In the modern day society with a lot of advancements and changes taking place
in every field almost every minute, the field of law is no exception. A lot of
intricacies have come up in the formation of a valid contract and same is the
case with a contract of agency.
A contract of agency has three fundamental
constituents- a principal, an agent and a third party. The role played by an
agent in the entire process is of much importance and relevance in the
successful carrying out of the business. Although the agent simply represents
his principal in the conduct of the business, the role played by him is
significant as it is him who has the power to affect the legal relations of the
principal with third persons.
The Indian Contract Act, 1872 lays down a set of
guidelines which highlight the powers, rights and duties of an agent. In the
paper at hand, an attempt shall be made to highlight the obligations of an agent
in the contract of agency under the Indian Contract Act and a comparison of the
same with the English laws.
Who is an Agent?
The word agent
is used to refer to various kinds of activity. In the
famous case of Kennedy v. De Trafford
, Lord Herschell observed No
word is more commonly and constantly abused than the word agent. A person may
be spoken of as an agent and no doubt in popular sense of the word he may
properly be said to be an agent, although when it is attempted to suggest that
he is an agent under such circumstances as create the legal obligations
attaching to agency that use of the word is only misleading
. Often in the field
of business, the word agent
is used in a complimentary sense and not in the
legal sense of the word.
Section 182 of the Indian Contract Act, 1872, opens, by defining who an agent
and a principal
is. It says, 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 represented, is called the principal
definition of an agent, in short, subtly tries to bring out the difference
between the legal positions of an agent from that of any ordinary person who is
employed to do an act. The essence of the matter lies in the fact that in the
case of an agent, it is the principal himself who authorises the agent to
represent him or act on his behalf and while doing so, he can bring the
principal into contractual relations with a third person.
J. Ramaswami of the Madras High Court tried to explain the concept of agency in
the case of P. Krishna Bhatta v Mundila Ganpathi Bhatta
 where he said
that in legal terms and phraseology, any person who acts for another cannot be
called an agent. If such a thing happens, a servant rendering his services to
his master; or a person tilling anothers field or a person working in somebody
elses shop or factory would be considered as their agent.
However, it is not so. It is only when a person acts as a representative of
another in business dealings and negotiations, between that other
person and a
third party, he is legally an agent of the person on whose behalf he is acting.
To put it succinctly, it may be described as the relationship between a
principal and an agent whereby the principal, expressly or implicitly,
authorizes the agent to act on his or her behalf and the agent is, thus,
empowered to negotiate on behalf of the principal or bring him or her and third
parties into a contractual relationship.
The same observation was made by the Supreme Court in Syed Abdul Khader v
 where it said that “the expression agency is used to connote
the relation which exists where one person has an authority or capacity to
create legal relations between a person occupying the position of principal and
a third party”. An agent is simply an extended hand of the principal and cannot
claim independent rights.
What is a contract of agency?
It is often believed that until 13th century, agency was not a part of the
common law system. There were three main factors that helped in the effective
development of this concept of agency
. These factors can be pointed out as:
the emergence of attorneys to deal with legal matters; the influence of the
canon law; some of the customs of the merchants who were engaged in healthy
trade in Europe. The influence of mercantile law which was greatly contributing
to the development of commercial activities, also helped the common law to
develop the concept that a principal was in direct contractual relation with
third parties and such a principle formed the basis for the evolution of the
theory of agency
The origin of such a principle, which said that the principal is in direct
contractual relationship with third parties in any contract entered into by his
agent on his behalf, emerged from the case of Costace v Forteye. This case was
decided in 1389 by the majors and elder men based in the city of London. What
happened in this particular case was that an apprentice and attorney of a London
merchant bought wine from a French merchant for his master (Fortenye) and when
he failed to satisfy the full payment to the seller, the agent was committed to
prison. However, the agent (apprentice) i.e. Costance, said that it was his
master who had sent him to buy the wine and then the master had approved the
The Mayor then ordered that the master (defendant) should satisfy the full
payment to the French seller and also ordered that the plaintiff should be set
free from the prison. The Mayor based his decision on the ground that the
apprentice had made the purchase for the use and benefit of the master. The
point that can be understood from the above case is that, a direct claim by a
third party was admitted against the principal for contracts made by his agent
for the benefit of the principal
Thus, a contract of agency is essentially one where an agent is authorized by
the principal to act on his behalf or represent him and in the process, bring
the principal into contractual relations with third persons.
