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Understanding Contract of Agency

In India, the agent and principal share a relationship that is contractual in nature, and therefore it is governed by the terms and conditions of the contract between them. In agency contracts, there exists a legal relationships between two people whereby one person acts on behalf of the other.

The person acting on behalf of the other is called an agent, and the person from whom the agent derives authority to act is called the principal. Agent and principal are defined under Section 182 of the Indian Contract Act, 1872. According to the section 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. It discusses the characteristics and the role of an agent under the Indian Contract Act, 1872.

A section of the paper also create a distinction between agency and dealership, as to how a dealer who may appear to be an agent is not actually an agent. It tries to discuss the relationship between a principal, an agent, a sub-agent. It also differentiates between the role and duties of an agent, sub-agent and a substituted agent. The central idea behind the principal-agent relationship is that the principal is too busy to do various jobs so he/she hires an agent to do the job on his or her behalf.

Existing Legal Situation
The legal connection in which the agent deals with a third party on behalf of the principal is governed by agency law. The competent agent has the legal authority to act on behalf of the principal in front of a third party. As a result, the process of finalizing a contract through an agent entails a two-way connection.

On the one hand, agency law is concerned with an economic unit's external commercial relationships and the various representatives' powers to influence the principal's legal position. On the other hand, it governs the internal connection between the principal and the agent, imposing obligations on the representation. The two relationships do not have to be perfectly aligned.

Agency is regarded as an essential component of the existing social order in all modern legal systems. It performs the most diverse tasks in both public and private law; in particular, it aids in the organization of the division of labor in the national and international economy by allowing a principal to considerably expand his individual zone of action by having one or more others operate for him.

A principal may also be a group of people who carry on a trade or business through a partnership, a registered corporation, or another type of corporate body, in addition to the individual principal. As company units have become more involved in transactions done at a distance (through the employment of factors or commercial agents) or have grown, the demand for legal counsel in some form has increased.

Continental law also permits the use of legal representatives, such as a father, mother, guardian, or curator, to allow minors, crazy people, and other legally incompetent people to act. Although a similar category of "authority by law" does exist in common law, powers based on familial relationships are rare and emerge in only a few cases.

Definition and Types of Agents

Agency means that the relationship that exists when one person or party engages other to act for him or to do his work, to sell his goods or to manage his business. Agency law deals with the agent- principal relationship and it is a relationship where one party always has the legal rights or authority to act in place of another. Agency can be express or implied.

If the agency is express, it is created by deed, verbally without writing or in writing. If the agency is implied, it can be inferred from the relation between the parties and the nature of the employment without proof of express appointment. Agency is recognized in all modern legal systems as an indispensable part of the existing social order.

It fulfills the most diverse functions in both public and private law; it assists in organizing the division of labour in the national and international economy by making it possible for a principal greatly to extend his individual sphere of activity by having one or more person act for him. In addition to the individual principal, a principal may be composed of a group of person carrying on a trade or business by way of a partnership, a registered company, or another kind of corporate entity.
  • Chapter X of the Indian Contract Act 1872 deals with the laws relating to agency. The laws that are related to agency are important because all business transactions in the worldwide are carried out agency. Agency law is an important area of Business law. Principal and agent involve in three main parties in relationship, they are: The Principal, The Agent, and a Third Party.
     
  • Agent:
    Agent is define in the Section 182 of the Indian Contract Act, that a person employed to do any act for another or to represent another in dealing with third person.
     
  • Principal:
    It is also defined in the Section 182 of the Indian Contract Act, that the person for whom such act was done which id to be represented. The person who has delegated his authority will be the principal.

Types of Agents

  • General Agent

    The general agent possesses the authority to hold out a broad vary of transactions within the name and on behalf of the principal. the overall agent is also the manager of a business or could have a lot of restricted however all the same current role—for example, as an agent or as an insurance agent approved to check in customers for the house workplace. In either case, the overall agent has authority to change the principal's legal relationships with third parties. One United Nations agency is selected a general agent has the authority to act in any manner needed by the principal's business. to limit the overall agent's authority, the principal should spell out the constraints and however the principal is also answerable for any of the agent's acts in way over his authority.
     
