Contract of Agency — Features & Distinctiveness
Introduction
An agency is a relationship between two parties — a principal and an agent — where the first party delegates to the second party, authority to perform actions as if the first party was performing it themselves. Thus, in simple words, a contract of agency creates a legal relationship through which one person acts on behalf of the other. The person performing actions on behalf of another is known as agent whereas the party on whose behest the agent works, or derives authority to act, is referred to as the principal.
The laws of agency are based upon the Latin maxim, “Qui facit per alium facit per se”, which literally translates into “he who does an act through another, does the act himself”.[1] This means that when one person authorises another to act or represent him/her, it is as good as that person acting him/her self. Primarily used in the domain of the law of torts for defining vicarious liability of an employer, this maxim also forms the bedrock of the laws of agency, as the principal is also responsible for the acts done through his/her agent.
In the Indian Contract Act, 1872, Chapter X deals with the laws of agency as they are found prevailing in India. The relationship between the agent and principal is contractual, i.e., it is governed by the conditions laid down in the contract. The two basic principles of contracts of agency are as follows:
An agent may be delegated authority to do any act which the principal can perform for him/her self, except in contract which is dependent upon or involves personal services, such as marriage or singing. This is because authority for performance of personal services cannot be delegated to an agent as the terms of the contract require performance by the principal.
· The acts done by an agent with authority from the principal are considered as acts done by the principal him/her self.
The U.S. District Court, in Butler v. Bunge Corporation, held that “Qui facit per alium facit per se”, that is, the authorised acts of an agent are, in legal contemplation, the same as the principal’s acts.[2] The Supreme Court of India, through an observation in the case Syed Abdul Khader v. Rami Reddy[3], held that “the expression agency is used to connote the relation which exists between a person occupying the position of principal and third parties.”
Who can be an agent?
Section 182 of the Act defines the terms ‘agent’ and ‘principal’. It states, “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.” An agent acts on behalf of the principal, under the principal’s authority, and the principal can be held liable for acts performed by agent with such authority. An agent can be employed by anyone of the age of majority and of sound mind.[4] Similarly, a person of unsound mind or not of the age of majority cannot be employed as an agent. This is because the agent has to be responsible to the principal.[5]
In addition to this, section 191 defines a “sub-agent”, who is a person employed by the original agent in an agency. However, authority cannot be delegated to another for acts which the agent has undertaken to perform personally, unless 1) by the ordinary custom or the trade, or, 2) by the nature of agency a sub-agent must be employed.[6]
Agent’s authority
The extent of an agent’s authority is explained in section(s) 186 to 189. Section 187 defines express and implied authority of an agent. When authority is presented through spoken/written words, it is express. On the other hand, when authority has to be inferred from circumstances of the case, it is implied. In a case where a mother consented to her son driving a car for her, the mother bearing all expenses, the son became an implied agent of the mother.[7] Section 188 states that the agent is authorised to take any lawful recourse to do an act he/she has been employed to perform.
In Lakshminarayan Ram Gopal & Sons Ltd. v. Government of Hyderabad[8], the Supreme Court made a distinction between an agent and servant. It was held that while an agent has the authority to act on behalf of the principal, this power is not enjoyed by a servant. Further, a servant has to act in accordance with all reasonable orders given by the principal, however, an agent is not subject to direct supervision of the principal.[9] An agent also differs from a bailee in the fact that the former has power to contract on behalf of the principal, whereas the latter does not have such authority.[10]
Apparent authority of an agent is created when a manifestation is made by the principal to the third parties in respect of such authority. However, in fact, no authority at all lies with such an agent. The principal, being fully-versed with the fact that the agent has no authority, makes a representation to any third-party which reasonably causes them to believe in the agent’s authority to perform an action or to represent the principal. In this manner, apparent or ostensible authority is created in the agent. Section 237[11] provides the concept of apparent authority: “When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such act and obligations were within the scope of the agent’s authority.”
In plain terms, this section states that a principal who has induced third-parties into perceiving that an agent has authority to perform certain actions, will be bound by the actions of such an agent. The case of Harshad J. Shah v. L.I.C. of India[12], considered the question of apparent authority of LIC agents to collect insurance policy premiums in great detail. It was contended that the fact that LIC did not do anything to stop the practice of its agents collecting premiums from policy-holders in spite of the fact that the regulations prohibited the same, gave rise to apparent authority in the minds of third-parties. The Court, however, refuted this contention and the judgement has been widely criticised for the same.
