This Article is written by Biswayan Bhattacharjee (Currently pursuing BBA LLB from KIIT School of Law, Bhubaneswar)
Agency is an comprehensive word used to describe the relationship between one person and another, where the second person brings the first into legal relationships with others.
Table of Contents
A contract of agency happens when a person employs another person to represent him or act on his behalf. According to section 182 of the Indian Contract Act 1872, the person employing another person is called the “Principal” and the person being employed is called “Agent”.
Section 186 of the Indian Contract Ace 1872, says that an agent may be expressly or impliedly authorized to act on the principal’s behalf. For example, A authorizes B to sell his house to C. In this case, A is bound by the actions of B, i.e. he is bound for the sale of the house to the third person, which is C. Hence, the agent acts as a connecting link between the principal and a third person to come into a contractual relationship. According to Dhavan J, an agent never acts on his own but always on behalf of another. He either represents his principal on any transactions or dealings with a third person or performs an act for the principal.
In order to be an agent, the following conditions have to be met :
- Section 184 states that any person may become an agent, but no person under the age of majority and of sound mind may do so in order to be accountable to his principal in accordance with the provisions set forth.
- Section 185 mentions that consideration is not necessary to be an agent.
- The agent must have expressed or implied authority to act on his behalf. (Section 186)
Expressed authority – An authority is said to be expressed when it’s given by words spoken or given.
Implied authority – An authority is said to be implied when it is to be inferred from the circumstances of the case or the ordinary course of the dealing.
The Indian Contract Act, 1872 provides individual rights to both the principal and agent to ease the course of business and ensure justice. The rights of agent and principal are discussed further.
The agent may be directly or implicitly allowed to act on the principal’s behalf. If I give my agent permission to sell my house to a third party and he does so, I am obligated to sell the house to the third party in the same manner as I would if I had contracted to sell the house to the third party myself. The agent merely serves as a conduit between his principal and the third party. Contracts entered into by an agent, as well as obligations arising from actions performed by an agent, can be implemented and have the same legal effect as if the contract had been entered into and the acts performed by the principal in person.
DUTIES OF AGENT (Rights of Principal)
Given as follows are the rights of the principal which are the duties of the agent :
Agent’s duty to not delegate his duties.
Section 190 of the Indian Contract Act 1872 gives the situation when an agent can not delegate his duties. It reads – “An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally unless by the ordinary custom of trade a sub-agent may or from the nature of agency, a sub-agent must be employed.”
When an agent has undertaken to perform certain acts of the principal personally, he cannot delegate his duties to another person. This rule is in accordance with the maxim “delegates non potest delegare” which means that someone who has been delegated with a task cannot delegate the task further to another person.
It can be noted that an undertaken task that requires the personal skills of the agent cannot be handed over to someone else by the agent. For example, a task of painting requires the personal skill of the painter. If A, being the painter (agent in this case) delegates the same to a sub-agent, then the agent is going against his duty. On the other hand, the task of delivery of goods does not require a personal skill. Therefore, the agent can employ a sub-agent to deliver the goods on behalf.
There are some exceptional cases where the agent can delegate to a sub-agent, which are as follows.
- When there is a custom of trade to that effect. For example, delivery of goods.
- When the nature of the agency requires a sub-agent to be appointed. For instance, an agent authorized to recover some amount from a third person may employ a lawyer to represent him on the suit.
- When an act does not require personal skill.
- When the principal, expressly or impliedly, agrees to the appointment of a sub-agent for the performance of a task which has been assigned to the agent
Agent’s duty to properly appoint a substituted agent.
A substituted agent is named or recommended by an agent to the principal to do a part or whole of a task that had been assigned to the agent. According to section 195, of the Indian Contract Act 1872, while naming the substituted agent, the original agent must exercise due care and caution as an ordinary man of prudence would exercise in his own case. When the agent exercises due care in naming the substituted agent for the principal, the agent’s responsibility is over.
Duty to follow principal’s directions.
Section 211 makes it mandatory for the agent to act according to the direction of the principal. An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise if any loss is sustained, he must make it good to his principal, and if any profit accrues, he must account for it.
For example, A, an agent engaged in carrying on a business for B in which it is customary to spend money in hand from time to time, at profit, omits to make such an investment. A must repay B the interest that such investments usually generate.
Duty to show proper skill and care.
