By Dipti Khatri, UPES Dehradoon
Editor’s Note: In India, section 182 of the Contract Act 1872 defines “Agent is a person employed to do any act for another in dealing with third parties”. An agent in commercial law (also referred to as a manager) is a person who is authorized to act on behalf of another (called the principal or client) to create a legal relationship with a third party. The principal has to perform his/her own part of the agency in primarily two ways. The principal has to pay or where necessary indemnify the agent for the services rendered or expenses incurred respectively. This paper deals with a critical analysis of this topic.
In India, Section 182 of the Contract Act, 1872, defines “Agent is a person employed to do any act for another in dealing with third parties”. An agent in commercial law (also referred to as a manager) is a person who is authorized to act on behalf of another (called the principal or client) to create a legal relationship with a third party. The principal has to perform his/her own part of the agency in primarily two ways. The principal has to pay or where necessary indemnify the agent for the services rendered or expenses incurred respectively.
The Indian Contract Act of 1872, Sec.183 and 184 deals with the appointment of agent and who may be called as agent. There may be different kinds of agent such as banker, factor, advocate etc. According to the extent of authority there may be general, special, universal agent. There are various rights which are given to agent and they can also be sued on certain grounds. There are certain duties of agents such as execution of instructions, exercise of skill and care, act in good faith etc. Likewise principal also has certain duties such as payment of agent, indemnification of agent. Various case laws has been dealt to explain these matters .Agents owes fiduciary duties to the principal such as loyalty, confidentiality. A real estate broker who becomes an agent of a seller or buyer is deemed to be a fiduciary.
Agent is authorized to create a contract between his principal and third party. An agent can-be sued on his personal liabilities and the authority of an agent can be revoked.
Agent and Principal
An “agent” is a person employed to do any act for another,or to represent another in dealing with the third person.
The person for whom such act is done, or who is represented,is called the principal.
Thus,what distinguishes an agent from a person appointed to do any act is the agent’s representative capacity coupled with a power to affect the legal relationship of the principal with the third person.It is only when he acts as a representative of the other in business negotiations,that is to say,in the creation,modification or termination of contractual obligations,between that other and third persons,that he is an agent.Representative character and derivative authority may briefly be said to be the distinguishing feature.
To know whether a person occupies the position of an agent or not,the law has to go by his functions.The law has to see the substance of the transaction and not the parties terminology.The relevance of the expression used is an agreement has often been in connection with the hire purchase transactions.[i]
WHO MAY EMPLOY AN AGENT?
Any person who is of the age of majority according to the law to which he is subject,and who is of sound mind, may employ an agent. In Shepherd v.Cartwright[ii] it was observed:
“An infant cannot appoint an agent to act for hum neither by means of a power of attorney,nor by any other means.If he purports to appoint an agent,not only is the appointment itself void,but everything done by the agent on behalf of the infant is also void and incapable of ratification.
Further “there is nothing in the act which prohibits the guardian of a minor from appointing the agent for him”.
WHO MAY BE AN AGENT?
Sec.184 lays down the concept of who may be an agent. The agent may not be competent to contract. As between the principal and the third person any person may become an agent,but no person who is not of sound mind can become an agent,so as to be responsible to his principal according to the provisions in that behalf therein.
Ordinarily,an agent occupies no personal liability while contracting for his principal and therefore, it is not necessary,that he should be competent to contract.
Thus, a person can contract with a minor agent but the minor agent will not be responsible to the principal.
According to Section 185 of Indian Contract Act, Generally an agent is remunerated by a way of commission for services rendered,but no consideration is immediately necessary at the time of appointment.[iii]
Kinds of Agent:
Following are kind of agent.
(I) Del-credere agent:
A del-credere agent is an agent, who guarantees to his principal that person to whom he sells will pay for that, if he will not pay, he will be liable. It is a type of mercantile agent.
A factor is an agent to whom goods are entrusted for sale.