Test for determining the existence of agency
In Loon Karan Sohanlal v. John & Co
., Dhawan J. of the Allahabad High
Court put forward the test for determining whether there exists the relationship
of agency. He explained that in American Jurisprudence it is clearly mentioned
that mere use of the words agent
does not by itself create a
relationship of agency and the same law is followed in India. He added that it
has been held in several decisions that just because the parties have named
their relationship as agency
is not a conclusive proof unless the incidence of
this relationship, as disclosed by evidence, justifies a finding of agency. He
also said that the courts, while examining the evidence, must try to find out
the true nature of the relationship and the functions and powers assigned to the
Applying this test, it was held that a procurement agent
is not an agent in
the legal sense of the term as he does not represent another and is directed to
do an act on a commission.
For the creation of a legally valid contract of agency, there are certain
requirements that need to be fulfilled.
The Indian Contract Act provides that in order to take up the role of a
principal, a person should have attained the age of majority according to the
law to which he is subject and should be a person of a sound mind.
Another point highlighted by this act is that a minor cannot take up the
position of a principal. This is based on the simple logic that since a minor
cannot enter into a contract, the appointment of an agent by him under a
contract of agency would also be void.
However, there are certain exceptions to this rule. In cases where the minor is
capable of binding himself by the contract, he may appoint an agent to enter
into a contract on his behalf. Moreover, there is nothing in this act that
prevents the guardian of a minor from appointing an agent for him. Also, no
consideration is necessary for a contract of agency.
As far as the question whether it is compulsory for an agent to be competent to
contract is concerned, it is clearly mentioned in section 184 that as between
the principal and third persons any person may become an agent
. This is mainly
because an agent under ordinary circumstances incurs no personal liability while
acting on behalf of his principle and thus it is not compulsory that he should
be competent to contract.
Same is the condition under the English law where it is possible for a person to
contract through a minor but the minor will not be responsible to his
principal. In case of a company, it may act as an agent beyond its
Whenever a contract of agency is entered into, it is the principal and the agent
who predetermine their mutual rights and obligations. Their mutual undertakings
may be expressed or implied as can be inferred to a greater or less extent, from
the nature and the circumstances of the particular agency. The obligations that
are peculiar of certain categories of agents, such as factors and brokers, are
defined by their usage. However, there exist certain duties of general nature
that are generally imposed by law upon every agent unless excluded or modified
by a special contract. We shall now be dealing with some of such duties in
Duties of an agent
1. Duty to execute mandate- It is the foremost duty of an agent to carry
out the mandates of his principal. He should perform the duty assigned to him in
the best possible manner and in case of any failure on his part, he would be
held absolutely liable for the principals loss.
In England, the rule of equity which is followed in almost all the cases states
that, if an order is sent by a principal to an agent to make an insurance for
him and the agent after charging the principal, never in fact makes the
insurance, the agent would be considered as the insurer himself
. In such
cases, the agent is usually held liable to the principal for the amount lost due
to the absence of insurance.
The same position was reiterated by the Supreme Court in Pannalal Jankidas v
, where the agent who was asked by the principal to get the
goods insured and in fact charged the premium from the principal but never got
the insurance, was held liable to compensate the principal when the goods were
lost in an explosion.
2. Duty to follow Instructions or Customs- Section 211 of the Indian
Contract Act provides that it is the paramount duty of the agent to act
according to the instructions of the principal and to regulate his activities in
such a manner so as not to go beyond his authority. In Bostock v Jardine
it was clearly laid down that any disobedience of or departure from the
instructions is enough to make the agent absolutely liable for the loss.
Whenever the directions are not clearly mentioned, the agent is supposed to
follow the customs which are most prevalent among businesses of the same kind
and in the place where the agent conducts such businesses.
The English law of agency follows like provisions. It provides that where an
agent acts in contravention of the instructions of his principal, if any loss is
sustained in the process, he is liable to make good for it. In Lilley v
Doubleday, where the agent did not act according to the instructions of the
principal and the goods were destroyed, he was held liable.
It is held that an estate agent cannot make a contract with a third party that
would be binding upon his principal. This was first laid down in the case of John
In USA too, the provisions are somewhat similar and it is the agents supreme
duty to pursue the terms of his authority and adhere strictly to the
instructions given by his principal. Any voluntary deviation by the agent from
the instructions provided, is at his own peril, and, subject to the exceptions
hereinafter stated, renders him liable to the principal for any loss resulting
unless the principal, with full knowledge of the facts, ratifies such acts.
