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Contract Of Agency Essentials, Modes Of Creation And Determination

In the current time of trade and commerce, it is not possible for person to carry out all the task by its own. But at some point of time and at some juncture of business, there is requirement of a person who is representing you Infront of third party with whom you are entering in the course of business or when you are dealing. The person who is representing you is known as "AGENT". Agent can perform various business project.

They are good for Principle since agent make the work easy and convenient for them. Contract of agency is a bilateral contract in which a legal relation formed between two people in which one person is authorised to perform the task on behalf of other for the third party. The person on whose behalf the act is done is known as "PRINCIPLE" and the person acting on behalf of principle is "AGENT". In this paper we will discuss various cases which have important role in creation and development of the Contract of Agency.

This paper makes an effort to examine how the contract of Agency is formed and what are its essentials to form the contract of agency and what are the modes of creation of contract of agency and its determination. This paper also describes the difference between servant and agent

Indian Contract Act is a law that deals with mercantile laws (Business Law). It enforced on 1 September 1872. Initially it is a Common law but passed in the Indian Parliament.

Indian Contract Act consist of 11 Chapter but chapter 7 "Sale of Goods" in 1930 and Chapter 9 "Partnership" in 1932 was repealed. Under it various aspect is given and explained in ,much broader way, it describes aspects like offer, acceptance, essential of contract, consideration, void, voidable and void ab initio, contingent contract, indemnity, guarantee, bailment and agency. It explains the contractual legal relationship between two or more parties.

Agency comes under chapter 10 of Indian Contract Act, 1872 from section 182 to section 238. Section 182 of Indian Contract Act 1872 defines Agent and Principal, an "agent' is a person who is hired to carry out any task for another or to speak on another person's behalf. The "principal" is the person acting on their behalf or being so represented

"Quit facit per alium, facit per se" it means "He who acts through another does the act himself" is a foundational legal maxim of the law of agency. This maxim is mentioned while addressing the employer's responsibility in terms of vicarious liability.

Agency Under Indian Contract Act ,1872,
  • In agency two contract form i.e.
    1. The first contract form between the agent and principle under which principal giving the authority to agent to work on behalf of him/Principal
    2.  Second Contract form between third party and the principal through the work of agent
    In the case of P. Krishna Bhatta v Mundila Ganapathi Bhatta[1] the concept of agency was explained. It was held that every person who work for principal does not became his agent

    To comes under the contract of agency it has to fulfil all the essential which is required to form the contract given in contract act 1872 i.e.
    1. Valid contract must include two parties or more with offer and acceptance
    2. Agreement, which is the foundation of a contract, is defined in sec 2(e) of the Indian Contract Act 1872
    3. Valid contract requires free consent
    4. Intention to create a legal relationship
    5. Contractual Capacity: Parties to the agreement must be of the age of majority, i.e., 18 years and of sound mind
    6. Valid contract should be supported by consideration, which should be lawful in nature
    7. Lawful object
    *making an agency require no essential thought
  • Essential Features of Agency
    1. Principal should be competent to contract:
      This essential comes under sec. 183 of Indian contract act 1872 which talk about the capacity that any person who is of sound mind and who is of age of majority according to law to which he is subject, may employ an agent. It was also stated that a contract of agency is void if it is entered into by a minor and all the liability of agent if he/she is minor will shift to the principal automatically. So it is important that whenever any one who is reading sec.183 may read it with sec 10 that is "what agreement are contract" and sec.11 "who are competent to contract". It was observed in case of Shephard v Cartwright.[2]