Creation of Agency
An agency can be created in many ways: by express appointment, by conduct of parties, by necessity and by subsequent ratification of an unauthorised act. An agency can be created only through the will of the principal and consent of both principal and agent, either expressly or by implication from conduct. In the case of a husband and wife, an implied agency is created for the wife to purchase household necessities and for the husband to be bound to pay for these expenses, subject to limitations.[13] A husband, however, is not an implied agent of the wife. Certain cases create necessities to assume the responsibilities of an agent and his/her acts will be binding on the principal. In the case of Great Northern Railway Company v. Swaffield[14], a consigned horse was not received and thus, out of necessity, the company had to make arrangements with a stable-keeper. Similarly, section 189 gives the agent authority to perform such acts in an emergency as would be reasonable to protect his principal from losses.
Ratification
Section(s) 196 to 200 pertain to ratification of an unauthorised act. The provision of section 196 mandates that when acts are done by one person on behalf of another but without authority, the person on whose behalf such acts have been done can chose to ratify the act and create an agency. As per section 197 and 198, the ratification may be express or implied and must be made with full knowledge of material facts. Further, no unauthorised act can be ratified which would injure and give rise to damages to a third person.[15] When an insurance company manager acted without authority to give effect to an assurance, but the company accepted the premium of the policy, the court found that ratification had been done by the company.[16]
The following are, in a nutshell, the essentials of ratification:
1. The agency must exist.
2. The act must be unauthorised, but in name of the principal.
3. Ratification must be for whole and not part.
4. There must be material knowledge as to facts (section 198).
5. Cannot be for an unlawful act.
6. Must not injure and give rise to damages to a third person (section 200).
Duties of Agent
The following duties are binding upon every agent, although others may be created by the contract.
· The most essential duty is to carry out the work for which the agent has been employed by the principal. Section 211 provides that the agent is bound to perform the business of the principal, failing which the agent must make good any loss sustained.[17] The business must be conducted with adequate skill and reasonable diligence[18], and the agent must compensate the principal for any consequences of neglect.[19]
· It is the duty of an agent to pay sums received in the course of work to the principal[20], after retaining the remuneration due to him for conducting the business as provided in section 217.
· Section 213 talks about the duty of agent to maintain proper accounts and to produce them before the principal upon demand. The court held that this duty arises out of the fact that the agent has the power to enter into contractual relations on behalf of the principal and therefore the principal has a natural entitlement to know what is happening with his accounts.[21]
· An agent is also bound by the duty to not make secret profits in the course of conducting business of the agency on behalf of the principal. As the nature of relationship between agent and principal is based upon good faith, it is necessary for the agent to not obtain any unfair advantage.[22]
· Section 190 elaborates when an agent cannot delegate authority to another for performance of an act which he/she has undertaken to perform personally. The exceptions to this rule are found in cases of trade custom, ministerial action, principal’s consent and in the nature of work. In John McCain and Co. v. Pow[23], it was laid down that “an agent has no right to delegate powers to a sub-agent, unless authorised by the principal.”
· Section(s) 192 and 193 lay down provisions for proper and improper delegation of powers by agent to sub-agent and the responsibilities of agent in such scenarios. If properly appointed, the principal is bound by and responsible for acts of the sub-agent. The agent is responsible to the principal for acts of the sub-agent; however, the sub-agent is not directly responsible to the principal (section 192). If improperly appointed, then the agent becomes the principal with respect to the sub-agent and is responsible to actual principal and third parties for all acts of sub-agent (section 193).
· The concept of substitute agent is described in section 194. A substituted agent is appointed when an agent, with authority to do so, names another person to act for the principal in business of the agency in place of the incumbent agent.
Rights of Agent
An agent has been provided with certain important rights. They are as follows:
· The first and foremost on this list is the agent’s right to remuneration, provided in section 219. Through this provision, an agent may detain remuneration due to him from the money obtained in the course of the business. As per the language of this section, the remuneration is not due to agent until the completion of the act. Where an agent had been appointed to negotiate a house purchase for a commission of 2%, he was not entitled to receive the commission until the house had been bought.[24] Section 220, however, points out that if an agent, found guilty of misconduct, is not entitled to receive remuneration.
· The right of the agent to lien is dealt with by section 221. According to this section, an agent is allowed to retain any good, papers or property of the principal until the remuneration/commission for services has been paid. There are certain prerequisites to this right, such as: firstly, the agent must be rightfully entitled to receive remuneration from the principal for work done. Next, the goods or property retained by the agent must belong to the principal and be received by the agent in course of business of the agency.[25] In Gopaldas v. Thakurdas[26], the effect of lien has been described as, “The agent’s lien does not give unrestricted authority to the agent to deal with the property in any manner …… but this confers no authority on the agent to sell or dispose of the property without consent of the owner.”