Section 212 of the Indian Contract Act 1857 requires the agent to execute proper skill and care while carrying out the performance or business of the principal.
It explains that until the principal has notice of his inability, an agent is obligated to perform the agency’s business with as much skill as is usually possessed by others engaged in a similar business. The agent is always obligated to behave with due care and skill, and to compensate his principal for direct effects of his own negligence, lack of skill, or misconduct, but not for loss or harm caused indirectly or remotely by such neglect, lack of skill, or misconduct.
Duty to render proper accounts.
According to 213, the agent should maintain proper accounts of the sum belonging to the principal which are in his hands. The agent mustn’t misutilize and misappropriate them. On-demand of the principal, he should render true accounts to his principal.
The Supreme Court held in Naranda Papammal that, while an agent does not have a constitutional right to sue his principal for the rendition of accounts, he does have an equitable right in such cases. Such situations exist if (1) all of the accounts are in the hands of the principal and he lacks the required accounts to calculate his commission against the principal; or (2) his remuneration is contingent on the degree of dealings that he is aware of but for which only the principal’s accounts are available.
Duty to communicate with the principal.
Section 214 states that in challenging situations, it is an agent’s responsibility to communicate with his principal and seek his orders with all due diligence.
Duty not to deal on his own account.
Unless the principal agrees, an agent is prohibited from dealing in the business of the agency on his own account. If an agent deals on his own behalf in a contract without the principal’s permission, the principal has the following two rights:
- To reject the transaction by demonstrating either: (a) that some material evidence was dishonestly withheld from him by the agent; or (b) that the agent’s transactions were in his favour. (Section 215)
- To make a claim against the agent for any benefit he might have received as a result of the transaction. (Section 216.)
Duty to pay sums received for the principal.
The agent’s responsibility is to pay all amounts earned on behalf of his principal to his principal. According to Section 217, an agent may retain, out of any sums received on account of the principal in the business of the agency, all money due to him in respect of advances made or expenses properly incurred by him in conducting such business, and he may make such deductions as are lawfully due to him.
DUTIES OF PRINCIPAL (Rights of Agent)
The following are the rights vested in the agent, which are also the duties of the principal:-
Right to remuneration.
Section 219 states that – ” In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act; but an agent may detain money received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actually complete.”
The above-mentioned clause states that an agent’s remuneration is not due until the act assigned to him is completed. Any special contract between the principal and the agent will override this law. If the parties have decided that the agent will be entitled to a fee if he finds a buyer who is ready and able to purchase the land, the agent will be entitled to it.
Section 220 states that an agent who is guilty of misconduct in the business is not entitled to any remuneration. It is in respect to that part of the business which he has misconducted.
This can be understood from an example – A hires B to recover a million rupees from C and put it in a safe deposit box. B recovers the 1,00,000 rupees and invests 90,000 rupees in good protection, but he invests 10,000 rupees insecurity that he should have known was poor, resulting in a 2,000 rupee loss for A. For recovering the 1,00,000 rupees and spending the 90,000 rupees, B is entitled to compensation. He is not entitled to any compensation for the 10,000 rupees he invested, and he must repay B the 2,000 rupees he owes him.
Right to retain sums.
All amounts earned on the principal’s account must be paid to the principal by the agent. 5 However, he has the right to keep any money due to him in respect of advances rendered or expenditures properly incurred by him in conducting such business, as well as any remuneration that may be payable to him for acting as an agent, out of any sums collected on account of the principal in the agency’s business. Similarly, when an agent sells his principal’s goods, he has the right to keep any money earned as compensation for the goods sold by him. Such right can be exercised by an advocate also but the lien must be confined to the costs incurred in that particular case.
Right to lien on principal’s property.
According to Section 221, an agent is entitled to maintain goods, documents, and other property of the principal obtained by him, whether movable or immovable, until the sum due to him for commission, disbursements, and services in respect of the same have been paid or accounted for to him, absent any arrangement to the contrary.
Before the fee due to him for such transactions are charged, a buying agent may exercise a lien on the goods purchased for his principal. However, such a right is subject to an agreement to the contrary. Furthermore, when the agent relinquishes ownership of the goods, this right is lost.
Right of Agent to be indemnified.
According to Section 222, an agent’s employer is obligated to indemnify him against the effects of all lawful actions performed by the agent in the exercise of the authority given to him.