      In this case, it was held that the person who is acting in course of agent cannot be appointed by the principal who is minor that below the age of majority neither in form of attorney nor in any other form which make him agent and if this happened then the whole contract will became void and not capable for ratification. The judge of this judgement had said that in order to select or employ an agent you should according to way of reasonable man's way. But who is minor is not capable and abide by law to choose a person as his agent it is beyond of its capacity
    2. Person should have capacity to became an agent:
      This essential comes under sec. 184 of Indian Contract act 1872, which talk about capacity that any person who is of sound mind and who is of age of majority according to which he is subject can became an agent. If the principal appoints agent who is minor than all responsibility of that agent will shift automatically to the principal. It was observed in case of Unit Trust of India v Ravindra Shukla[3]. It was held that cheque was sent by union trust of india by registered post but it was not received by the payee. There was no understanding with or request by the payee that it should be sent by post. Held that the post office acted as the agent of union trust of india. Liability for non-delivery was that of the union trust of india and not the post office
    3. Consideration is not necessary for the agency:
      This essential comes under sec.185 of Indian Contract act1872, which talk about that when at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstain from doing or promises to do or to abstain from doing is called consideration and in agency. The payee did not consent to or make a request for postal service forwarding
    4. Liability of Principal:
      The principal is answerable and liable for the act of the agent to the third party since the agent acts for and on behalf of the principal and not on his own behalf
  • Difference between agent and Bailee

    In spite of the fact that, bailee and agent looks similar to each other but in actuality they are not.
    1. An agreement that stipulates that the items must be returned or otherwise disposed of in accordance with the instructions of the person supplying them is known as a bailment. items are delivered to another person for a specific purpose under a bailment. The recipient of the commodities is referred to as the "bailee."
    2. In bailment, bailee has no authority to represent the bailor but in case of agency, agent is representing or acting on behalf of principal under his authority in front of third party in agency
    3. In bailment, the role of bailee ends as soon as he is free from the possession of goods which is with him in bailment but in agency, contract can continue for longer period of time
    4. In contract of agents are generally reimburse with a commission but in contract of bailment it can be gratuitous/ gift deed as well as reward
  • Difference between agent and servant
    1. A servant is a person who is under the master's control, and the contract of service is used to determine the servant's connection to the master.
    2. In agency, the agent works for the principal, but in the case of a servant, he works for the master.
    3. In agency, the agent works on the basis of commission, but in the case of a servant, they work on the basis of salary/wages.
    4. In agency, the agent is under the supervision and control of the principal, but in the case of a servant, it comes under the control of the master.
    5. In agency, the principal is liable for the act committed by the agent under his scope of authority, but in the master-servant relation, the master is liable for the act committed by the servant in the course of employment.
  • Difference between agent and independent contractor
    1. i. A person neither an agent nor a servant and comes into picture by the medium of 'contract for service' I.e., what is the work to be done. The independence of the independent contractor gives him or her the freedom to complete the assignment as he or she sees fit.
    2. ii. Independent contractor works for Master/Principal/Employer
    3. iii. Since, Principal is liable for the act of agent under his authority but in case of independent contractor neither the master, principal or employer is liable for the tort committed by the independent contractor
    4. iv. Principal will be held liable for the work of agent either by contract, request, authorization or delegation to fulfil the purpose of principal. The work done by independent contractor comes under 'contract of service' which tells only "What work is to be done?". Independent contractor acquires the freedom to do the given task in the manner he prefers
  • Kinds of Agent
    • On the basis of authority agent can be classifies as:
      1. General agent:
        one who is hired to perform every task associated with a specific business or occupation. For instance, a firm's shop manager, etc. He can bind the principle by engaging in any activity that is consistent with the normal course of that business, regardless of whether he is actually authorised for any particular act or not is immaterial provided third party acts bona fide.
      2. Special agent:
        A special agent is one who is employed to do some particular act or represent his principal in some particular transaction, eg an agent employed to sell a house. As soon as the house is sold his authority would end
    • Universal agent- A universal agent is said to be one whose authority is unlimited, i.e. Who is entitled to carry out all actions that the principal may lawfully carry out and may delegate. He enjoys extensive powers to act on behalf of principal
    • On the basis of nature of work performed agent can be classified as follows:
      1. Mercantile agent
        One who has authority either to sell the goods or to buy goods or to raise money on the security of goods(Sec2(9) of Sale of Goods Act)

