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What is meant by Contract of Agency?

Contract of Agency

Contract of Agency is defined as the situation wherein one of the parties ( the principal) in the contract transfers his authority to do an act to another person (agent) on his behalf, this is known as the contract of Agency.

The person who transfers his rights and duties in the contract is known as the “Principal” and the person on whom it is transferred is known as the “agent”. The definition of both the parties is also covered under Section-182 of the Indian Contract Act, 1872.

Is every person who acts on behalf of a person is considered as his agent?

The answer to this question is no, every person merely on the ground that he/she is working for him will not make him be categorized under the contract of the agency. The relationship of the agency will only be considered when the person who is acting on his behalf makes the principal liable or answerable to the third person, to whom the action has been done. This is known as the privity of contract.

Privity of Contract means no person other than the parties to the contract has any rights and obligations to do any act mentioned in the contract. But in the contract of agency the principal would also be liable to the third person even though he was not part of the contract with him because an act done by his agent would be considered as the act done by the principal himself.

Who has the legal authority to appoint an agent and who can become an agent?

The provision for appointing an agent is covered under Section-183 of the Indian Contract Act, 1872. It says that any person who has attained the age of majority and is of sound mind can appoint an agent for his work on his behalf.

The same goes with who may become an agent, a person having a sound mind attained the age of majority can become the agent, the provision of the same is covered under Section-184 of the India Contract Act, 1872. The section also provides that not only a major but a minor can also be appointed as an agent.

What are the essential elements which make the contact of agency valid?

The essential elements are: –

  1. There are two parties involved in the contract, principal and the agent. but the condition for their appointment needs to be fullfiled as given under section- 183 and section-184 respectively of the Indian Contract act, 1872.
  2. There is no consideration required to make the contract valid as compared to other contract where consideration is an essential element to make the contract valid and binding. The provision for the same is covered under Section-185 of the Indian Contract Act, 1872.
  3. The act of the agent should make the principal liable to the third person for the act done by the agent on his behlaf.

The Contract of agency can be created in the various ways mentioned below:

Contract
  1. The contract can be created in express form as well as in implied form.
  2. Agency can be created by estopple, necessity, and ratification.

Express Agreement

The Express agreement can be defined as an agreement wherein the party appoints the agent in writing or by express word. The same has been defined under Section-187 of the Indian Contract Act, 1872.

Implied Agreement

The Implied agreement can be defined as an agreement wherein the party does not directly appoint the agent but is appointed because of the circumstances of the situation.

Estoppel

Agency can also be created by way of Estoppel, it is a situation wherein the person act in a manner that makes the third party believe that the person acting, is authorized by the principal to do the act on his behalf. The provision of estoppel is covered under Section-237 of the Indian Contract Act, 1872.

Necessity

Agency can also be created by way of Necessity, it is a situation wherein a person acts on behalf of the other out of necessity to save the other from heavy loss and danger. It is a situation where the agent is not appointed, he is being categorized under the preview of agent because he has out of necessity worked on his behalf to save him.

More provision of agent authorities is covered under Section- 188 and Section- 189 of the Indian Contract Act, 1872. The section talks about that an agent has all the authority to act on behalf of his principal but only to the lawful things and every decision taken lawfully in an emergency to save the principal from heavy losses will also be considered valid.

Ratification

Agency can also be created by way of Ratification, it is a situation wherein a person has acted on behalf of another without his knowledge but later ratified by the person that yes I have given him the authority to do the same, then agency by ratification can be created. The principal can also refuse the act which is done by the person on his behalf. The provision for the same is covered under Section-196 of the Indian Contract Act, 1872.

The ratification of the agency can be done in both ways express as well as implied. The provision is covered under Section- 197 of the Indian Contract Act, 1872.

Conditions to be fulfilled for a valid contract of agency by Ratification:

  1. The person on whose behalf the work has been done must be in existence.

2. The person should be legally capable to enter into a contract.

3. The act done by a person for the other must be legally capable to be ratified by the principal.

The person on whose behalf the work has been done should have full knowledge of the acts done by the person. Section- 198 of the Indian Contract Act, 1872 covers the same provision, which says if the principal does not have the full knowledge of the act done by the person, then the principal will not have the power to ratify the act done by him.

If the principal is ratifying the act of the agent, he would be ratifying the full act of the agent, not the half act. Section- 199 of the Indian Contract Act, 1872 covers the provision.

The act ratified by the principal should not injure any third person, Section- 200 of the Indian Contract Act, 1872 covers the same provision.