  • Co-Agent

    Co-agent is a person, who is named by the agent with the express or implied authority of the principal. Section 194 of the Indian Contract Act deals with the Appointment of a Co-Agent. It works under the control of the principal and is an agent of the Agent. There is private of contract between the principal and substituted agent. It is responsible for the principal. The Agent is not responsible for the acts of the co-agent.
     
  • Broker

    An individual or firm employed by others to plan and organize sales or negotiate contracts for a commission.
    A brokers function is to arrange contracts for property in which he or she has no personal interest, possession, or concern. The broker is an intermediary or negotiator in the contracting of any type of bargain, acting as an agent for parties who wish to buy or sell stocks, bonds, real or Personal Property, commodities, or services. Rules applicable to agency are generally relevant to most transactions involving brokers. The client is considered the principal and the broker acts as the clients agent. An agents powers generally extend beyond those of a broker. A distinguishing feature between an agent and a broker is that a broker acts as a middleperson. When a broker arranges a sale, he or she is an agent of both parties.
     
  • Del Credre

    A del credere agency guarantees the creditworthiness of a buyer and, in case of default, assumes the risk posed to the seller. Del credere means believe in Italian. A del credere agency is a type of principal-agent relationship wherein the agent acts not only as a salesperson, or broker, for the principal, but also as a guarantor of credit extended to the buyer also del credere agent only becomes liable to pay the principal after the buyer defaults on payment and is not liable for any other issues that might arise between the buyer and seller.
     
  • Commission Agent

    An international agent who is paid a percentage of the sales that an agent generates. The Agent offers products to potential clients in an assigned territory which is usually a country, strictly in accordance with the sale conditions indicated to it by the Principal. There is no employment relationship between the Agent and the Principal, and their relationship is purely a commercial one. In this regard, on the end of this agreement, the Agent shall not be entitled to receive any compensation. In international trade the relationships between the commercial agent and his clients are governed.
     
  • Factor

    People who are employed by others to sell or purchase goods, who are entrusted with possession of the goods, and who are compensated by either a commission or a fixed salary. A factor is a type of agent who sells goods owned by another, called a principal. The factor engages more frequently in the sale of merchandise than the purchase of goods. A factor is distinguished from a mere agent in that a factor must have possession of the principals property, while an agent need not. The factor-principal relationship is created by a contract. Both parties are expected to comply with the terms of the agreement. The contract is terminable by the factor, by the principal, or by operation of law.

Understanding Rights and Duties of an Agent.

We all know that in the contract of an Agency, there are two people, a principal, and an agent. The principal is the one who appoints the agent to do a particular task in the normal course of business. The principal is bound by the acts of his agents and then he is responsible for all his acts which he did with the third parties, even though the principal is not directly related to the third party and their contracts. So, for this there are some rights and duties mentioned for the agents. There are some rights which the agent will get and some duties which an agent needs to follow.

Rights Of An Agent:

The rights of an agent are mentioned in the Section 217 to Section 223.
Section 217 (Right of retain out of sums received on principal's account.)- This section empowers to retain out any sum which is received on the principal's account during business.

The money is received for the following payments:
  • All the money which is due of himself because of the advances made, he will retain it from the principal's account.
  • The expenses incurred by him for conducting the business.
  • Remuneration payable to him.
    1. Section 219 (Right to remuneration):
      According to the contract between agent and the principal, the agent is entitled to get remuneration. If there is no amount fixed, then he will get it according to the business. But he will not get the amount for the work which is done by misconduct.
       
    2. Section 221 (Rights to lien):
      If the principal doesn't pay the remuneration due to the agent, then the agent can retain the goods or property of the principal. This will be considered as lawful.
       