(III) Mercantile agent:
A mercantile agent is the person who has authority to sell the goods or to buy goods or to raise money on the security of goods.
The relationship between banker and his customer is that of debtor and creditor.
An auctioneer is an agent who is authorized to sell goods to the highest bidder at a public sale for commission.
A sub-agent is a person employed by and acting under the control of the original agent in the business of agency.
A broker is an agent employed for buying or selling the goods or other property. He simply acts between the two parties.
He is an agent who, busy or sells on behalf of his principal.
An advocate also acts an agent. He appears on behalf of principal in the court.
Who acts jointly is called co-agent.[iv]
Types of Agents
The general agent possesses the authority to carry out a broad range of transactions in the name and on behalf of the principal. The general agent may be the manager of a business or may have a more limited but nevertheless ongoing role—for example, as a purchasing agent or as a life insurance agent authorized to sign up customers for the home office.
The special agent is one who has authority to act only in a specifically designated instance or in a specifically designated set of transactions. For example, a real estate broker is usually a special agent hired to find a buyer for the principal’s land.
Agency Coupled with an Interest
An agent whose reimbursement depends on his continuing to have the authority to act as an agent is said to have an agency coupled with an interest if he has a property interest in the business.
DUTIES OF AGENT
An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship. This duty supplements the duties created by an agency contract. A fiduciary duty exists because agency is a relationship of trust and confidence. The principal’s many remedies for an agent’s breach of her fiduciary duty include termination of the agency and recovery of damages from the agent.
Duties to execute mandate:
The first and the foremost duty of every agent is to carry out the mandate of this principal.He should perform the work which he has been appointed to do.Any failure in this respect would make the agent absolutely liable for the principal’s loss.Thus it had been held in number of cases that:
“The rule of equity is,that if an order is sent by a principal to a factor to make an insurance,and he charges his principal,as if it was made,if he never in fact made that insurance, he is considered as the insurer himself.”
In such cases the agent is held liable to the principal for the amount which would have been recovered if the goods had been insured.Thus,for example,in Pannalal Jankidas v. Mohanlal:[v]
A commission agent purchased goods for his principal and stored them in a godown pending their dispatch.The agent was under instruction to insure them.He actually charged the premium for insurance,but failed to insure the goods.The goods were lost in an explosion in the Bombay harbor.
The agent was held liable to compensate the principal for his lossminus the amount received under the Bombay Explosion Ordinance,1944, under which the Government paid compensation up to fifty per cent in respect of the uninsured merchandise lost in the explosion.
2.Duties to follow Instructions or Customs:
When an agent is appointed to facilitate or negotiate a transaction on behalf of the principal, the agent owes a duty to the principal to act in the principal’s best interests within the authority of the agent.
In practice, the duty to act in the best interests of the principal requires the agent to use his due diligence and skill to negotiate terms of a transaction on behalf of his principal with a third party to the greatest advantage of his principal in the circumstances.
According to Section 211 an agent that an agent is bound to conduct the business of his principal according to the directions given by the principal and to keep himself within the confines of his authority.In the absence of directions,the agent has to follow the custom which prevails in businesses of the same kind and at the place where the agent conducts such businesses.When the agent acts otherwise,if any loss be sustained,he must make it good to his principal,and,if any profit accrues,he must account for it.Thus for example,in Liley v.Doubleday:[vi]
An agent was instructed to warehouse his principal’s goods at a particular place.He placed a part of them at a different warehouse which was equally safe.But the goods were destroyed without negligence.
The agent was held liable for the loss. Any disobedience, or departure from,the instructions make the agent absolutely liable for the loss.
Where a principal had given instructions of ambiguous nature which were capable of two meaning,he was not permitted to argue as against the agent that he should have read the instruction in the other sense than what he actually did.
In the absence of instructions,business customs must be followed.Where,for example, the customs of a trade require that goods should not be sold on credit or in return for a negotiable instrument; the agent should not do so.If he does so,he would be liable to the principal for any loss resulting from the transaction.