        Kinds of mercantile agent:
        • Factors:
          A factor is a mercantile representative given goods to sell. In terms of the sale of items, he has a lot of discretion. In his own name, he sells the items on the terms he sees fit. He might also promise the items.
        • Commission agent:
          A commission agent is a mercantile agent that purchases or sells products on behalf of his principal at the most favorable conditions under his own name. recia ves commission for his labours, He may have possession of the goods or not.
        • Del Credere Agent:
          He is a person who, in exchange for an additional commission, promises his principal that the third party with whom he enters into contracts will uphold their end of the bargain of the principal, i.e., the seller will pay the buyer if the buyer fails to fulfill his financial commitments. As a result, he also becomes surety.
        • Broker:
          He is a person who works for a company that makes contracts for the sale and purchase of things. He does not have any stuff in his possession. He merely serves as a link in the chain.
      2. Non mercantile agent
        Advocates, attorneys, insurance agent, wife etc.
  • Creation Of Agency
    The Indian Contract Act recognises both express and implicit agency contracts. Any agency agreement need not be taken into account as a necessary component of the agreement.

    When the principal hires someone to represent him before a third party and the agent accepts payment in exchange for performing the duty, a contract of agency is created.

    1. Through Expressed Appointment
      Principal can appoint the agent through expressed appointment defines in sec. 187 of Indian contract Act, which defines that the appointment of agent can be made in writing or oral. In Indian Law the idea of employment of an agent is a broad definition compared to what is defined in English Law. According to sec. 182 of Indian Contract Law 1872, agent can be employed any person authorised by law. In English law the will of the person is necessary to be an agent. But it is not that principle an force the person to be an agent in order to create a contractual or legal relationship consent of both principal and agent is necessary

      The case law which tells about express agency is Delhi Electric Supply Undertaking v. Basanti Devi 1999[4]. In this case it was held that Employers (DESUs) were permitted by LIC to deduct premium payments from employees' salaries and send them to LIC under the Salary Savings Scheme adopted by LIC of India. As a result, DESU served as LIC's agent for that objective. As a result, LIC was deemed responsible for paying under the terms of the policy due to DESU's failure to collect a premium at the point when the employee's policy was set to expire.

      However, the laws of England provided a broader viewpoint and stated that two principals could jointly engage a single agent, who would then be jointly liable to both of them and subject to joint litigation.
    2. Through Implied Agencies
      In addition to the formal contract of agency an inferred contract of agency might also exist. It is described in Indian Contract Act sec. 187. Implied contract refers to a contract that is made by a person's actions or that pots him in a situation where it is..A lives in calcutta and runs a store in Serampore . He occasionally comes to store The shop is managed by B, and he is in the habit of ordering goods C in the name of A. For the purpose of the shop and of paying for them out of A's fund with A's knowledge. B is implicitly authorised by A to place orders with C on behalf of A for the purposes of the shop.
  • Kinds of Implied Agency
    1. Agency by Estopple
      According to the estoppel doctrine, if someone intentionally misleads another into believing a particular set of circumstances or facts exist and that someone else has acted on that belief through their words or conduct, they are estopped or barred from denying the truth of those statements, even if the situation in question did not actually exist. When an agent acts without authorization on behalf of his principal, he is subject to liability under section 237 of the Indian Contract Act, which states: the principal is responsible for those actions if, through his words or conduct he led the third parties to believe that the agent's actions and obligation fell within the scope of that authority

      In case of Ram Chandran v. Registrar, Co-operative Societies[5]. In this case it was observed that A society's clerk could also serve as the cashier. Later, the organisation forbade him from receiving contributions from its members. In cases involving the collection of money from members, the clerk was represented as the society's agent. Thus, Sec. 237 was applicable since it was determined that the clerk had an ostensible (apparent) authority.
    2. Agency by Holding Out
      Part of Doctrine of Estopple

      If the alleged principle has led a third party to assume that anything was done on his behalf, then he is responsible for what the alleged agent does. Agency by holding out, as contrast to "agency by estoppel," calls for some affirmative activity or good behaviour.

      For ex- E permits F, his servant, to buy items from G on credit on his behalf, and then E pays for them. E once offers F cash so she can buy things. F steals the funds and gives G credit to buy products from F. Because E had previously represented F as his agent, G can now sue E for the cost of the items.
    3. Agency by Necessity
      In times of need and emergencies, the implicit agency may also manifest. The Indian Contract Act's Section 189 addresses the agency by urgency or necessity. Section 189 of the Indian Contract Act of 1872 gives an agent the authority to take the necessary steps to safeguard his principal from any kind of damage.

