Agency under Contracts

Anonymous

Editor’s note: This paper analyses the role of an agent under the Indian law on contracts. In contracts of agency, there exists a legal relationship between two people where one person acts on behalf of the other. The essence of the principal-agent relationship is that the principal is too busy to do various jobs so he hires an agent to do the same on his behalf. This relationship is based on the maxim “qui facit per alium facit per se”. An agency can be created by express or implied consent, conduct, necessity or by ratification of the agent’s act by the principal. The paper distinguishes between agents and servants, agents and sub-agents, and sub-agents and substituted agents.

Introduction

The paper discusses the characteristics and the role of an agent under the Indian Contract Act, 1872. A section of the paper also creates 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 and a servant. It also differentiates between the role and duties of an agent, a servant, 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. The principal-agent relationship is defined at a later stage in the paper.

In India, the agent and principle share a relationship that is contractual in nature, and therefore it is governed by the terms and conditions of the contract between them. Chapter X of the Indian Contract Act, 1872 provides the basic structure of rules and regulations that basically govern the performance and formation of any type of contract including the agency contract. In agency contracts, there exists a legal relationship 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. The law of agency is based on the Latin maxim “qui facit per alium, facit per se,” which means, “he who acts through another is deemed in law to do it himself[i]. 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”.[ii] The competent agent is legally capable of acting for the principal vis-à-vis the third party. Now who can become an agent? Section 184 answers this question. According to this section any person can become an agent i.e. there is no need to have a contractual capacity to become an agent. Therefore, a minor can also act as an agent. But the minor will not be responsible to his principal.[iii] Different types of commercial agents have been identified under Indian law like brokers, auctioneers, del credere agents, persons entrusted with money for obtaining sales and insurance agents.

Creation of an agency

  • By express or implied contract- A principal may implicitly or expressly employ an agent. The appointment may be expressed in writing or it may be oral.
  • By conduct of party or situation– E.g. estoppel- Whereby a person allows another to act for him to such an extent that a third party reasonably believes that an agency relationship exists between the two.
  • By ratification- assent is given either to an act done by someone who had no previous authority to act or to an act that exceeded the authority granted to an agent.
  • By Necessity- a person acts for another in an emergency situation without express authority to do so.

Duties of an agent

  1. Duty to execute mandate
  2. Duty to follow instructions or customs
  3. Duty of reasonable care and skill
  4. Duty to avoid conflict of interest
  5. Duty not to make secret profit
  6. Duty to remit sums
  7. Duty to maintain accounts
  8. Duty not to delegate

Rights of an agent

  1. Right to remuneration– an agent is entitled to get an agreed remuneration as per the contract. If nothing is mentioned in the contract about remuneration, then he is entitled to a reasonable remuneration. But an agent is not entitled for any remuneration if he is guilty of misconduct in the business of agency.
  2. Right of retainer– an agent has the right to hold his principal’s money till the time his claims, if any, of remuneration or advances are made or expenses occurred during his ordinary course of business as agency are paid.
  3. Right of lien– an agent has the right to hold back or retain goods or other property of the principal received by him, till the time his dues or other payments are made.
  4. Right to indemnity– an agent has the right to indemnity extending to all expenses and losses incurred while conducting his course of business as agency.
  5. Right to compensation– an agent has the right to be compensated for any injury suffered by him due to the negligence of the principal or lack of skill.

Difference between agency and dealership

In the law of agency, the relationship that matters the most between an agent and the principal is the legal relationship. A person cannot become an agent of another merely because he gives advice to the other. Any person acting on behalf of the other cannot be an agent for another until there is an implied or explicit agreement between them, which leads to a legal relationship between them. Also not all those who describe themselves as agents will, in law, be considered as agents. The dealer of a particular make of cars, e.g. Mercedes, may be called as an agent, but the dealer in law is not an agent for the manufacturer. This is because, in practice, the dealer purchases vehicles from the manufactures and sell them on the dealer’s own account.

