Class Notes on Contract II – Unit III (2nd Sem / 3 year LL.B)

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Contracts of Agency

An agent does not act on his own behalf but acts on behalf of his principal. He either represents his principal in transactions with third parties or performs an act for the principal. The question as to whether a particular persons is an agent can be verified by finding out if his acts bind the principal or not.

Definition

Sec 182 of the Indian contract act,1872 defines Agent and Principal as:

  •  Agent: means a person employed to do any act for another or to represent another in dealing with the third persons and
  • The principal: means a person for whom such act is done or who is so represented.

Essentials of Agency

  • Principal is liable for the acts of agent
    • The principal is liable for all the acts of an agent which are lawful and within the scope of agent’s authority.
    • The contracts entered into by the agent on behalf of the principal have the same legal consequences as if these contracts were made by the principal himself.
  •  Who may employ an agent?
    • Any person may employ an agent if –
    • He is of the age of majority; and
    • He is of sound mind.
  •  Who can be an agent?
    • Any person may become an agent.
    • Even a minor or a person of unsound mind can become an agent
  •  Liability of agent
    • Generally an agent is liable to the principal
    • An agent is not liable to the principal if he is a minor or is of unsound mind.
  • Requirement of consideration
    • No consideration is necessary for creating an agency.

Creation of Agency

  • Any person who is of the age of majority and is of sound mind may employ an agent. (Section 183)
  • Between the principal and the third persons,any person may become an agent. But no person who is a minor and of unsound mind can become an agent.(184)
  • No consideration is necessary to create an agency. (Section 185)
  • It is not essential that a contract of agency be entered in to. It is sufficient if a person acts on behalf of another and is accepted by the latter.
  • An agency can be created either in writing or orally. An oral appointment is a valid appointment even though the contract of agency by which agent is authorized has to be in writing.
  • Agency by Ratification
  • Agency by Operation of Law
  • Two types of agreement
    • Express Agreement
    • Implied Agreement

Types Of Implied Agency

  • Agency by Estoppel or Holding out
  • Agency by Necessity
  • Agency in Emergency

Agency by Necessity

  • There was an actual and definite necessity for acting on behalf of the principal.
  • The agent was not in a position to communicate with the principal.
  • The act was done for the purpose of protecting the interest of his principal.
  • The agent has exercised such reasonable care as a man of ordinary prudence would have exercised in his own case.
  • The act was done bonafide.

Agency by Ratification

As per Section 196 of the Indian Contract Act, agency by ratification is said to arise when a person, on whose behalf the acts are done without his knowledge or authority, expressly or impliedly accept such acts.

Essentials of Ratification

  • Full knowledge
  • Whole transaction
  • No damage to 3rd parties
  • Act on behalf of other person
  • Existence of Principal
  • Within reasonable time
  • Lawful acts
  • Acts within Principal’s power
  • Communication

Agency by operation of law

Agency by operation of law arises where the law treats one person as an agent of another.

Kinds of Agents

Agents are classified in various ways according to the point of view adopted. From the viewpoint of the authority they have, they can be classified as special agents, general agents and universal agents. They are classified as mercantile or commercial agents and non-mercantile or non-commercial agents. There are different various types of kind agents are as follows.

Sub-Agent: Sub-agency denotes delegation of power by an agent to a person appointed by him as sub-agent. Incidentally the agent himself is delegate of his principal. The principal is that ‘a delegate cannot delegate’. According to this, a person to whom powers have been delegate cannot delegate them to another. Section 190 of the Act. Contains this principle. Generally, an agent cannot lawfully employ another to perform acts, which he has expressly. But, if by the ordinary custom of trade, a sub-agent may be employed, the agent may to do so.

A sub-agent, according to section 191, is a person whom the original agent employs in the business of the agency and who under the control of the original agent. Thus the relation of the sub-agent to the original agent is, as between themselves, that of the agent and the principal.