    3. Section 222 (Right of indemnification for lawful acts):
      If the agents have indemnified the principle against the acts which the principal had not done properly then the principal is entitled to indemnify the agent.
       
    4. Section 223 (Right to be indemnified against consequences of acts done in good faith):
      When the agent has agreed to do something for the principal in good faith, but the principal was illegally related to it then, the principal will indemnify the agent for the damage caused.
       
    5. Section 224 (Non- liability of an employer of agent to do a criminal act):
      When the principal employs the other person to do any criminal/ unlawful act then the principal will only be liable to compensate for that act.
       
    6. Section 225 (Compensation to agent for injury caused by principal's neglect):
      If the agent faces any injury/damage because of the act done by the principal negligently, then the principal it liable to recover him from the damages.

Duties Of An Agent

The duties of an agent are mentioned in Section 211 to Section 216 and 218.

  1. Section 211 (Conducting business according to principal's directions):
    The agent must work in the business according to the directions given by the principal. If the agent fails to do so or occurs any loss out of it, then he will be responsible to accrued/sustain the profit to the principal.
     
  2. Section 212 (Working with skill and diligence):
    In the conduct of the business it is very important for the agent to work with diligence. If he fails to do so and cause any misconduct, then he will be liable to compensate the loss. As the misconduct can be bot direct and indirect so the loss will be compensated during the time of direct misconduct only.
     
  3. Section 213 (Rendering the proper accounts):
    The agent is required to render proper accounts of the principal. As accounts are needed to show the performances of the business. It should also include supporting documents of that account.
     
  4. Section 214 (Communicating with the principal in cases of difficulty):
    If agent is doing that kind of work which requires the permission of the principal, then he should seek his advice or instructions during any difficulty
     
  5. Section 215 (Repudiation of the transaction by the principal):
    If the agent deals with something on his own account during business and does not seek permission of the principal and if the principal comes to know about it, then he can repudiate the transactions. If the agent has dishonestly done any act which is disadvantageous to him.
     
  6. Section 216 (Not to deal with the own account):
    If the agent tries to deal on his own accounts without the knowledge of the principle, then the principal is entitled to claim any kind of benefit which the agent got.
     
  7. Section 218 (Agent's duty to pay sum received for principal):
    The agent is bound to pay all the sum to the principal which he has received on his account.

Essentials of Agency

The major essentials to the contract of agency are as follows:

Competency of the Principal
The requirement for the competency of the principal has been repeated (as Section10 of the "act" also requires for "parties competent to contract") and laid down in the Indian Contract Act under Section 183, where the requirements for a competent principal have been listed down to.
  • Majority, i.e., the principal must have attained the age of majority, under the relevant laws.
  • Sound mind, i.e., the principal must be of sound mind, at least now of appointing the agent.
The basic rule of thumb here is that the principal should be capable of performing the tasks (in law), which he wants his agent to do for him. (Tiwari, 2020). Thus, any appointment of an agent by a minor or a person of unsound mind is explicitly declared to be void.

Competency of the Agent:
The requirements regarding the competency of the agent have been listed down in Section 184 of ICA, 1872, where it has been explicitly mentioned that anyone between the principal and the third party may become an agent, regardless of its age or soundness of his mind. It prescribes that any person, including a minor and an unsound person, may become an agent. However, they (the agent) may not be liable to the principal unless they have attained the age of majority and are of sound mind.

From the general description provided under the section, it can be interpreted that, any person, including ones who themselves might not be competent enough to contract (minors and persons of unsound mind included), have the capacity to represent and bind their principals into direct and valid contractual relationships.

Consideration not required: As per the view of the Indian Contract Act, even consideration is not an essential element for the creation of an Agency; hence no consideration is required to be presented while the formation of an agency.