Certain exceptions present under the law of agency in USA where an agent is not
required to perform this duty are:-
(a) Where obedience to such duty would require him to perform an illegal or
(b) Where a departure from instructions or mandates is justified by the
occurrence of an unforeseen emergency, or the performance of which has, without
the default of the agent, become impossible.
(c) Where obedience would impair his security for advances made upon goods
consigned to him for sale.
3. Duty of reasonable care and skill- Section 212 of the Indian Contract
Act states that in a contract of agency, an agent is required to conduct the
business with such skill and diligence as is usually observed by persons engaged
in businesses of the same kind. He is supposed to perform his acts efficiently
and diligently and in case of his failure to do so, he is liable to make
compensation to his principal in respect of the direct consequences of his
own neglect, want of skill or misconduct. However, he cannot be made liable with
respect to the losses or damages which are indirectly or remotely caused by such
neglect, want of skill or misconduct. Also, if the agent satisfies the standards
that are required in the kind of business he is engaged in, he will not be held
liable to compensate the principal.
The English law also follows the same line and says that the kind of care and
skill which an agent is supposed to bestow depends on the nature of his
profession. For instance, an insurance agent is must make sure that the
clauses usually required for the protection of the principal are present in the
policy. Similarly, an estate agent must be well aware of the laws of the land
and also must take care to ensure the solvency of the tenant. The English
Act also lays down that a person who is acting as an agent should command enough
legal knowledge to sufficiently safeguard the interests of the principal in the
course of the agency.
Under the US law of agency, it is said that when an agent is appointed, he
impliedly undertakes that he will exercise reasonable skill, care, and diligence
in the performance of the agency. As a rule, it is laid down that, where an
agent is receiving compensation for the services he is rendering, that
particular degree of skill, care, and diligence is required, and suffices, which
is usually exercised by persons of common capacity and prudence who are engaged
in similar transactions.
Obviously, the degree of skill, care, and diligence with which an agent
undertakes to perform his duty, is a question of fact, depending, not only upon
the nature of the act to be performed, but upon all the circumstances of the
case such as what are the instructions communicated, the usages of trade and the
customs followed in that business, the manner of the previous dealings, and the
degree of skill which the agent professes
Thus, if the transaction is of a nature that requires expert skill and
knowledge, the agent impliedly undertakes, if a different intention does not
appear from his part that he will exercise the skill and knowledge of an
expert On the other hand, if the agent does not profess to be an expert, and
the principal, being well aware of this fact, nevertheless finds him suitable
for the duty, it will not be implied that the agent undertook to exercise the
skill and knowledge of an expert, nor will the agent be held liable if his
performance is not of a higher standard upon which the principal has reason to
Section 212 covers another aspect which says that it is the duty of an agent to
use all reasonable diligence to communicate with the principal in cases of
difficulty and try his best to seek his instructions. In all such situations
where the agent is misinforming the principal and a loss occurs due to his
misconduct, he is liable to the principal as was held in Jayabharthi Corp v.
Sv P.N. Rajasekhara Nadar
4. Duty to avoid conflict of interest- This duty deals with two aspects.
Firstly, as described in Section 215, it is said that in situations where the
agent acts on his own without obtaining any permission of the principal or
acquainting him with the true state of affairs or if the principal comes to know
that certain material facts were dishonestly concealed from him or the agent
dealt with the business in such a manner so as to be disadvantageous to the
principal, the principal has all the rights to repudiate the transaction.
However, such repudiation must be made within reasonable time after discovering
The second aspect is dealt with by section 216 whenever the agent without the
knowledge of his principal engages in transactions on his own account rather
than on the account of the principal and makes benefit out of such transactions,
the principal is entitled to claim any such benefit from the agent.
Similar laws are followed in England and it is explained that since an agent is
in a fiduciary relationship with the principal, it is his duty not to do any
such thing that would bring into conflict his own personal interest and his duty
towards his principal.
Under the US law, the provision is that whenever the agent assumes to deal with
himself in a manner in which he is likely to deal with third persons, then in
such a situation, his own interest and that of his principal necessarily become
antagonistic and the principal may repudiate such a transaction irrespective of
the fact whether or not it has resulted in a loss to him and without regard to
it being bona fide.