Because an agent acts under the principal’s control and for the principal’s benefit, she has a duty to act within her actual authority and to obey the principal’s reasonable instructions for carrying out the agency business.
There are exceptions to the duty to obey instructions. A gratuitous agent need not obey his principal’s order to continue to act as an agent. Also, agents generally have no duty to obey orders to behave illegally or unethically. Thus, a sales agent need not follow directions to misrepresent the quality of the principal’s goods, and professionals such as attorneys and accountants are not obligated to obey directions that conflict with the ethical rules of their professions.
Usually a principal’s instructions are clear and can be easily followed. Sometimes, however, the instructions are ambiguous. For example, an instruction may have terms an agent does not understand. Or perhaps a cell phone conversation may be garbled due to poor signal strength. When a principal’s instructions are unclear, the agent has a duty to communicate with the principal to clarify the instructions.[vii]
3. Duty of reasonable care and skill
Section 212 lays down the standard of care and skill required by an agent.
a.Common law requires an agent to act with due care and skill in performing his duties. Agents who fail to meet this standard are prima facie negligent.
b.Generally speaking, an agent in a certain profession, trade or calling who performs his duty with the degree of care and skill expected of a reasonable, average member of the relevant profession, trade or calling meets the requisite standard.
The Agent is bound to act with reasonable diligence,and to use such skill as he possesses;and to make compensation to his principal in respect of the direct consequences of his neglect,want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect,want of skill,or misconduct.
If the principal suffers any loss owing to the agent’s want of care or skill, the agent must compensate the principal for such loss .An agent is liable to his principal for the direct consequences.If, for example,an agent fails to send the principal’s money in time,he may be liable for the money and the loss of interest,but not if the principal becomes insolvent by that reason.
Keppel v.Wheeler An agent was appointed to sell a house.He received as offer which he promptly communicated to his principal.The latter accepted it provisionally “subject to contract”.Subsequently the agent received a higher offer which he failed to pass on to the principal.This resulted in final acceptance of the first offer in ignorance of the second.The agent was held liable to make good the principal’s loss in terms of the difference in the two prices.[viii]
The meaning “direct consequences”has been explained by Pannalal Jankidas v Mohanlal:
An agent, having been instructed to insure certain goods, failed to do so.The goods were lost in an explosion at the docks.Even if the agent had taken out a fire insurance policy in the usual form it would not have covered a loss of this kind,as fire due to explosion would have been an expected peril.But the Bombay Government passé an ordinance under which it overtook to pay half loss in cases of uninsured goods.Thus the principal got only half of what he would have got if the goods had been insured.
The agent contended that as the passing of the ordinance could not have been anticipated,the loss was too remote.But, it was held by a majority, that the loss was the direct result of the agent’s negligence.
A paid agent must act with the care, competence, and diligence normally exercised by agents in similar circumstances. Paid agents who represent that they possess a higher than customary level of skill may be held to a correspondingly higher standard of performance. Similarly, an agent’s duty may change if the principal and the agent agree that the agent must possess and exercise greater or lesser than customary care and skill.
Agent is also under the duty to communicate with the principal- It is the duty of an agent, in cases of difficulty, to use all reasonable diligence of communicating with his principal, and in seeking to obtain his instructions. Unless otherwise agreed, an agent may not use or communicate confidential information of the principal for the agent’s own purpose or that of a third party.
Confidential information is the principal’s information entrusted by the principal to the agent for purposes of the agent carrying out her duties. Confidential information includes facts that are valuable to the principal because they are not widely known or that would harm the principal’s business if they became widely known. Examples include the principal’s business plans, financial condition, contract bids, technological discoveries, manufacturing methods, customer files, and other trade secrets.[ix]
In the absence of an agreement to the contrary, after the agency ends almost all fiduciary duties terminate. For example, an agent may compete with her principal after termination of the agency. As the following ABKCO case illustrates, however, the duty not to use or disclose confidential information continues after the agency ends. The former agent may, however, utilize general knowledge and skills acquired during the agency.