However, these provisions do not deprive the agent of his legal and justified remunerations unless proven to be specified otherwise in the contract.
These principles of the contract act are based upon the ideologies of Common Law, which specify that no consideration is required to give an individual the authority of an agent, neither does it bar any one of the parties from suing each other, either it be for the negligence on part of the agent or for the recovery of due compensation from the principal. (Shapiro, 2003)

Formation of Agency
The term agency refers to a connection between a principle and an agent in which the principal delegated his or her authority to the agent to act on behalf of the principal. An agency contract governs such a connection. The agent's and principal's rights and responsibilities are governed by the contract's written or implied provisions.

The relationship between principal and agent can be established in one of four ways:

  1. Agency by express agreement
  2. Agency by operation of law
  3. Agency by ratification
  4. Agency by implied authority. (Freienfels, 2018)
  1. Agency by expressed agreement

    Definitions of express and implicit authority are discussed in section 187 of the India Contract Act. An authority is explicit when it is conveyed by words spoken or written.
    E.g., By completing a power of attorney in A's Favour, P authorizes A to handle one of his businesses. P and A's connection as principal and agent has been established by express authorization.

    The use of terms in the agreement is extremely significant in filtering out the agent's true authority. The phrase for and behalf of was used in the vendor agreement in Alwie Handoyo v. Tjong Very Sumito. The requirement of permission in the agent-principal relationship, as well as the use of clear language in the agreement, was reiterated by the Court of Appeal.
     
  2. Agency by operation of law

    Without any special agreement or legal necessity to enter any formalities, the law establishes the connection between Principal and Agent. The Partnership Act is the best example, in which each Partner acts as the firm's agent.
    For example:
    1. When a partnership is formed, each party becomes the agent of the other partner. By operation of law, such an agency is said to have arisen.
    2. By law, the promoters of a corporation are its agents when it is founded.

    When a partnership contract is signed, a fiduciary duty is created automatically. Each partner is now responsible for managing the firm's business and accounting for its activities. Any failure on the part of the partner on these fronts constitutes a violation of fiduciary duty.
     
  3. Agency by ratification

    After completing the required task, the agency can be constituted. This occurs in the event of ratification, in which the principal endorses the act performed on his behalf by another person. This confirmation or approval can be expressed or implicit.
    Section 196 of Indian Contract Act establishes a person's rights in relation to acts performed on his behalf without his consent. This gives the Principal of Election the option of ratifying or disowning such activities.
    For example: The following are some examples from the Indian Contract Act:
    1. Without permission, A purchases stuff for B. After that, B sells them to C on his own account, implying that B approves of A's purchase on his own.
    2. Without B's permission, A lends B's money to C. After that, B accepts C's interest on the money. B's actions imply that the loan has been ratified.

      In the case of Bolton Partner v. Lambert T offered to sell land to the managing director of a company, who accepted without authority on behalf of the firm. T rescinded the offer and informed the employer of the situation. The unauthorized acceptance of the managing director was subsequently ratified by the company. It was determined that the contract is valid. T's retraction of the offer was useless because P ratified on time. The agent is also placed in the same position as if he had authority to perform the act at the time it was performed.
       
  4. Agency by Implied Authority

    The definition of implicit authority is discussed in Section 187 of the Indian Contract Act. When things spoken or written, or the customary way of dealing, are accounted conditions of the situation, such authority is said to be implied.

    For example: P is based in Delhi, but he has a business in Manali and travels there on sometimes. An oversees the company, and P is aware of it. As a result, A has implied permission from P to administer the company in P's name. P, who lives in Delhi, hired A to collect a debt owed to him from T, who lives in Chennai. Now, A is free to pursue any legal action necessary to recover the loan.

    The chairman of the company was deemed to be impliedly accountable as an agent of the company in the Hely-Hutchinson and Freeman & Lockyer case. It was because of the Board's actions that he was appointed as managing director.