No privity of contract exists between the manufacturer and the buyer. This example highlights the difference between agency and dealership. An agent markets his principal’s products for a fixed commission, which can be determined according to the contracts. But, a dealer buys the product of a company directly from its manufacturer on its own name. So, rather than matching up the principal and the third party, the dealer acts as a principal and buys or sells stock for the dealer’s own inventory. An agent acts as an intermediary and receives a commission for its services. But, a dealer acts on behalf of the firm rather than acting as an intermediary. As mentioned in the above car example, no contract exists between the dealer and the manufacturer, thus, there is no legal relationship, which is the most important thing in the law of agency.

The description of an agent looks quite similar to that of a servant or a bailee but their duties, role and liabilities are entirely different. The Supreme Court has clearly underlined the distinctions between an agent and a servant in the case Lakshminarayan Ram Gopal & Sons v. Hyderabad Government.[iv]

The table draws a distinction between an agent and a servant:

Agent Servant
An agent is authorized to act on behalf of his principal and create contractual obligations between the principal and a third party. A servant does not have the authority to create contractual obligations between the principal and a third party.
The principal has the authority to direct the agent as to what he has to do but he cannot direct how it is to be done. The master can direct a servant as to what has to be done and also how it should be done
An agent is paid in terms of commission A servant gets his salary or wages.
An agent can work for different principals at the same time A servant usually works under one master at a given point of time.
The agent offers and accepts new proposals from the third party on behalf of his principal and thus new legal relations are created in law of agency. A servant cannot create any such legal relations

Section 191 of the Indian Contract Act, 1872 defines sub-agent. According to this section “a sub-agent is a person employed by, and acting under the control of, the original agent in the business of the agency.”[v] The appointment of an agent may be done properly or improperly, which determines the relationship between the principal and the sub-agent.

Thus there are two types of delegation–

  1. Proper delegation– This comes under section 192 of the Indian Contract Act, 1872. This is when an agent having the authority to do so, appoints a sub-agent.
  2. Improper delegation– This comes under section193 of the Indian Contract Act, 1872. This is when an agent without any authority appoints a sub-agent.

The table shows a distinction between an agent and a sub-agent:

Agent Sub-agent
An agent is appointed by a principal and is under his control. A sub-agent is appointed by an agent and as such is under the control of the agent.
An agent acts under the principal. A sub-agent acts under an agent.
A privity of contract exists between a principal and an agent. No privity of contract exists between a principal and a sub-agent.
An agent can ask for remuneration from the principal. A sub-agent cannot ask for remuneration from the principal.

Sections 194 and 195 talk about substituted agents. When an agent having the authority to do so, names another person to act for the principal in the business of the agency, then such a person is called a substituted agent and not a sub-agent. Thus a contractual relation comes in existence between the principal and the substitute agent and therefore the substituted agent is directly liable to the principal to perform his duties.

The distinction between a sub-agent and a substituted agent is important because an agent is liable in relation to the acts of a sub-agent, but an agent carries no liability to the principal for the acts of the substituted agent.

The table shows a distinction between a sub-agent and a substituted agent:

Sub-agent Substituted agent
An agent appoints a sub-agent and therefore a sub-agent is under the control of an agent. A substituted agent is only named by the agent but is under the control of the principal.
A sub-agent acts under the agent. A substituted agent acts independently for his principal.
A sub-agent cannot be held liable by the principal, except in case of fraud. A substituted agent can be held liable by his principal.
A sub-agent is not entitled to any remuneration from the principal. A substituted agent can ask for his remuneration from his principal.
No contract exists between a sub-agent and the principal. A contractual relationship exists between the substituted agent and the principal.
An agent is liable for the acts of the sub-agent. An agent is not liable for the acts of substituted agent.

Formatted on 19th March 2019.

Footnotes

[i] Agency | LII / Legal Information Institute, http://www.law.cornell.edu/wex/agency (last visited Nov 22, 2012)

[ii] Section 182, Indian Contract Act, 1872

[iii] Foreman v Great Western Rly Co, (1878) 38 LT 851.

[iv] AIR 1954 SC 364

[v] Section 191, Indian Contract Act, 1872

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