      The Indian Contract Act, 1872 also outlines the scope of an agent's authority and grants an agent the freedom to do everything that is legal and advantageous to his principal. Therefore, it is a requirement of agency that an agent work in good faith to protect the principal's property or avert loss on their behalf.
      • Conditions for agency by necessity:
        • There should be real necessity
        • Communication is impossible
        • Bona fide action of the agent
      In case of Great Northern Railways Co. v. Swaffield[6].It was held that the principal sent a horse to his agent by railroads, but the agent was away working other jobs and was unable to receive the horse. So when the horse arrived at its destination, no one was there to meet it.

      As a result the railway station master accepted the horse and took the necessary actions to keep it alive. As a result the station master acted as the principal's agent and the latter is responsible for praying the sum that the railway company expended to keep the horse alive.
    4. Agency By Law
      Employment of any agent by any entity designated by law as having the authority to do so and do not just by the principal

      Ex- When a company is first formed, its original directors are its agent by operation of law.
    5. Agency By Ratification
      Sections 196-200 of the Indian Contract Act of 1872 deal with ratification. Ratification to put it simply is the subsequent adoption of an action. Ratification typically occurs when someone acts as an agent without the proper authority when they go beyond that authority or when the principal is not obliged by the terms of agent's contract. However the principal will be able to approve the act or transaction of the agent and assume responsibility for it. Following condition must be met for ratification to be valid

      Sec-196. Right of person as to acts done for him without his authority.

      Effect of ratification-B
      He may choose to approve or repudiate actions taken on his behalf by another individual without his knowledge or consent though he approves them, the same results will occur as though they were carried out on his authority.

      Sec-197.Ratification may be expressed or implied:
      The individual acting on behalf of another person may imply or express ratification in their actions.

      Ex- A, without authority, buys goods for B. Afterwards B sells them to C on his own account; B's conduct implies a ratification of the purchase made for him by A
  • Essentials of a valid ratification
    • The agent must represent themselves as acting on behalf of a principle who is considering acting.
    • There should be an act capable of ratification-illegal, prohibited acts cannot be ratified
    • The principal must be in existence at the time of origin contract
    • The principal needs to be able to enter into a contract
    • The principal needs to be fully informed of relevant facts
    • Whole transaction must be ratified
    • Ratification must be within stipulated time for the performance of contract or within reasonable time
    • Ratification cannot cause harm to a third party (Section 200)
  • Rules of ratification
    1. Ratification can be done only by person, for whom the act was done, professing him to be a principal
    2. Ratification goes back to when the act was passed
    3. It can be expressed or implied by the acts of the principal
    4. Ratification must be whole act and cannot be of a part of it
    5. Ratification cannot be done to cause injustice to the third party
    6. Ratification cannot be done if the principal ratifying is in knowledge of facts which are materially defective
    7. Illegal and void acts cannot be ratified
    In case of Ashbury Railway carriage and Iron Co. Ltd v. Riche[7]. This case law regarding an incompetent agent's ratification of a contract is particularly significant. In this instance it was decided that the principal could not ratify the contract later on if the agent had pretended to make it on the principal's behalf when the principal was actually incapable of doing so.

    Agency in Husband-and-Wife relationship:
    Cohabitational agency is another name for husband-and-wife agency. If a man and woman live together and appear to be husband and wife to a third party the woman will have the same legal authority over the guy as if she were his wife. However, this presumption may be void in the following situations: when the wife is prohibited from borrowing money or making any purchases on credit; when the goods being purchased on credit are not necessities; when the wife is provided with enough cash or allowances; and when the trader has been specifically warned not to extend credit to his wife.

    If the wife lives separately from the husband, the husband is legally required

    to Support her but if they were living apart for no good reason, the wife would

    not be considered the husband's agent. When the husband and wife do not

    reside in a domestic establishment, the husband is not responsible for the

    wife's purchase.
  • Termination of Agency
    Section 201 defines Termination of Agency:
    An agency ends when the principal revokes his authority, the agent renounces the agency's business, the agency's business is completed the principal or agent passes away or loses mental capacity or the principal is declared insolvent in accordance with the terms of any act currently in effect for the relief of insolvent debtors.