(i.) In case of proper appointment: The agent is responsible to the principal for the acts of the sub-agent. Thus, a commission agent for the sale of goods who makes a proper employment of a sub-agent for selling his principal’s goods is liable to the principal for the fraudulent disposition of the goods by sub-agent within the course of his employment.

(ii.) In the case of appointment without authority: In term of Section 193, the principal is not bound by the acts of the sub-agent, nor is the sub-agent liable to the principal. The agent is the principal of the sub-agent both to the principal and the third party.

Substituted Agent: Substituted agents are different from sub-agents. Section 194 provides that substituted agents are not sub-agents but are in fact agents of the principal. Suppose an agent has an implied authority to name another person to act for the principal in the business of the agency, and he has named another person accordingly. In the circumstances, such a named person is not a sub-agent he is an agent of the principal for such part of the business of the agency as has been entrusted to him.

For Example: A directs B who is a solicitor to sell his estate by auction and to employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. In such a situation, C is not sub-agent, but is A’s agent for the sale.

Special Agents: A special agent is also known as a specific or particular agent. Such agent appointed to perform a particular work or to represents his principal in particular transaction only. As soon as the said period lapses, the agency stands terminated. Specific agents have a limited authority and as soon as the entrusted to him is performed, his authority also comes to an end. A special agent cannot bind his principal in any act other than for which he is specially appointed. If he dose anything outside his authority, his principal cannot be bound by it. The third parties that deal with a special agent must ascertain the extent of the authority he has.

General agents: This type of agents has a general authority to do everything in the course of his agency and he has to perform all the acts in the interest of his principal. Thus, a general agent is one that has authority to do all acts connected with the business of his principal. A manager of a branch shop of a firm or a commission agent is instances of general agents. General agents have an implied authority to bind his principal by doing various acts necessary for carrying on the business of his principal. Sufficiently wide powers are vested in him to affect the business deals, enter into trade bargains, to make purchases and also payments of the purchases, to receive money on behalf of his principal.

Universal Agent: A universal agent has a universal or an unlimited power to act on behalf of his principal. A universal agent is one whose authority is unlimited and who can do any act on behalf of his principal provide such act is legal and is agreeable to the law of land. A universal agent is practically substituted for his principal for all those transactions wherein his principal cannot participate.

For Example: When a person leaves his country for a long time, he may appoint his son, wife or friend as his universal agent to act on his behalf in his absence.

Co-Agents: When a principal appoints two or more persons a agents jointly or severally, such agents are known as co-agents. Their authority is joint when nothing is mentioned about the exercise of their authority. It implies that all co-agents concur in the exercise of their authority unless their authority is fixed. But when their authority is several, any one of the co-agents can act without the concurrence of other.

Auctioneers: An auctioneers is a mercantile agent who is appointed to sell goods on behalf of the principal i.e., seller and for this function, an auctioneer get a reward in the form of a commission. An auctioneer conducts auction on behalf of a seller, as he is primarily the agent of the seller. However, after the sale, he also becomes of the purchaser who gives the highest bid. An auctioneer has no authority to self-the goods of his principal by private contract or contracts.

Besides the above mentioned agents, there are other types of agents also such as brokers, bankers, clearing agents, forwarding agents, underwriter, estate agents, etc. They also play an important role and perform various functions for and on behalf of their principals.

Types Of Mercantile Agents

  • Factor
  • Commission agent
  • Del credere Agent
  • Broker
  • Auctioneer

Rights And Duties Of Parties

  • It is duty of an agent in cases of difficulty, to use all reasonable diligence in communicating with his principal and seeking to obtain his instruction (Section 214)
  • An agent should not set up an adverse title to the goods which he receives from the principal as an agent.
  • An agent is duty bond to pay sums received to the principal on his account.
  • An agent must not use confidential information entrusted to him by his principal for his own benefit or against the principal.
  • The agent must not make secret profit from the extract agency. He must disclose any extra profit that he may make.
  • An agent must not allow his interest conflict with his duty. For example, he must not compete with his principal.
  • An agent must not delegate his authority to as ub-agent . This rule is based on the principle ‘Delegatus non protest delegare
  • Delegate cannot further delegate (Section 190).