4. DUTY TO AVOID CONFLICT OF INTEREST
An agent whose interest’s conflict with the principal’s interests may be unable to represent his principal effectively. Therefore, an agent may not acquire a material benefit from a third party in connection with an agency transaction. When conducting the principal’s business, an agent may not deal with himself.
For example, an agent authorized to sell property cannot sell that property to himself. Many courts extend the rule to include transactions with the agent’s relatives or business associates or with business organizations in which the agent has an interest. However, an agent may engage in self-dealing transactions if the principal consents. For this consent to be effective, the agent must disclose all relevant facts to the principal before dealing with the principal on his own behalf.
Unless the principal agrees otherwise, an agent also may not compete with the principal regarding the agency business and not assist the principal’s competitors, so long as he remains an agent. Thus, an agent employed to purchase specific property may not buy it himself if the principal desires it. Furthermore, an agent ordinarily may not solicit customers for a planned competing business while still employed by the principal.
Finally, an agent who is authorized to make a certain transaction may not act on behalf of the other party to the transaction unless the principal knowingly consents. Thus, one ordinarily may not act as agent for both parties to a transaction without first disclosing the double role to, and obtaining the consent of, both principals. Here, the agent must disclose to each principal all the factors reasonably affecting that principal’s decision.
Occasionally, though, an agent who acts merely as a middleman may serve both parties to a transaction without notifying either. For instance, an agent may simultaneously be employed as a “finder” by a firm seeking suitable businesses to acquire and a firm looking for prospective buyers, so long as neither principal expects the agent to advise it or negotiate for it.
An agent will not breach her duty of loyalty, however, if she acts in good faith, discloses to the principal all material facts regarding her conflict of interest, and deals fairly with the principal.
An agent who has accepted an appointment to act for a principal (“A”) should not thereafter accept appointment to act for another principal (“B”) if the interests of principal B conflict with the interests of principal A. However, if the agent fully discloses to each principal the agent’s interests under the two appointments and the fact that he acts for both principals at the same time and obtains the consent of each principal to the dual agency, he may still act for the two principals. Accordingly, an estate agent who acts for both the vendor and purchaser in a sale and purchase property transaction must disclose the fact to both the vendor and the purchaser and obtain their consent for so acting.
The agent’s duty to avoid conflict of interest applies equally to cases where the interest of the agent himself or that of his close relatives conflicts or potentially conflicts with his duties to the principal. However, if the agent fully discloses such interests to the principal and obtains the principal’s consent, the agent may still act for the principal.
Failure to make full disclosure to the principal is a breach of the agent’s fiduciary duty and the agent is liable to account for any profit that the agent has made from such transaction in addition to other remedies available to the principal for the agent’s breach of duty. The following situations require more discussion:
i.Purchase or rent from principal– the general rule is that an agent cannot purchase or rent property from his principal without full disclosure of all the facts to the principal. The agent has to show:
- How the terms and conditions of the sale or tenancy to the agent compare to a sale or tenancy to a third party in the market;
- He has disclosed all the relevant facts to the principal before entering into any agreement with the principal; and
- The principal has given his informed consent to such a transaction.