5. Duty not to make secret profit- The Indian law of agency provides that
it is the duty of an agent not to make secret profits. Now, the question is,
what is secret profit
? To put it simply, it means any benefit and advantage
that is obtained by the agent which is much more than his agreed remuneration
and which he would never have made had he not been that agent. The principal is
entitled to claim interest on the illicit profit made by the agent.
In England, accepting bribe
falls within the term profit
of this sort.
In Andrews v Ramsay, an auctioneer who received who received a commission
from the buyer in addition to his usual remuneration from his principal, he was
bound to give the commission to the principal. Also in cases where the agent
sells his own goods or stock to the principal without making him aware of this
fact and charges the prevailing market price, it is held that he is liable to
account for any profit that he made in the transaction.
However, in cases where an agent merely makes use of the knowledge received in
the course of business and makes some profit out of it, he is not liable to the
principal if he neither makes any use of the principals property nor diverts
any of his opportunities.
The position in US is that an agent who is employed to buy on behalf of the
principal may not buy from himself. Also, an agent who is appointed to sell
cannot himself become the purchaser. It is also clearly stated that any sort
of evidence of custom cannot be admitted to convert a broker who is employed to
buy for his employer into a principal to sell to him unless the employer has
knowledge of such an arrangement and assents to the dealing on the footing of
such custom. It is also laid down that agent will not be permitted to
accomplish indirectly what he is not allowed to do directly; for instance by
selling to a third person acting in his interest.
6. Duty to remit sums- Section 218 of the Indian Contract Act enumerates
yet another duty of an agent. It states that an agent is bound to pay all sums
received on account of his principal subject to certain deductions. In BholaNath
v Mulchand, it was held that in case an agent is receiving money on behalf
of his principal under a contract that is void or illegal, he simply cannot use
the illegality of the contract to withhold the payment to his principal which
illegality has been removed by the other party by paying the amount.
7. Duty to maintain accounts- An agent is required to render true and
complete accounts to his principal as and when demanded. This is important
because it helps the agent to perform his other duties well; for instance this
helps him to remit proper sums to his principal. It is pertinent to note
that although there is no such provision in this Act which enables an agent to
institute a suit against the principal for accounts, the Supreme Court in Narandas
Morardas Gajiwala v S.P.A.M Papammal
, that the provisions of the
Contract Act are not exhaustive in such regard and it is an equitable remedy
available with an agent to sue the principal under certain circumstances.
In a Madras High Court Case, a mill which was being run by an agent was
taken over by the owners and it was claimed by the agent that he lost the
accounts in the process of take-over and thus claimed accounts from the
principal. However, since he was not able to prove that he had actually lost the
accounts, the court did not grant him any relief.
In Yasuda Fire and Marine Insurance Co. v. Orion Marine Insurance
Underwriting Agency Ltd
., it was held that “the obligation to provide an
accurate account in the fullest sense arises by reason of the fact that the
agent has been entrusted with the authority to bind the principal to
transactions with third parties and the principal is entitled to know what his
personal contractual rights and duties are in relation to those third parties as
well as what he is entitled to receive by way of payment from the agent”.
8. Duty not to delegate- The well-known maxim of Delegatus non potest
delegare is often used under the law of agency. This means that an agent who is
appointed to do a particular work cannot further delegate it to another person.
This is mainly because a particular person is chosen as an agent by the
principal for the simple reason that he reposes trust and confidence in such a
In the English case of John McCain and Co. v Pow, it was clearly laid down
that unless the principal specifically authorizes the estate agent to delegate
the work to another person or to appoint a sub-agent, he has no right to do so.
Section 190 clearly explains the conditions under which an agent is not allowed
to delegate his work to another. However, the same section puts forward a few
exceptions to this general principle. Some of these exceptions can be enumerated
a) Nature of work- Sometimes the nature of the work is such that it is
important for the agent to appoint a sub-agent. For instance, in a particular
case, a banker who was authorised to let out a house and collect rents was
allowed to delegate this duty to a sub-agent.
b) Trade custom- In cases where there exists a trade custom to the effect
that a sub-agent may be appointed, in such cases he can be appointed and the
work can be delegated to him.
c) Ministerial action- An agent can delegate such acts to a sub-agent which
are purely ministerial in nature. For instance, the authority to sign.
d) Principals Consent- Yet another exception where an agent can delegate
his duty to a sub-agent is with the principals consent. The principal may give
such a consent expressly or impliedly.