Ratification of the act should be made within a reasonable period of time.

What are the different types of Agents?

General Agent

In general agency, the principals appoint the agent and give him the authority to do every task on his behalf for his business.

Special Agent

In a Special agency, the principal appoints the agent and gives him the authority to do only a specific task or work. Any task performed outside the preview of the tasks asked by the principal would be considered invalid and the principal would not be liable for it.

Mercantile Agent

A Mercantile agent is the one who is appointed by the principal in the customary course of business to sell the product. The same has been defined under Section- 2(9) of the Sales of Good Act, 1930.

Del credere Agent

Del credere agent is appointed to act as a guarantor for the principal, and accordingly, the agent is paid for it.

Commission Agent

A commission agent is appointed for the sale and purchase of the product and can work for more than one business at a time.

Sub-Agent

The definition of sub-agent is covered under Section- 191 of the Indian Contract Act, 1872. A sub-agent can be defined as the agent of the original agent. For e.g., Mr A appoints S as his agent and S appoints M as his sub-agent.

Section- 192 of the Indian Contract Act, 1872 defines the liability of the principal for the act done by the sub-agent. It says if the sub-agent is appointed under the purview of the principal, the principal would be liable for the act done by the sub-agent towards the 3rd person.

Section- 193 of the Indian Contract Act, 1872 defines the responsibility of the agent towards the act done by the sub-agent.

Factors Agent

Factor agent is the one who has possession of the property and is hired to sell the property of the principal with his authority.

Broker-Agent

The broker agent is similar to the factor agent but the key difference between them is a broker agent does not have possession of the property, the possession remains in the hand of the principal, he is only appointed to sell and negotiate the price for the property.

Duties and Rights of the Agent

There are 8 duties of the agent covered under Section- 190, 195, 211, 212, 213, 214, 215, and 218 of the Indian Contract Act, 1872.

Section- 190, talks about an agent who is not permitted to hire any sub-agent to perform his task or works which he has personally promised to do so. But if the customs and trade permit him to do them, then in that situation he can otherwise not.

Section- 195, talks about an agent who should use the same amount of discretion as a man of the ordinary prudence will use while selecting an agent for the principal. If he does the same then the agent will not be liable for the wrong and negligent act of the sub-agent to the principal as well to the third person.

Section- 211, talks about how should an agent work in the business for which he is appointed. So, he should work according to the direction given by the principal to him and if the same is not given according to the customs which prevails in that particular business.

If the agent goes against the direction given by the principal and against the customs that prevail in that business, the agent has to pay the losses if any suffered by the principal and also shares the profit if any occurred by the decision taken by the agent against the wishes of the principal and customs of the business.

Section- 212, talks about the duty of skill and diligence of an agent. The agent should use as much skill and diligence which is used by any other agent working in the same business. If any loss is incurred by the agent because of the direct neglect act of his, then he will be personally liable to compensate the principal.

Section- 213, talks about the agent having the duty to maintain proper accounts of the business or work for which he is appointed, and also produce the same when asked by the principal himself.

Section- 214, talks about communication with the principal for future steps. The agent should use reasonable diligence to communicate with the principal for his future work.

Section- 215, talks about the duty of the agent that he should not bring his conflicting interest in the contract of the agency and should not cheat the principal. If the principal came to know that his agent doing any such activities and his actions will make a loss in his business then he can repudiate the contract of the agency.

Section- 218, talks about the duty of the agent to return all the sum received by him on behalf of the principal to the principal. The agent can deduct his part of the commission for performing that act.

Rights of the agent

There are 8 rights available to the agent covered under Section- 188, 189, 194, 205, 217, 219, 221, and 222 of the Indian Contract Act, 1872.

Section- 188, talks about the right of the agent, that he has the right to do every lawful act which is required in that business, in the contract of agency.

Section-189 talks about the right of the agent, which says that the agent is allowed to take decision any decision that he thinks is fit in a situation of emergency to protect the principal from heavy losses.

Section- 194, talks about the right of the agent to appoint any third person for his principal to perform a particular task. In this condition, the third person will not be considered as his sub-agent whereas the agent of the principal.

Section- 205, talks about the right of the agent, which says that if the contract of the agency is revoked before time without sufficient cause then the principal is liable to compensate the agent for that breach. The same goes for the agent, that if he revokes the contract without any sufficient cause before the duration as agreed he will be liable to compensate the principal.