    A type of general contract is an agency contract. As a result unless the agency is irrevocable it may be terminated in the same manner as a contract is discharged. Only an act or agreement between the parties to the agency or a change in the law can end the relationship between the principal and agent. Unless a sufficient amount of time has passes to disprove the presumption an agency will be presumed to have remained once it has been established that it existed. When an agency relationship ends, the agent's obligation to act on behalf of the principal also ends. A contract might specify the duration of an agency's existence

    There are several ways to dissolve an agency:
  • By the act of the parties
    The principal or agent can end the agency by engaging in any of the following actions.
    1. Mutual agreement between the parties:
      By mutual agreement between the parties i.e., Principal and agent the agency can be terminated at any time or any stage.
    2. Revocation by the Principal:
      The principal has the right to revoke an agent's authority at any moment. However unilateral withdrawal that isn't done in line with the agency agreement rules could make the principal accountable to the agent for violating the terms of the arrangement
      1. Where Authority has been partly exercise Principal cannot revoke his agent's authority:
        Sec. 204 talks about it that insofar as actions and duties that result from actions already taken in the agency the principal cannot rescind the authority granted to his agent after it has been partially exercised.
      2. Termination of agency where agent has interest in subject-matter:
        According to Section 202, this situation arises when an agent has a personal stake in the real estate that is the topic of the agency the agency cannot absent a specific agreement to the contrary, contract to the determent of such interest be cancelled, this kind of agency is also known as irrevocable agency pr agency linked with interest.
      3. Compensation for revocation by principal or renunciation by agent:
        Sec. 205 talks about it that the principal must pay the agent compensation for any previous services rendered or the agent must pay the principal money where there is an express or implied agreement that the agency should continue for any period of time.
      4. Notice of revocation or renunciation:
        Sec. 206 talks about it that if such a revocation or renunciation occurs, reasonable notification must be given or the principal or agent as applicable will be responsible for making good on any damage
  • By Operation of Law
    1. Competition of business:
      Sec.201 talks about it that when the business of agency is completed the relationship between agent and principal comes to an end automatically
    2. Expiry of time:
      after the expiry of time the agency is automatically terminated
    3. Death of Principal or agent:
      When either the principal or agent fied the agency relationship is automatically terminated
    4. Insanity of Principal or agent:
      When either of them became of unsound mind the agency came to an end
    5. Insolvency of Principal:
      When the principal became insolvent the agency came to an end
    6. Subsequent impossibility:
      Agency is terminated after the creation of agency
    7. The subject matter of agency business is destroyed
    8. Business of the agency became lawful
In case of R. Sayani v. Bright Bros(P) Ltd[8]. In this case it was observed that if an agency is terminated early without good reason after being established for a specific amount of time compensation must be paid. There was no reasonable advance notification of the agency premature determination. The agent received Rs. 4,000 each month. According to the court, there should have been at least three months' notice given. As a result, a compensation of Rs. 12,000 was permitted.

* When the agent's authorization is revoked with respect to both the agent and a third party- Sec. 208- Insofar as the agent is concerned, and insofar as third parties are concerned, the termination of an agent's power does not take effect prior to either of those parties being aware of it.

This paper has tried to show the multiple facets of the contract of agency. It explains the various methods by which it can be formed and comes to an end. This paper has also threw light on the essentials required for the contracts of agency, what are the different types of agents under it and how to create the contract of agency and this paper also highlight some basic and most confusing issues like how a bailee or servant or independent contractor is different from the agent and how the owner is different from the principal. If Contract is the genes than Law of Agency is the species

  1. AIR 1955 Mad 648
  2. 1935 AC 431
  3. 1619 of 2005
  4. 6113 of 1995
  5. AIR 1963 Mad 105
  6. 1874 LR 9
  7. 1875 LR 7 HL 653
  8. AIR 1980 Mad 162

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