ii.Sale or rent to principal– similarly, an agent may not sell or let his own property to his principal without full and frank disclosure and the obtaining of his principal’s informed consent. The agent has also to show how the terms of the relevant transaction compare to similar transactions in the market.[x]
5. Duty not to make secret profit:
Common law requires that an agent should not make any profit or acquire any benefit in the course and in the matter of his agency without the knowledge and consent of his principal. Such profit, generally known as secret profit, is not restricted to money but may include anything of value, for example, an interest-free loan, a club membership, etc. An agent who has made secret profit is liable to account to the principal for such profit in addition to any other remedies available to the principal for the agent’s breach of duty. The following situations are some examples of secret profit:
i.Use of property
An agent who uses property entrusted to him by the principal to make a profit for himself and without the principal’s consent is in breach of his duty not to make secret profit. For example, if an estate agent is entrusted with the keys to a property by its owner for the purpose of listing while the owner is abroad, and the estate agent lets the property to a third party and receives and keeps the rent for himself without the consent of the owner, the estate agent will be, among other things, in breach of his duty not to make secret profit.[xi]
ii.Use of position
In some circumstances, an agent may obtain a benefit simply through his position as agent of the principal. For example, an agent appointed to purchase goods for his principal from a supplier obtains secret monetary benefit from the supplier for placing purchase orders with the supplier. Such an act by the agent will amount to making secret profit.
Likewise, if a company director is entrusted with the task of negotiating a contract with a third party on behalf of the company (that is, as the company’s agent), the director cannot subsequently enter into that contract personally with that third party, even if the latter is willing to do so without the company’s consent. An agent who, without lawful authority or reasonable excuse, solicits or accepts any advantage in relation to his principal’s affairs or business in the course of his agency shall be guilty of an offence under Section 9 of the Prevention of Bribery Ordinance, Cap. 201.
iii.Use of information or knowledge
An agent who acquires information or knowledge which he has been employed by the principal to collect or discover, or which he has otherwise acquired for the use of his principal should not make use of the same for his personal gain. For example, in the course of acting for a purchaser, an estate agent looks for a property for investment in a particular building specified by the principal and becomes aware of a property in that building which is being offered for sale at below the market price.
If the estate agent makes use of this information, which he is appointed to obtain on behalf of the purchaser, and acquires that property himself without disclosing the same to the purchaser and makes a profit by reselling it, the estate agent will, among other things, be in breach of his fiduciary duty not to make secret profit.
However, the duty not to make secret profit may be discharged if the agent makes full disclosure of all the relevant facts to the principal and the principal consents to the making and retention of such profit by the agent.
Can agent’s duty to account to his principal secret profits he has made in the course of the agency continue even after the agency relationship terminates.
6. Duty to remit sums
According to Section 218 of Indian Contract Act, agent is under the duty to remit sum repay to his principal all sums received on his account. The agent is, however, entitled to deduce his lawful charges, but subject only to this right, the principal’s money must be remitted to him even if it has been received in pursuance to a void or illegal contract.
The agent has to perform this duty even if his earnings for the principal flow out of void or illegal transactions. “If an agent receives money on his principal’s behalf under an illegal and void contract, the agent must account to the principal for the money so received and cannot set up the illegality of contracts as a justification for withholding payment, which illegality the other contracting party has waived by the paying the amount.”
The agent has the right to make a counter claim. The Bombay High Court did not consider it fair or in the interest of justice to compel the agent to deposit the amount in the court as a measure of protecting his principal, particularly where there was a claim against the claim.
7. Duty to maintain Accounts:
Alan agent who receives any property for his principal or from his principal is bound to keep such property separate from his own and he is to be treated as a trustee of such property.
For the reason stated in sub-paragraph (a), an agent has a duty to keep proper accounts of the property received by him in the course of the agency and to render such account to the principal on request.
Even after the agency relationship has ceased, the agent’s duty to account to the principal may continue. Hence, the agent is obliged to return to his principal all documents and property originally given to the agent by the principal and documents prepared by the agent on the instruction and at the expense of the principal.
Agents must keep accurate records and accounts of all transactions and disclose these to the principal once the principal makes a reasonable demand for them. Also, an agent who obtains or holds property for the principal usually may not commingle that property with her own property. For example, an agent ordinarily cannot deposit the principal’s funds in her own name or in her own bank account.