Distinction between Agent and Servant

Agent: 

  • He has the authority to create commercial relationship between the principal and the third party
  • He may work for several principal at a time
  • He usually get commission

Servant: 

  • He ordinarily has no such authority
  • He ordinarily work for only one master at a time
  • He usually get salary or wages

Rights of Agent

  • The agent has a right to retain any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of his remuneration and advances made or expenses properly incurred by him in conducting such business.
  • The agent has a right to receive remuneration.
  • Right of lien: In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property.
  • The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.
  • Where he has bought goods for his principal by incurring a personal 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.
  • Where he is personally liable to the principal for the price of the goods sold, he stands in the position of an unpaid seller towards the buyer and can stop the goods in transit on the insolvency of the buyer.

Duties of an Agent

  • Duty to act according to directions or custom of trade – Sec. 211
  • Duty to act with reasonable care and skill – Sec. 212
  • Duty to render account – Sec. 213
  • Duty to communicate with Principal and to obtain Principal’s instructions – Sec. 214
  • Duties to disclose all material circumstances and to obtain the Principal’s consent in dealings – Sections 215 & 216
  • Duty to pay sum received for Principal – Sections 217 & 218
  • Duty to protect and preserve the interest entrusted to him – Section 219
  • Duty not to delegate – Sec. 190

Rights Of Principal

  • Right to repudiate the Transaction
  • To claim any resulted benefit from Agency
  • Right to Recover Damages
  • To Resist Agent’s claim for Indemnity

Duties Of Principal

  • To indemnify against consequences of all lawful acts of agent
  • To indemnify the agent against consequences of acts done in good faith
  • To pay compensation against agent’s injury
  • To pay the agent the commission or other remuneration agreed.

Liability of Principal to Third Parties For The Acts Of Agent (Sec. 226 to 228)

  • Principal is liable for the acts of agent
  • The principal is liable for all the acts of an agent which are lawful and within the scope of agent’s authority.
  • The contracts entered into by the agent on behalf of the principal have the same legal consequences as if these contracts were made by the principal himself.
  • When agent exceeds his authority: Whether the acts done within the authority are separable from the acts done beyond authority.
  • If yes – The principal is not bound for excess acts done by the agent.
  • If no – The principal is not bound by the transaction and the principal can repudiate the whole transaction.

Delegation

General rule: The general rule is that an agent cannot lawfully employ another act, which he has
expressly or impliedly undertaken to perform personally.

Exceptions

  • There is a custom or usage of trade to that effect.
  • Where power of the agent to delegate can be inferred from the conduct of the both the principle and the agent.
  • When the principal is aware of the intention of the agent to appoint sub agent by the does not object to it.
  • When principle permits appointment of a sub-agent.
  • If the nature of the agency is such that the sub-agent is necessary

Extent of Agents authority

  • Lawful Acts
  • Emergency Authority
  • Ostensible Authority

Personal Liability of an Agent

General Rule – No personal liability [ Sec.230]

In the absence of contract to contrary, an Agent cannot –

  • (a) personally enforce contracts entered into by him, on behalf of his Principal,
  • (b) be held personally liable for them.

This  is  because  the  Agent  merely  acts  on  behalf  of  his  Principal.  Thus,  he  enjoys immunity from being personally sued.

