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Contract of Agency

Unit I

Contract of Agency
Chapter X of the Indian Contract Act, 1872 (Sections 182 to 238) Agency is a contractual relation between two parties created by agreement express or implied The relationship of agency arises wherever one person called the agent has authority to act on behalf of another called the principal

Essentials of Contract of Agency


Relationship of agency is based upon a contract Contract may be express or implied There should be the appointment of an agent by the principal Agent should have legal capacity or be competent to do the act for which he is employed Principal should confer authority on the agent to act for him

Essentials of Contract of Agency


Authority conferred makes the principal answerable to third parties Object of appointment must be to establish relationship between principal and their parties Relationship of Agency is based on confidence between principal and the agent Contract of Agency requires no consideration

Agent
Any Person may become an agent An agent to be responsible to his principal has to be of the age of majority and of sound mind. Minor can be employed as agent and the Principal shall be bound by the acts of such an agent. Principal has to be of the age of majority and is of sound mind. Minor cannot be a Principal.

Classification of Agents
Express or Implied Agents General, Special or Universal Agents Agent or Sub-Agent Mercantile (or Commercial) Agents Non-Mercantile (or Non-Commercial) Agents

Classification of Agents On the basis of extent of authority


General Agent : Agent who acts for several principals in the normal course of his/her profession; Agent who has the authority to act for all business of a principal. Special Agent : Agent who acts for a principal only for a particular purpose. Universal Agent : Agent whose authority to act for the principal is universal or unlimited.

Classification of Agents on the basis of nature of work (Mercantile)


Banker : Banker acts as an agent of the customer when he collects cheques. He has general lien in respect of the general balance of bank account Factor : Entrusted with the possession of goods and who has the authority to buy, sell or otherwise deal with goods or to raise money on their security. He has general lien on the goods

Classification of Agents on the basis of nature of work (Mercantile)


Broker : Broker negotiates and makes contracts between the principal and the third party. He is not entrusted with the possession of goods and hence he has no lien on the goods. Auctioneer : He is entrusted with the possession of goods for sale at a public auction. He has only a particular lien on the goods for his charges. Commission Agent : General term used in practice even for a factor or broker.

Classification of Agents on the basis of nature of work (Mercantile)


Del-Credere Agent : Agent who in consideration of an extra remuneration guarantees to his principal the performance of the contract by the other party. He is appointed generally when the principal deals with a person about whom he knows nothing. His liability is secondary and arises only on the insolvency or failure of the party.

Classification of Agents on the basis of nature of work (Non Mercantile)


Attorney : A person appointed to act for another in business or legal matters Solicitor : A person who tries to obtain business orders, advertising, etc.; a canvasser Promoter : A person who promotes something, in particular eg. Building a house Insurance Agents : Agent who sells insurance

Classification of Agents on the basis of nature of work (Non - Mercantile)


Clearing and Forwarding Agents : person who is engaged in providing any service, either directly or indirectly, concerned with the clearing and forwarding operations and includes a consignment agent. He normally undertakes the following activities:
receiving the goods from the factories or premises of the principal or his agents; warehousing these goods; receiving dispatch orders from the principal; arranging dispatch of goods as per the directions of the principal by engaging transport on his own or through the authorized transporters of the principal; maintaining records of the receipt and dispatch of goods and the stock available at the warehouse

Creation of Agency
By Express Agreement By Implication or law ie. From the conduct of the parties or from the necessity of the case By Ratification By Operation of law

Implied Agency
Agency by Estoppel : Implied by the conduct of parties. Principal knowingly permits a person to act in certain business in his name or on his behalf. Such principal is estopped from denying the authority of the supposed agent to bind him. 3 possible cases of agency by estoppel:
A person can be held out as an agent although he is actually not so A person acting as agent may be held out as having more authority than he actually has A person may be held agent after he has ceased to be so

Implied Agency
Agency by Holding out : Where a person permits another by a long course of conduct to pledge his credit for certain purposes, he is bound by the act of such person in pledging his credit for similar purposes, in certain cases without the previous permission. Example : Husband holds out his wife having his authority by words or conduct and a third party advances money to the wife on the faith of such conduct, the husband is liable for such debts.

