Contract of Agency

Chapter
7
Contract of Agency

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 Contract of Agency

Introduction
Before the Industrial revolution, business was carried on largely by individual
artisans in their homes and in small family operated shops. As population and
trade expanded and division of labour and specialisation became the order of the
day, there arose the problem of distribution of goods. Today, the legal terms
master-servant and employer-employee are used interchangeably. Over time,
employers delegated a broader range of responsibilities to their employees – for
example, by giving them authority to contract for raw materials, to sell finished
products and even to employ other employees. In these expanded roles, the
employees became known as agents and their employers were called principals.
The Indian Contract Act, 1872, makes provisions as regards agency. Sections
182 to 238 deal with the subject of agency.

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 Contract of Agency

Definition of Agent and Agency

Meaning of Agent and Agency (s.182). Agent is “a person employed to do any
act for another or to represent another in dealings with third person”. The
function of agent is to bring about contractual relation between the principal and
a third party. The agent is only a connecting link between the principal and the
third party and is rightly called as ‘conduit pipe’.
Who can Employ 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 agent
(s.183).
Who may be Agent? Since agent is a mere connecting link or a ‘conduit pipe’
between the principal and the third party, it is immaterial whether or not the agent
is legally competent to contract.
Example. Rahim appoints Kiran, a minor, to sell his car for not less than Rs
90,000. Kiran sells it for Rs 80,000. Rahim will be held bound by the transaction
and further shall have no right against Kiran for claiming the compensation for
having not obeyed the instructions, since Kiran is a minor and a contract with a
minor is void abinitio. Copyright © 2007, S.S. Gulshan

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 Contract of Agency

Different Kinds of Agencies

A contract of agency may be created by an express agreement or by implication
(implied agreement) or by ratification. Thus, there are different kinds of agencies.
 Express Agency (s.187)
 Implied Agency (s. 187)
 Agency by Estoppel (s. 237)
 Agency by Holding Out
 Agency of Necessity (s.189)
 Agency by Ratification (Ss.196-200)
 Agency Coupled with Interest

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 Contract of Agency

Classification of Agents
Agents may be classified from different points of view. One broad classification
of agents is: (i) mercantile or commercial agents and (ii) non-mercantile or
non-commercial agents. Another classification of agents is: (1) general and (2)
special.
 Special and General Agents
 Mercantile or Commercial Agents
 Non-mercantile or Non-commercial Agents
 Sub-agent and Substituted Agent (Ss. 190-195)
Examples. (i) Amar directs Bharat, his solicitor, to sell his estate by auction and
to employ an auctioneer for the purpose. Bharat names Cooper, an auctioneer,
to conduct the sale. Cooper is not a sub-agent, but is Amar’s agent for the
conduct of the sale.
(ii) Amar authorises Bharat, a merchant in Calcutta, to recover the money due to
Amar from Cooper and Co. Bharat instructs Dalip, a solicitor to take proceedings
against Cooper and Co. for the recovery of the money. Dalip is not a sub-agent
but is a solicitor for Amar. Copyright © 2007, S.S. Gulshan

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 Contract of Agency

Duties and Rights of Agent

Duties of Agent
1. To conduct the business of agency according to the principal’s directions
(s.211).
2. The agent should conduct the business with the skill and diligence.
3. To render proper accounts (s.213).
4. To communicate with the principal in case of difficulty (s.214).
5. Not to make any secret profits.
6. Not to deal on his own account.
7. Not entitled to remuneration for misconduct (s.220).
8. Not to disclose confidential information supplied.
9. To take all reasonable steps for the protection and preservation of the
Cont….
interests entrusted to him. Copyright © 2007, S.S. Gulshan

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 Contract of Agency

Rights of Agent

1. Right to remuneration (Ss.219-220).

2. Right of retainer (s.217).

3. Right of lien (s.221).

4. Right of stoppage in transit.

5. Right of indemnification (Ss. 222-224).

6. Right to compensation for injury caused by principal’s neglect (s.225).

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 Contract of Agency

Principal’s Duties to the Agent and His Liability to Third

Parties
Duties of a Principal. The rights of agent are in fact the duties of the principal.
Thus a principal is (i) bound to indemnify the agent against the consequences of
all lawful acts done by such agent in exercise of the authority conferred upon him
(s.222); (ii) liable to indemnify agent against the consequences of an act done in
good faith, though it causes an injury to the rights of third persons (s.223); (iii)
bound to compensate his agent in respect of injury caused to such agent by the
principal’s neglect or want of skill (s.225).

