his due. The
Right of lien has two conditions and the following are the
conditions:
 The agent should entitle himself lawfully to the principal to
receive the money for services in the agency, commission or
disbursement
 To exercise the right of the lien, the property should belong to the
principal. The property should come under the possession of the
agent while exercising his duties
 Indemnity against Consequences of Lawful Acts
 The principal must compensate/safeguard the agent against the
consequences of all the lawful acts done by the agent.
Duties of an Agent
 Conduct the Principal’s Business
 The agent must conduct his principal’s business. He should conduct it
according to the directions of the principal. If the agent contradicts by not
following the directions of the principal, then he must make it good with the
principal. If any profit comes from contradicting the principal, then he must
account it to the principal.
 Reasonable Skill and Diligence
 The agent has to act diligently and skillfully if not he has to compensate to the
principal for his negligence and want of skill. The compensation does not
include the damage or loss caused by the negligence.
 Communicate with Principal
 Communicating with the principal and acting according to his directions is
one of the most important duties of the agent.
 Render Accounts
 When the principal demands for the accounts, the agent has to render the
proper accounts.
 Avoid Conflict of Interest
 If the agent deals on his own without the consent of the principal and gives the
material circumstances from such a deal, then the principal can reject the
transactions for certain reasons. The following are the reasons:
 If the agent has given the materials in a dishonest way
 If the principal has a disadvantage of such a dealing
 Not to Make Secret Profit
 The principal can claim the benefit arising for the dealings, which he acts
without the consent of the principal.
 Remit Sums
 The agent must remit all the sums received on behalf of the principal. However,
he has the right to deduct his lawful charges from the sum.
 Not to Delegate
 The agent has no right to lawfully employ another person to perform his duties
that are implied on him. The lawfully delegated person by the agent is the sub-
agent. The agent can employ the sub-agent only for the following
circumstances:
 Consent of principal
 Ministerial action
 Trade custom
 Nature of work
Termination of Agency
The termination of an agency can take place through the following ways:
 Revocation (Officially cancel) of Authority
 The principal can revoke the authority of the agent. This ends the
authority before even exercising the authority. The important
principles relating to the revocation of authority are the following:
 The principal cannot revoke the authority of the agent if the agent has
exercised the act halfway.
 If there is an implied or expressed contract stating the continuation of
the agency for a period of time, then the agent to the principal or the
principal to the agent should compensate for the revocation
 There should be reasonable notice of the revocation, if not, then the
principal or the agent must compensate the other for the damages.
 Renunciation by the Agent
 The agent can similarly renounce (Formal rejection) the agency
business to that of the principal revoking it. The agent or the principal
can express or imply the renunciation or revocation, respectively.
 Completion of Business
 Only after the completion of the business, the contract of agency
comes to an end.
 Death or Insanity
 If the principal or the agent becomes insane or dies, then the contract
of agency terminates automatically.
 Principal’s Insolvency
 If the principal becomes bankrupt, then the agency terminates itself.
 Expiry of Term
 If the appointment of the agent was for a certain period, then there
will be an automatic termination of the agency. The agency will be
terminated even if the work is not completed.