Following are three types of implied agency:

  1. Agency by Estoppel:
    It occurs when a person, through his words or actions, leads others to believe that another person is his agent. For example: A consigns things to B for sale and instructs him not to sell at a fixed price. B's instructions are unknown to C, so he enters a contract with B to purchase the goods at a lesser price than the reserved price. By the contract, A is obligated.
     
  2. Agency by necessity:

    It emerges under the following circumstances: first, when acting on behalf of the principal is an actual and concrete necessity. Second, if communicating with the principle and obtaining his approval is impossible, and third, when the conduct is done in the principal's best interests.

Discharge of Contract and Agency

Section 62 of the Indian Contract, 1872 provides that "if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed."

Discharge can happen through various types:

  1. Discharge by Performance:
    When the parties to a contract fulfil the obligations arising under the contract within the time and manner prescribed, then the contract is discharged by performance. Since both, the parties to the contract fulfil their obligation arising under the contract, then it is discharged by performance. Now, discharge by the performance of a contract can be by:
    Actual performance:
    When a party to a contract does what he had undertaken to do under the contract, he is said to have performed his obligation to the contract. Then it becomes the duty of the other party to do what he had agreed to do under the contract. Thus, when both the parties perform their respective obligations, the contract comes to an end.

    Attempted performance:
    Sometimes, the party who is bound to perform a promise under a contract is ready and willing to perform it at the proper time and place but is unable to do so because the other party does not accept the performance. This willingness of the party is known as 'Attempted performance' or 'Offer to perform' or 'Tender'.
     
  2. Discharge by Mutual Agreement:
    If all parties to a contract mutually agree to replace the contract with a new one or annul or remit or alter it, then it leads to a discharge of the original contract due to a mutual agreement.
     
  3. Discharge by the Impossibility of Performance:
    If it is impossible for any of the parties to the contract to perform their obligations, then the impossibility of performance leads to a discharge of the contract. If the impossibility exists from the start, then it is impossibility ab-initio.
     
  4. Discharge of a Contract by Lapse of Time:
    The Limitation Act, 1963 prescribes a specified period for performance of a contract. If the promisor fails to perform and the promisee fails to act within this specified period, then the latter cannot seek remedy through law. It discharges the contract due to the lapse of time.
     
  5. Discharge of a Contract by Operation of law:
    A contract can be discharged by operation of law which includes insolvency or death of the promisor.
     
  6. Discharge by Breach of Contract:
    If a party to a contract fails to perform his obligation according to the time and place specified, then he is said to have committed a breach of contract.
    Also, if a party repudiates a contract before the agreed time of performance of a contract, then he is said to have committed an anticipatory breach of contract.
     
  7. Discharge of a Contract by Remission:
    A promisee can waive or remit the performance of promise of a contract, wholly or in part. He can also extend the time agreed for the performance of the same.
     
  8. Discharge by Non-Provisioning of Facilities:
    In many contracts, the promisee agrees to offer reasonable facilities to the promisor for the performance of the contract. If the promisee fails to do so, then the promisor is discharged of all liabilities arising due to non-performance of the contract.
     
  9. Discharge of Contract due to the Merger of Rights:
    In some situations, it is possible that inferior and superior right coincides in the same person. In such cases, both the rights combine leading to a discharge of the contract governing the inferior rights.

     

Termination of Agency

Termination of agency is addressed in Section 201 of the Indian Contract Act. The principal revoking his authority; the agent renouncing the agency's business; the agency's business being completed; or either the principal or agent dying or becoming of unsound mind; or the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors; or the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors. (Siman, 2019)

Following the various ways in which an agency can be terminated:
  1. Termination of agency is discussed in Section 202 of the Indian Contract Act when the agent has an interest in the subject-matter. In the absence of an express contract, the agency cannot be dissolved to the detriment of the agent's personal interest in the property that is the subject-matter of the agency. For example: A gives B permission to sell A's land and use the revenues to pay himself the obligations owed to him by A. This authority cannot be revoked, nor can it be terminated by his insanity or death.
     