The principal is, however, not liable for acts which are criminal in nature though
done by the agent at the instance of the principal (s.224).
Cont….

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 Contract of Agency

Liability of Principal to Third Parties

1. Agent being a mere connecting link binds the principal for all his acts done
within the scope of his authority (s.226).
2. The principal is liable for the acts of the agent falling not only within the
actual authority but also within the scope of his apparent or ostensible
authority.
3. The principal will be liable even for misrepresentations made or frauds
committed by agent in the business of agency for his own benefit.
4. The principal is bound by any notice or information given to the agent in the
course of business transacted by him.
Undisclosed Principal. Where agent, though discloses the fact that he is agent
working for some principal, conceals the name of the principal, such a principal is
called an undisclosed principal.
Concealed Principal. Where agent conceals not only the name of the principal
but the very fact that there is a principal, the principal is called a concealed
principal. Copyright © 2007, S.S. Gulshan

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 Contract of Agency

Personal Liability of Agent

Agent is only a connecting link between the principal and third parties. Being only
a medium, he can, in the absence of a contract to the contrary, neither
personally enforce contracts entered into by him on behalf of his principal, nor is
he personally bound by them (s.230).
Agent incurs a personal liability in the following cases:
1. Breach of warranty.
2. Where the agent expressly agrees to be personally bound.
3. Where agent signs a negotiable instrument in his own name.
4. When agent is guilty of fraud or misrepresentation in matters which do not
fall within his authority (s.238).
5. Where trade usage or custom makes agent personally liable.
6. Where the agency is one coupled with interest.
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 Contract of Agency

Termination of Agency
Circumstances under which Agency Terminates or Comes to an End
(s.201).
1. On revocation by the principal.
2. On the expiry of fixed period of time.
3. On the performance of the specific purpose.
4. Insanity or death of the principal or agent.
5. Insolvency of the principal.
6. By renunciation of agency by the agent.
When Termination of Agency takes Effect?
1. The termination of the authority of agent does not, so far as regard the
agent, takes effect before it becomes known to him (s.208).
2. As regards third parties, they can continue to deal with the agent till they
come to know of the termination of the authority (s.208).
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 Contract of Agency

Examples (i) A directs B to sell goods for him and agrees to give B 5%
commission on the price fetched by the goods. A afterwards, by a letter revokes
B’s authority. B, after the letter is sent, but before he receives it, sells the goods
for Rs 100. The sale is binding on A and B is entitled to five rupees as his
commission.
(ii) A, at Chennai, by a letter directs B to sell for him some cotton lying in a
warehouse in Mumbai and afterwards, by another letter, revokes his authority to
sell and directs B to send the cotton to Chennai. B, after receiving the second
letter, enters into a contract with C, who knows of the first letter, but not of the
second. For the sale to him of the cotton C pays B the money, with which B
absconds. C’s payment is good as against A.
(iii) A directs B, his agent, to pay certain money to C. A dies and D takes out
probate to his will. B, after A’s death, but before hearing of it, pays the money to
C. The payment is good as against D, the executor.

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 Contract of Agency

Power of Attorney
Meaning. A power of attorney is defined by s.2 (21) of the Stamp Act, as
including “any instrument not chargeable with a fee under the law relating to
court fees for the time being in force,” which empowers “a specified person to act
for and in the name of the person executing it”. It is the Powers of Attorney Act,
1882, which deals with the subject, but does not define it.
A Power of Attorney may be Special or General. If the deed conferring power
by one to another relates to one single transaction, it is known as special power
of attorney.
Registration. As a general rule, registration of power of attorney is not
necessary but if it authorises the donee to recover the rents of an immovable
property of the donor for the donee’s benefit, it would require registration.

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