 Kennedy v. De Trafford, 1897 AC 180, 188(HL)
 HALSBURYS LAWS OF ENGLAND, (2nd Edn) 1, para 194(g).
 Mohesh Chandra Basu v Radha Kishore Bhattacharjee, (1907-08) 12 CWN 28, 32.
 P. Krishna Bhatta v Mundila Ganpathi Bhatta, AIR 1955 Mad 648.
 Syed Abdul Khader v Rami Reddy, (1979) 2 SCC 601.
 National Textile Corporation v Nareshkumar Badrikumar Jagad, (2011) 12 SCC
 Willam HoldsworthSir, A History of English Law vol 8, 1966, pg 223.
 CIT v Ogale Glass Works Limited, AIR 1954 SC 429.
 Loon Karan Sohanlal v. John & Co., AIR 1967 All 308.
 State of Madras v. Jayalakshmi Rice Mill Contractor Co., ILR 1958 AP 671.
 Section 183, Indian Contract Act, 1872.
 Shephard v. Cartwright, (1953) 1 WLR 460.
 Beaven v Webb, (1901) 2 Ch 59,77.
 Madanlal Dhariwal v Bherulal, AIR 1965 Mys 272.
 Section 185, Indian Contract Act, 1872.
 Mohomedally Ebrahim Pirkhan v Schiller, ILR (1889) 13 Bom 470.
 Foreman v Great Western Rly Co, (1878) 38 LT 851.
 Bell Houses Ltd. v. City Wall Properties Ltd.,(1966) 2 WLR 1323.
 Tichel v Short, 28 ER 154.
 Smith v Lascelles, (1788) 2 TR 187.
 Pannalal Jankidas v Mohanlal, AIR 1951 SC 144, 146.
 Bostock v Jardine, (1865) 3 H&C 700.
 Ferrer v Robbins, (1835) 2 CM & R 152.
 Lilley v Doubleday, (1881) 7 QBD 510.
 John v Philip, (1987)2 KLT 50.
 Agnew v Indian Carrying Co. (1865)2 Mad HC Cases 449.
 Krishna Chandra Ganpati v K. Hanumantha Rao, AIR 1950 Ori 241.
 Raja Ram v Abdul Rashim, (1973) 9 SLR 77.
 Lee v Walker, (1872) LR 7 CP 121.
 Heys v Tindal, (1861) 1 B&S 296.
 Park v Hammond, 128 ER 1127.
 Heinemann v. Heard, 50 N. Y. 35
 Page v. Wells, 37 Mich. 415
 Stanton v. Bell, 11 Am. Dec. 744
 Small v. Howard, 35 Am. Rep. 363
 Jayabharthi Corp v. Sv P.N. Rajasekhara Nadar, AIR 1992 SC 596.
 Firm of Rameshwardas Benarshidas v Tansookrai Bashesharilal Firm, AIR 1927
 Armstrong v Jackson, (1917) 2 KB 822
 De Busche v Alt, (1878) 8 Ch D 828.
 Michoud v. Girod, 4 How. (U. S.) 503
 Tota Ram v Kunwar Zalim Singh, AIR 1940 All 69.
 Harrington v Victoria Graving Dock Co, (1878) 3 QBD 549.
Andrews v Ramsay, (1903) 2 KB 635.
 Bentley v Craven, (1853) 18 Beav 75.
 Nordisk Insulinlaboratorium v. Gorgate Products Ltd., (1953) 1 All ER 986
 Conkey v. Bond, 36 N. Y. 427
 Bain v. Brown, 56 N. Y. 285;
 Butcher v. Krauth, 14 Bush (Ky.) 713
 Bholanath v. Mulchand, ILR (1901-03) 25 All 639.
 S. Paul & Co. v State of Tripura, AIR 1984 Cal 378.
 Narandas Morardas Gajiwala v S.P.A.M Papammal, AIR 1967 SC 333.
 State of TN v S. Alagirsubramaniam Chettiar, AIR 1988 Mad 248.
 Yasuda Fire and Marine Insurance Co. v Orion Marine Insurance Underwriting
Agency Ltd. (1995) 3 All ER 211.
 John McCain and Co. v Pow, (1975) 1 All ER 129 (CA).
 Mohinder v. Mohan, AIR 1939 All 188.
 Moon v. Witney Union, (1837) 43 RR 802.
 Mason v Joseph, (1804) 1 Smith KB 406.