  2. When the principal may revoke the agent's, authority is discussed under Section 203 of the Indian Contract Act. Except as specified in the preceding section, the principal may revoke the authority entrusted to his agent at any moment before the authority has been exercised to bind the principle.
     
  3. Section 204 of Indian Contract Act talks about revocation of authority where it has only been partially exercised.
    The principal cannot revoke his agent's authority after it has been partially exercised in terms of acts and duties arising from acts already performed in the agency. For example: A allows B to purchase 1,000 bales of cotton on behalf of A and pay for them using A's funds still in B's possession. B purchases 1,000 cotton bales in his own name.
     
  4. Compensation for cancellation by principal or renunciation by agent is discussed under Section 205 of the Indian Contract Act. If the agency is to be prolonged for any period, the principal must compensate the agent, or the agent must compensate the principal for any earlier revocation or renunciation of the agency without good cause.
     
  5. Notice of revocation or renunciation is discussed under Section 206 of the Indian Contract Act. A reasonable notice of such revocation or renunciation must be given, or else the damage caused to the principal or agent must be made good by the other.
     
  6. Revocation and renunciation may be declared or implied, according to Section 207 of the Indian Contract Act. Revocation and renunciation can be explicit or implied in the principal's or agent's behavior, respectively. For example: A authorises B to rent A's home. After that, A lets it go on his own. This implies that B's authority has been revoked.
     
  7. Section 208 of the Indian Contract Act discusses when the termination of an agent's authority takes effect as to the agent and as to third parties. The termination of an agent's authority has no effect on the agent before it is known to him, or on third parties before it is known to them. For example: By letter, A tells B to sell some cotton stored in a warehouse in Bombay for him, and then, by letter, revokes his right to sell and directs B to send the cotton to Madras. After receiving the second letter, B enters a contract with C, who is aware of the first but unaware of the second, for the sale of cotton to him. C gives B the money, with which B flees. C's payment is superior to A's.
     
  8.  Section 209 of the Indian Contract Act discusses the agent's obligation upon termination of agency due to the principal's death or insanity. When an agency is ended due to the principal's death or incapacity, the agent is obligated to take all reasonable means for the protection and preservation of the interests entrusted to him on behalf of the late principal's representatives.
     
  9. Section 210 of the Indian Contract Act addresses the termination of a sub-authority. agent's The termination of an agent's authority results in the termination of the authority of all sub-agents designated by him (subject to the regulations stated herein about the termination of an agent's authority).
     
Conclusion
Contracts establishing a relationship of the agency are very common in business law. These can be express or implied. An agency is created when a person delegates his authority to another person, that is, appoints them to do some specific job or a number of them in specified areas of work. Establishment of a principal-agent relationships confers rights and duties upon both the parties.

There are various examples of such a relationship: Insurance agency, advertising agency, travel agency, factors, brokers, del credere agents, etc. The relationship operates in such a way that the agent is responsible for compensating his or her principal for loss or damage resulting from his or her actions and the principal owes his or her agent contractual services.

In addition, the tasks include- the task of following instructions or customs, the task of not delegating his responsibilities, the task of avoiding conflicts of interest, the task of keeping accounts, and the task of sound care and skills.

References:
  1. Wardahbeg, M. (2019, March 26). Law of Agency: What is Principal- Agent relationship? IPleaders.
  2. Alden, J. (2012). Introduction to Agency and the Types of Agents. Lardbucket.
  3. Avtar Singh, Contract & Specific Relief, Page- 433, 12th Edition, EBC Publishing (P) Ltd.
  4. S. (2019, March 21). Termination of Agency under Contract Act. Academike.
  5. Müller-Freienfels, W. (2018, April 13). Agency. Encyclopedia Britannica.
  6. Tiwari, A. (2020). iPleaders. Essentials to the Contract of Agency in ICA 1872
  7. Shapiro, S. (2005) Agency Theory. Annual Review of Sociology, 31 263-284

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