Implied Agency
Agency by Operation of Law When company is first formed, its promoters and its agents are implied by operation of law A partner is the agent of the firm for the purposes of the business of the firm, and the acts of a partner, which is done to carry on in the usual way binds the firm.

Implied Agency
Agency by Necessity : Sometimes extraordinary circumstances require that a person who is not really an agent should act as an agent of another.
There should have been real and definite commercial necessity for the creating of agency Should be impossible to obtain principals instructions within the time available The person should act bonafide and in the interest of parties concerned

Implied Agency
Agency of Husband and Wife : There exists a relationship of principal and agent between spouses as long as they are living together Agency by Precedent (previous) and Subsequent (after; also known as agency by ratification) Authority

Agency by Ratification
Ratification is a kind of affirmation or approval of a previous unauthorized act or acts relating to a contract. Ratification may be express or implied by conduct of the person on whose behalf the acts are done. Example :
A without authority buys goods for B; B sells them to C on his own account afterwards. A without Bs authority lends Bs money to C. Afterwards B accepts interest on the money due from C

Essentials of valid Ratification


Act must have been done on behalf of the person ratifying Principal must be in existence at the time of the act that is to be ratified Ratifier should be competent to ratify the act Transaction must have been subsisting at the time when it is ratified (not withdrawn) Principal must have signified his unconditional acceptance of the act

Essentials of valid Ratification


May be express or implied Ratification must have been made with full knowledge of all material facts Whole transaction must be ratified Must be made within a reasonable time Act to be ratified should not be void or illegal Ratification must be communicated Ratification related back to the date of the act of the agent

Nature and Extent of Authority of an Agent


Express and Implied Authority : Expressed when it is given by words spoken or written; Implied when it is to be inferred from the circumstances of the cases Ostensible and Apparent Authority : As it appears to others
When an agent is employed for a particular business, it is presumed that he has authority to do all such lawful acts as are necessary or incidental to such business.

Nature and Extent of Authority of an Agent


Emergency Authority : Agent has authority to all such acts for the purpose of protecting his principal from loss as would be done by person of ordinary prudence, in his own case, under similar circumstances

Delegation of Agents Authority Sub Agent


Agent cannot delegate his powers or duties to another without express authority of the principal Sub Agent : Person employed by and acting under the control of the original agent in the business of the agency.

When Agent can appoint a SubAgent


Custom or Usage of trade permits employment of sub-agents It is necessary because of the nature of the agency Act to be done is purely ministerial and does not involve any confidence or require any skill Agent has express authority to appoint sub-agent In course of agents employment unforeseen emergencies arise which render it necessary to delegate his authority

When Agent can appoint a SubAgent


Principal knows that the agent intends to appoint a sub-agent Authority of agent to appoint a sub-agent can be inferred from the conduct of the parties

Delegation of Agents Authority Substituted Agent


Person appointed by the agent to act for principal in the business of the agency with the knowledge and consent of the latter. Example : A directs B, his solicitor to sell his estate by auction and to employ an auctioneer, for the purpose. B names C as an auctioneer to conduct the sale. C is not a subagent of B but As agent for the conduct of the sale.

Rights of an Agent
Entitled to receive remuneration May retain out of any sums received on account of the principal in the business of agency due to himself in respect of advances made, expenses incurred in conducting that business and also remuneration payable to him Agent is entitled to particular lien i.e., right to retain goods, papers (documents) and other property of the principal received by him , until the amount due to him for commission, disbursements and services is paid

Rights of an Agent
Can stop goods in transit under certain circumstances The employer of an agent is bound to indemnify (Compensate for harm or loss) him against the consequences of all lawful acts done by such agent in exercise of authority conferred upon him Principal must pay compensation to his agent in respect of injury caused due to principals neglect or want of skill

Duties of an Agent
Follow instructions of the Principal; if instructions is not given according to the custom which prevails in doing business of same kind; Agent need not obey unlawful instructions of the principal. Work with reasonable skill and diligence; as is generally possessed by persons engaged in similar business; make compensation to principal in respect of direct consequences of his own neglect, want of skill or misconduct.

Duties of an Agent
Render proper accounts to his principal on demand; Agent is answerable for any secret profit which he had earned from his agency work Communicate with the principal in difficult times to obtain his instructions Should not deal on his own account without obtaining the consent of his principal and acquainting him with all material circumstances; if done without the knowledge of principal then benefit which has resulted can be claimed by principal.