Section- 217 (Right of lien for Sums), talks about the right of the agent, which says that an agent has the power to hold or retain all the sum which is received by the agent on behalf of the principal during the conduct of the business until the principal clears all the sum of the agent and any expense which is made by the agent in conduction that act of the principal.

Section- 219 when there is no special contract between the employer and the agent, the payment for his work will not be given to him until he completes the work that he was employed for, but in some cases, he can keep such payment made to him on account of the whole or the part of the sales that he made for the goods provided to be sold.

Section- 221 (Right of lien for Principal Property), talks about the right of the lien of property of the principal by the agent. An agent is entitled to retain every property whether movable or immovable of the principal until the principal clears the dues of the agent.

Section- 222, talks about the right of the agent to be indemnified from the principal for all the lawful acts done by him on his behalf.

Liability of the agent towards the third person

An agent is not personally liable to the third person for any acts done by him on behalf of the principal, the liability remains that of the principal, this is because of the contract of privity.

Section- 226 talks about the liability for the acts done by the agent on behalf of the principal. All the act which is done by the agent on behalf of the principal will be considered as the act done by the principal himself.

Section- 227 talks about the liability of the principal for the acts done by his agent within the scope of the authority given by the principal. If the act done by the agent exceeds the authority given by the principal and it can be separated from the authority given then the principal is not liable for any of his acts.

Section- 228 talks about the liability of the principal for the act done by his agent on behalf of him. If the act done by the agent cannot be separated from within the scope of authority given by the principal then also the principal is not liable for the acts done by the agent. He can ignore the transaction made by the agent.

Section- 238 talks about the liability of the principal for the fraud acts or misrepresentation made by the agent during the contract of the agency. The principal will have no liability for the misrepresented acts and frauds made by the agent on behalf of the principal during the authority. The contracts made by the agent doing fraud and misrepresentation would be declared void contracts/agreements and thus the principal will not be liable for the acts done by the agent.

Termination of the Contract of agency

The provision of termination of the contract of agency is covered under Section- 201, 203, 204, 205, and 206 of the Indian Contract Act, 1872.

Section- 201, talks about termination of agency. The contract of the agency is terminated either when the principal revokes his authority from the agent or the agent leaves the contract of the agency, or the contract of agency is completed or the principal/ agent had died or becomes unsound mind.

Section- 203, talks about the power of the principal as when he can revoke the authority which is planned to be given to the agent. The principal can revoke the authority at any time before the agent performs any task of the business.

Section- 204, talks about when the principal cannot revoke the authority provided by him to his agent in a situation when the agent has partly exercised his authority being given to him.

Section- 205, talks about the compensation of revocation by the principal. It says if the principal terminates the contract of the agency before the completion of the contract of the agency without sufficient cause, then the principal will compensate the agent for the premature termination of the contract.

Section- 206, talks about the notice of revocation. If the principal has the reason to terminate the contract of the agency then he must give them the notice of such termination in advance with the reason to the agent. If he fails to do the same then he can be made liable to pay compensation to the agent for any damage caused to the agent.

Conclusion

A Contract of the agency is a very common contract and it can be created on our daily life routine whenever giving some other person the authority to perform some tasks to be performed on behalf of us, but it is to be noted that every act which is done by the agent will not create the contract of agency. Only when the principal is answerable to the third person for the act of the agent creating privity of contract, then it will be considered as the contract of agency.

Frequentely asked question

What is the personal liability of the agent to the third person for the act done by him on behalf of the principal?

In a Contract of agency, the agent is not personally liable for the act done by him on behalf of his principal, but there are exceptions for the same, and the agent can be made liable for the acts done by him.

  1. The agent can be made liable for the act done by him on behlaf of the principal who resides in a foreign country, it is assumed by the third person that the act done by the agent is of his own and not of the principal.
  2. The agent can be presonally liable for the act done on behalf of the principal if he does not unveil the name of the principal. Under Section- 230 of the Indian Contract Act, 1872 the same has been stated.
  3. If the principal is legally incompetent to become the principal then in that situation the agent will be liable for the act done by him on behalf of the principal.
  4. If the agent falsely present himself as the agent of any principal and does the act but later the principal does not recrify the same the agent will be liable for the act done by him. The same is covered under Section- 235 of the Indian Contract Act, 1872.
  5. When the agent crosses his authority provided by the principal then all the liability grown out of it will be of the agent itself and not of the principal.
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Hi everyone, my name is Harpreet Randhawa, a law student who believes in sharing my opinions and spreading awareness on our law system. I hope you find my writing crisp and relevant.

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