· Section 222 and 223 pertain to the agent’s right to indemnity, which means that a principal is bound to indemnify the agent against consequences of a lawful act performed in course of the agency with authority. This right also extends to expenses undertaken by the agent for performing business of the agency. Section 223 lays down that when an agent does an act in good faith, but it hurts the right of a third person, the principal is bound to indemnify the agent. However, the Supreme Court has held “there can be no agency for the commission of a crime. The wrongdoer would be personally liable.”[27]
· Also made available to an agent, is the right to compensation from principal under section 225, whereby an agent must be compensated for injury caused by principal’s neglect or want of skill. This right gives rise, in parallel, to a duty of care of the principal towards the agent.
Termination of Agency
There are several modes of termination of agency such as revocation, completion of business, death of principal or agent, lapse of time, renunciation by agents, principal/agent becoming unsound and insolvency of principal as explained by section 201.[28]
Revocation is a common method of termination of agency. It is covered under section 203 which says that a principal may revoke authority given to an agent at any time before the exercise of authority (which would effectively bind the principal). The revocation may be either express or implied in the conduct of principal.[29] Revocation is also subject to certain conditions, which are highlighted in section(s) 204, 205 and 206.
As per section 204, authority of an agent cannot be revoked after the agent has begun to exercise it, as the principal would be bound by the obligations arising from such exercise. In case an agent continues to exercise the business of agency after revocation of authority, the agent would not be entitled to recover profits derived from such course of business.[30]
Section 206 mandates that a notice of revocation must precede revocation, or otherwise the loss accruing to agent from such revocation has to be made good by the principal. “A termination without notice is ineffective.”[31] The principal is made liable to compensate an agent by section 205 for a revocation without sufficient cause where there is a contract for the agency to be continued for a period of time.[32]
Section 202 adds a rider to the provisions of termination of agency. It lays down that an agency, where the agent has interest in the subject-matter, cannot be terminated to harm this interest. Termination of agency by completion of business is dealt with in section 201, wherein it is suggested that agency is automatically terminated by operation of law when its business is completed. This section also says that the agency is terminated by itself on the death or insanity of principal or agent. Agency is also terminated through winding up or dissolution of partnership, principal’s insolvency and on expiry of time. When agency is terminated by death or insanity of principal, it is the agent’s duty to take reasonable steps to protect interests entrusted to the agent.[33]
Footnotes
[1] http://www.duhaime.org/LegalDictionary/Q/QuiFacitPerAliumFacitPerSe.aspx (last visited on 00:58 25–06–19).
[2] 329 F. Supp. 47 (1971).
[3] (1979) 2 SCC 601.
[4] Section 183, The Indian Contract Act, 1872.
[5] Section 184, The Indian Contract Act, 1872.
[6] Section 190, The Indian Contract Act, 1872.
[7] Smith v. Mosse, (1940) 1 KB 424.
[8] AIR 1954 SC 364.
[9] AVTAR SINGH, Law of Contract and Specific Relief, 12th ed. 2017, pp. 742–743.
[10] UCO Bank v. Hem Chandra Sarkar, (1990) 3 SCC 389.
[11] Section 237, The Indian Contract Act, 1872.
[12] AIR 1997 SC 2459.
[13] ANIRUDH WADHWA (ed.), The Indian Contract Act, 15th ed. 2016, pg. 317.
[14] (1874) LR 9 Exch 132.
[15] Section 200, The Indian Contract Act, 1872.
[16] Hukumchand Insurance Co. Ltd. v. Bank of Baroda, AIR 1977 Kant 204.
[17] Pannalal Jankidas v. Mohanlal, AIR 1951 SC 144.
[18] Section 212, The Indian Contract Act, 1872.
[19] State Bank of Indore v. National Textile Corporation, (2004) 4 MPLJ 214.
[20] Section 218, The Indian Contract Act, 1872.
[21] Yasuda Fire and Marine Insurance Co. v. Orion Marine Insurance Underwriting Agency Ltd., 1995 QB 174.
[22] AVTAR SINGH, Law of Contract and Specific Relief, 12th ed. 2017, pg. 764.
[23] (1974) 1 WLR 1643 (CA).
[24] Ayyanah Chetty v. Subramania Iyer, (1923) 45 MLJ 409.
[25] Pestonji Bhimji v Ravji Javerchand, (1934) 150 IC 483 (Sind), 447.
[26] AIR 1957 MB 20, 22.
[27] A. Thangal Kunju Musaisar v. M. Venkatachalam Potti, AIR 1956 SC 246.
[28] Section 201, The Indian Contract Act, 1872.
[29] Section 207, The Indian Contract Act, 1872.
[30] Haribar Prasad Singh v. Kesho Prasad Singh, AIR 1925 Pat 68.
[31] Om Prakash Pariwal v. Union of India, AIR 1988 Cal 143.
[32] Section 205, The Indian Contract Act, 1872.
[33] Section 209, The Indian Contract Act, 1872.