Duties of an Agent
Pay all sums to his principal which are received for principal; entitled to deduct his lawful charges It is the duty of the agent not to set up adverse title (A title set up in opposition to or in defeasance [the action or process of rendering something null and void] to another title is adverse title) Should not delegate authority (few exceptions are there) Should not use agency informations against principal; principal can restrain him by an injunction (authoritative warning or order) from court

Duties of an Agent
When agency is terminated by death or insanity of principal, agent shall take all reasonable steps (on behalf of the representatives of late principal) for protection and preservation of the interest entrusted to him When under duty an agent should act in the interest of the principal; Duty to the principal and his personal interest conflict should not come in the due course. Eg. P employed A, a stock broker to buy some shares and A sold his own shares to P without disclosing. P could rescind the contract.

Rights and Liabilities of Principal


Rights and Liabilities of Principal in relation to third parties under contracts made by his agent depend on whether
Agent contracts as agent for a named principal Agent expressly contracts as an agent for an unnamed principal Agent contracts for a principal whose existence he does not disclose

Agent acting for a Named Principal


Agent acts within scope of his authority (Principal is bound by acts of agent if it is lawful and within the scope of agents authority) Agent exceeds his authority (If the act is separable, Principal is bound by that part which is within his authority) Notice given to an agent is as effectual as notice given to principal; Does not apply if agent had committed fraud on the principal

Agent acting for a Named Principal


Principal is liable for the act of the agent created by estoppel Principal is liable for misrepresentation or fraud of his agent acting within the scope of his authority and fraud is committed for benefit of principal or that of the agent

Agent acting for an Unnamed Principal


Contract made by the agent is binding on the principal Principal should be in existence at the time of the Contract Agent is not personally liable

Agent acting for an Undisclosed Principal


Agent is personally liable for the contract Agent can sue and be sued in his own name Agents right to action comes to an end with the intervention of the undisclosed principal Once the third party knows of the existence of the principal as well as of the agent, he has right to sue both or either of them.

Personal Liability of an Agent


An agent cannot personally enforce contract entered by him on behalf of his principal, nor is he personally bound by them. Agent is personally liable
In case of foreign principal (in the absence of any contract to the contrary) In case of undisclosed principal (in the absence of any contract to the contrary) In case of incompetent principal who cannot be sued (in the absence of any contract to the contrary)

Personal Liability of an Agent


Agent is personally liable
In case of principal not in existence (contract made by promoter of company not yet incorporated, promoter is liable) In case of acts not ratified In case of acts in his own name without disclosing that he is contracting as an agent In case of express agreement between principal and agent (provision of personal liability of the agent) In case of custom or usage of trade making agent personally liable (in the absence of any contract to the contrary)

Liability of Agent
Misrepresentation and Fraud by Agents (if done in the course of business for their principals - same effect as if done by principal; if done out of the scope of authority - does not affect principal) Money received by agent and paid to principal by playing fraud on third person; third person cannot sue the principal unless principal is aware of the fraud

Termination of Agency
Termination by Acts of Parties
By Agreement between principal and agent By revocation of agents authority by principal By renunciation of business by the agent

Termination by Operation of Law


By performance of contract of agency By efflux of time By death or insanity of agent or principal By insolvency of principal By destruction of subject matter of agency By principal becoming an alien enemy

Termination of Agency
When termination is effective To Agent : When it becomes known to the Agent To Third parties : When it becomes known to them

Irrevocable Agency
Agency coupled with interest
Agency is created for the purpose of securing some benefit over and above his remuneration as an agent Eg. A gives authority to B to sell As land and to pay himself out of the proceeds the debts due to him from A. A cannot revoke this authority nor can it be terminated by his insanity or death Rule will not apply if interest of agent arises after creation of agency Object of creating agency to secure gain or benefit to the agent; not sufficient if it is incidental

Irrevocable Agency
Agent has incurred a personal liability for the principal
Agent cannot be permitted to withdraw, leaving the agency exposed to risk or liability he has incurred

Agent has partly exercised the authority


Principal cannot revoke the authority given to agent after the authority has partly been exercised

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