Example – Under the orders of A of Calcutta, B contracts with C in Singapore to supply those goods to him. When A fails to deliver the goods to B, C sues B for breach of contract. B tells A of the lawsuit, and A gives him permission to defend it. B defends the case and is ordered to cover the costs. A is liable to B for those ages and costs, and damages, costs, and expenditures are incurred as a result.
Apart from the right to indemnity against the effects of all legitimate actions performed by the agent, Section 223 states that the agent is therefore entitled to indemnity against the consequences of an act performed in good faith, even though the act injures the rights of third parties.
CASE – 1
Union of India v. Chinoy Chablani & Co. AIR 1982 Cal. 365.
Facts: • In this case, the Mineral and Metal Corporation of India Ltd. made an arrangement with the USSR’s Black Sea Steamship Company on behalf of the plaintiff, the Union of India.
• The USSR Shipping Company agreed to transport a consignment of fertilisers from the port of Odesa in the USSR to any port in India under the terms of the agreement.
• The respondent, Chinoy Chablani & Co., was the steamer agent for discharging the consignment in Calcutta.
• This loss to the plaintiff (Union of India) was caused by the carriers’ wrongful actions, as certain bags containing fertiliser were found cut and torn, and certain amounts of sweepings only, when the cargo was discharged.
• The plaintiff filed a lawsuit for Rs. 73, 285 in damages against the steamer agents (Chinoy Chablani & Co.).
• The plaintiff argued that since the Shipping Company was owned by the USSR and could not be sued in India, the Shipping Company’s agents in India could be held liable under section 230(3)
Held: The first requirement for making an agent responsible under this clause, according to the court, is that the agent must enter into a contract on behalf of the principal. The question of liability of Shipping Agents did not arise in this case because the contract was directly entered into by the principal (shipping company) with the Union of India, and they were not liable for the same.
CASE – 2
Facts: Narandas Morardas Gaziwala and Ors., a partnership firm based in Surat that dealt in lace and silver thread, had dealings with another firm, Krishna and Company, who served as their agents for selling their products on a commission basis in the three districts of Madras. On the firm’s breakup, Murugesa Chettiar, one of the partners, took over all of the firm’s assets and liabilities. Krishna & Co. became indebted in 1951 as a result of their dealings. On April 1, 1951, Murugesa Chettiar (hereinafter referred to as the plaintiff) signed a promissory note in the amount of Rs. 7,500/- in favour of Narandas Morardas Gaziwala, the amount determined to be due and payable to him. In response, the Surat firm filed a lawsuit against the plaintiff in the court of Subordinate Judge, Chingleput, seeking to recover the sum owed under the promissory note. By agreement of the parties, all suits were tried together.
- Is the complainant, as the agent, allowed to sue the defendant-Surat firm for accountancy?
- Is the plaintiff entitled to set up a parole arrangement to provide the condition precedent to the promissory note’s enforceability?
Held: The Indian Contract Act makes no allowance for an agent to sue the principal for the account’s rendition. The law is not exhaustive, and the agent’s right to sue the principal for accounts is an equitable right that arises in unusual cases, rather than a statutory right. Such unusual situations occur when the principal owns all of the accounts and the agent lacks the necessary accounts to assess his claim for commission against his principal. The agent’s right can also occur in rare circumstances where his remuneration is contingent on the nature of transactions that he is unaware of or where he is unable to determine the extent of the dealings of the amount due to him unless the accounts of his principal are gone into.
The Supreme Court agreed with the HC that the transactions on which the plaintiff is entitled to the commission are unique in that they are only known to the principal. As a result, the Supreme Court decided that the plaintiff had the right to sue the Surat firm for accounts because of the unique circumstances of this case (remuneration was based on the number of transactions).
The court also agreed with the HC’s conclusion that the Surat firm had made direct sales to consumers in violation of the plaintiff’s single agency agreement.
On the issue of the parole agreement, the SC rejected the Surat Firm’s argument and upheld the HC’s finding that there was a collateral oral agreement that the promissory note duty would not be implemented for 5 years and unless the sum was due after the commission agency’s accounting period. The Supreme Court held that the agreement was a condition precedent to the promissory note’s enforceability and that the plaintiff should use the 3rd proviso to s. 92 of the Evidence Act to adduce evidence of oral agreement.
- Contract-II – Dr. RK Bangia