In Ram All v.Asian Commrel[xii]The High Court observed:
“The right to claim a statement of accounts is an unusual form of relief,only granted in certain specific cases and is only to be claimed when the relationship between the parties is such that this is the only relief which will enable the claimant to satisfactorily assert his legal rights”.
8.Duty not to delegate
The general rule is that an agent may not delegate his authority or duty in whole or in part except with the authority and consent of the principal.
Owing to the fact that an agency agreement is privy to the principal and the agent and that authority is normally given to the agent personally, on account of his trustworthiness, skill or experience, the agent is under a duty to the principal not to delegate his duties under the agency agreement to another person, but to exercise the authority in person. Hence, an agent has normally no implied authority to employ deputies or sub-agents to carry out his duties.
Where an agent is not authorized to delegate, the act of a “sub-agent” appointed by the agent will not be binding on the principal. The agent who so delegates his authority is also in breach of the duty not to delegate and is liable to compensate for any loss which the principal may suffer in consequence of the agent’s failure to exercise his authority in person.
It was laid down in John McCain and Co. v. Pow[xiii]that unless so authorized by the principal,an estate agent has no right to appoint a sub-agent and delegate to him his powers which require special skill and care.No implied authority could be pleaded. In this case the sub-agent affected a sale on his account.The agent had sued for his commission.The court negatived the claim as the contract of agency did not permit appointment of sub-agent.
But there are exceptions in the following cases when the agent can delegate:
Nature of work: Sometimes the very nature of work makes it necessary for the agent to appoint a sub- agent .For example,an agent appointed to sell an estate may retain the services of an auctioneer and the one authorized to file a suit may engage a lawyer. A banker instructed to make payment to particular person at the particular place may appoint a banker who has an office at that place.A banker authorized to let out a house and collect rents may entrust the work to an estate agent.
Trade Custom-A sub-agent may be appointed and the work delegated to him if there is ordinary custom of trade to that effect.Thus architect generally appoints surveyors.
Ministerial action-An Agent cannot delegate acts which he has expressly or impliedly undertaken to perform personally,eg.acts requiring personal or professional skill.But the agent may delegate acts which are purely ministerial in nature,e.g.,authority to sign.
Principal Consent- The principal may expressly allow his agent to appoint a sub-agent.His consent may also be implied from the conduct of the parties.The principal may ratify his agent’s unauthorized delegation.
An agency is the creation of a contract entered into by mutual consent between a principal and an agent. By agency, a principal grants authority to an agent to act on behalf of and under the control of the principal. The relation between a principal and an agent is fiduciary and an agent’s actions bind the principal. An agent is liable to a principal when he/she acts without actual authority, but with apparent authority.
An agent is liable to indemnify a principal for loss or damage resulting from his/her act principal owes certain contractual duties to his/her agent. Correlative with the duties of an agent to serve a principal loyally and obediently, a principal’s primary duties to his/her agent include:
To compensate the agent as agreed; and To indemnify and protect the agent against claims, liabilities, and expenses incurred in discharging the duties assigned by the principal.
Formatted on February 27th, 2019.
[i] Avtar Singh, Contract & Specific Relief Act 724-727(10th ed.2008)
[ii] Shephard v Cartwright (1935)Ch 728,755
[iii] Pollock & Mulla ,Indian contract and Specific relief acts 780-785(8th ed.,2008)
[iv] R. K. Bangia, Indian Contract Act 278-280(11th ed., 2004)
[v]Pannalal Jankidas vs. Mohanlal 1951 AIR 144, 1950 SCR 979
[vi]Liley v.Doubleday (1881) 7 QBD 510
[vii]R.L.Meena ,Law of Contract 401 (8th ed. 2008)
[viii]Keppel v.Wheeler (1927) 1 KB 577
[ix] John Cartwright, Anson’s Law of Contract 567 (29th ed.,2010)
[xii]Ram All v.Asian Commrel AIR 1933 Lah 483
[xiii]John McCain and Co. v. Pow (1975)All ER 129