Exceptions, i.e. Agent personally as well as Joint & Severally Liable

The Agent is personally liable in the following cases –

  1. Foreign Principal [Sec.230] : Where the contract is made by an Agent for the sale or purchase of goods for a merchant resident abroad.
  2. Undisclosed Principal [Sec.230]: Where the Agent does not disclose the name of his Principal.
  3. Principal cannot be sued [Sec.230]: Where the Principal, though disclosed, cannot be sued, e.g. Principal becoming of unsound mind, subsequent to appointment of agent.
  4. Acting for a Principal not in existence: Where the Agent acts for a Principal who is not in existence at the time of making contracts, he shall be personally held liable e.g. contracts entered into by Promoters before incorporation of a Company are made in their personal capacity and hence personally liable.
  5. Agency coupled with interest [Sec.202] : Where the Agent has an interest in the subject matter of agency.
  6. Agent guilty of Fraud [Sec.238] : Where an Agent is guilty of fraud or misrepresentation in matters that are outside the scope of his authority, he is personally liable, and do not affect his Principal.
  7. Agent exceeds authority & act not ratified: Where an Agent acts either without any authority or exceeds his authority, he shall be held personally liable when the principal does not ratify his acts.
  8. Agent receives or pays money: Where an Agent receives or pays money by mistake or fraud to a third party, he shall be personally liable to such third party. Also ha can personally sue the third party if the fraud or mistake is accountable to such third party.
  9. Express Agreement for personal liability: Where an Agent expressly aggress to be personally bound.
  10. Execution of Contract in his own name: Where an Agent executes a contract in his own name, without disclosing that he is acting as Agent for a Principal, he shall be personally liable, e.g. An Agent signs a Negotiable Instrument without making it clear that he is signing it as an Agent only, he shall be held personally liable on the same. He would be personally liable as Maker of P/N, even though he may be described as Agent.
  11. Trade custom or usage: Where trade usage or custom makes an Agent personally liable.
  12. Agent with special interest: An Agent with special interest   or with a beneficial interest, e.g. a Factor or Auctioneer, can sue and be sued personally. [Subramanya vs Narayana]
  13. Action against Agent or Principal [Sec 233] : Where the Agent is personally liable, a person dealing with him may hold  – (a) either him or (b) his Principal or (c) both of them liable. The liability of Principal and Agent is “joint and several”.
  14. Exclusive liability [Sec. 234]
    • Where a person has made a contract with an Agent and –
      • Induces such Agent to act upon it in the belief  that  only  his  principal  would  be held liable,
      • Induces the principal to act upon it in the belief that only his Agent would be held liable.
    • Such Third person cannot later on, shift the liability on to –
      • The Agent, or
      • The principal, respectively.

Termination of Agency

According to section 201, an agency is terminated by:

  • By an agreement between the parties,
  • By the principal revoking his authority
  • By the agent renouncing the business of agency
  • By the business of agency being completed
  • By either the principal or the agent dying or becoming of unsound mind
  • By the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for relief of insolvent debtors.
  • On expiry of fixed period

Agency May Be Terminated by

  • Agreement
  • Revocation of authority by the principal
  • By operation of Law

Agency Termination By Operation Of Law

  • On performance of the contract. Where an agent is appointed to perform a specified transaction, his authority comes to an end on the completion of the said transaction.
  • On expiry of time.
  • When the agent or the principal dies or becomes of unsound mind. The death of the agent terminates his authority.
  • The death of one of the joint agents will terminate the agency only as far as he is concerned, while it will continue to be valid as regards the other surviving agents in the absence of contrary intention.
  • On the insolvency of the principal
  • On the destruction of the subject matter.
  • On the principal becoming an alien enemy.
  • On the dissolution of a company.
  • On termination of sub-agent’s authority.

Exceptions

  • Irrevocable Agency: When an agency cannot be put an end to, it is said to be irrevocable agency. An agency is irrevocable where the agent himself has an interest in the property which forms the subject-matter of the agency.
  • Time when Termination takes Effect: The termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him. As regards third persons, it terminates when it comes to their notice.

Unit III Important Case Laws

  • Lloyd V.Grace Smith & Co.,1912 AC716
  • M.Kasam V. Commissioner of Income Tax,ILR 1937(2)Cal.160
  • Cox V.Hickman,1860 (11) ER 431
  • C.Ramchand v.V.S.Narayana Swamy,AIR 1982 Mad.326
  • Hurst V.Bryk & Ors.,2000 (2) All ER HL 193
  • Popular Flims V. Nalini Saigal,84 Cal.WN 867

 

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