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CREATION OF AGENCY

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This article is written by Divyanjali Mishra of 3rd Semester of Maharashtra National Law University, Aurangabad, an intern under Legal Vidhiya

ABSTRACT

The Concept of Agency is widely used. The creation of a contract agency has to undergo various nuances which are mentioned under the Indian Contract Act, of 1872. There are various ways in which agency contracts can be created which is mentioned in the present article. At the same time, there are various ways in which the contract of an agency can be terminated. Understanding this becomes crucial in the modern world and the same is discussed at length. The article focuses on the various types of agencies and explains briefly the circumstances under which such relationships are created. The article also discusses the essential elements, features, and effects of the contract of agency, and analyses some of the relevant case laws and judicial interpretations on the subject. It aims to provide a comprehensive and critical overview of the Contract of Agency and its implications for the parties involved.

Keywords: Contract of Agency, Creation, Termination, principal, agent.

INTRODUCTION

The concept of agency is much used in the day to day working, be it professional or some other work. Due to the wide use of agency, it is legally enacted in the Indian Contract Act, of 1872, to protect the rights and interests of the people entering into such contracts. The concept of Agency is Defined under Chapter X of the Indian Contract Act from section 182 – 238. A Contract of Agency consists of at least two parties, one is called the principal and the other, Agent[1]. The word Agency has been derived from Latin word ‘Agentis’ which means ‘actor’ i.e., to say there is an agent who is acting as per the saying of the principal on his behalf. Here the relationship between the principal and the agent is such that one is representing the other. The one who is representing is the Agent and the one who is being represented is called the principal. 

The agent is a link between the principal and the third person, with whom the principal wants to make a contract. Contracts are of two types, social contracts and professional contracts. Here, in the contract of the Agency, the legal relationships are being covered.

According to the Indian Contract Act, an agent is a person who is employed to do any act for another or to represent another in dealings with a third person. A legal fiction is being created here. The actual contract is entered upon by the principal through the agent. The law of Agency is based on the maxim, Qui facit per alium facit per se, which means that he who acts through another does the act himself[2].

CONCEPT OF AGENCY

A contract of an Agency contains various facets that need to be fulfilled. When a contract of agency is created, duties and rights also come into the picture. There are certain duties that an agent has to follow along with certain rights and the same is for the principal also.

Essentials for creating agency 

The contract of agency requires at least two parties, one principal and other the agent as defined under section 182 of the Indian Contract Act. 

The principal should be capable of performing the task which he wants his agent to do for him. A principal must fulfill all the essentials as mentioned under section 11 of the Indian Contract Act i.e., he must have attained the age of majority[4], he must be of sound mind and must not be disqualified from contracting by any law to which he is subject. A person who does not fulfill any of the said essentials is not a valid principal. As mentioned in Mahendra Pratap Singh v. Padam Kumar Devi, after a client becomes mentally infirm his power of attorney becomes worthless. 

According to the Contract Act, any person between the principal and the third party may become an agent. The capacity of an agent could be looked at from two angles:

  1. The capacity of an agent to act on behalf of the principal to bind his principal and the 3rd person: In this regard, anyone can become an agent be it a minor or a major. A minor can also bind a principal in a contract with the third person.
  2. Capacity to bind himself by a contract between himself and his principal: So far as the agent’s capacity to bind himself to the principal is concerned, for that the agent must be competent to contract. Section 184, therefore, provides that no person who is not of the age of majority and sound mind can become an agent, to be responsible to his principal. 

An agent who is not competent as per section 11 of the Indian Contract Act, cannot be further made liable under section 211-218 under the Indian Contract Act, which states the Agent’s duty to the principal[5]. 

The law does not require any consideration as such for the validity of a contract of agency[6]. The principal’s willingness to bind himself by the acts done by the agent on his behalf serves as a sufficient detriment to the principal. 

MODES OF CREATION OF AGENCY

Agency can be created through a number of ways. The methods through which such agency can be created are as follows:

Agent’s authority can be expressed or implied as defined under sections 186 and 187[7]. The agent who has the authority to do an act can do every lawful thing that is necessary to carry on the act that is assigned[8].

This is an agency which is created by law. The agent can do all such acts in an emergency, which even though not assigned initially by the principal but due to the situation contingent, has to be performed. In this case, the principal has to give assent to every such task done prudently by the agent due to the emergency. Here the agency is being created for every such task which was not delegated by the principal but was done on account of the emergency.

Sometimes the agent has neither express nor implied authority to do an act on behalf of the principal, but the principal by his conduct creates an impression in the minds of the third person that the agent has an authority to act on his behalf[9]. This is known as the principle of estoppel and agency is created in this case.

When an act has been done by one person on behalf of another without his authority, the person on whose behalf the act was done has the following options-

  1. To disown the act: if disowned, the agent has to compensate the other in respect of any loss or damage incurred by the third party. 
  2. To ratify the act.

For ratifying an act, the following essentials need to be fulfilled:

  1. The act is done on behalf of the other person. (sec. 196)
  2. The principal should be in existence and competent to contract when the act is done. 
  3. Ratification may be express or implied (sec. 197)
  4. Ratification should be with full knowledge of the fact[10] (sec. 198) and of the whole transaction (sec. 199)
  5. The ratified act should not be injurious to the third person (sec. 200)
  6. Ratification should be made within a reasonable time.

If the act is ratified by the principal, then an agency is created and the principal then shifts the liability on himself.

Now if an agent acts on his account, then such an act cannot be ratified by another person[11]. 

DOCTRINE OF RELATING BACK

When the Principal ratifies an act, which has been done on his behalf but without his authority or knowledge, the same effect follows as if the act had been performed with the principal’s prior authority[12].

DUTIES OF AGENT

  1. Duty not to delegate his duties. (section 190)

Delegatus non potest delegare, an agent to whom some authority has been delegated cannot further delegate that authority to another person. An agent cannot employ a sub-agent to get the work done through him. The general rule is not to delegate the work. But there are exceptional cases:

  1. If the custom of trade is such that.
  2. Is the nature of the agency requiring sub-agent employment?
  3. If the act requires a special skill.
  4. Or if the principal agrees to the same.

Section 191 of the Indian Contract Act, defines a sub-agent. When the sub-agent is properly appointed his act binds the principal the privity of contract subsists in this case. Otherwise, if the sub-agent is not appointed for any of the above-mentioned reasons, i.e., improperly appointed then it does not bind the principal and no privity of contract exists between them. Also, in such cases, the agent is responsible to both the third person and the principal[13].

Only for particular work, the principal can employ a substituted agent[14]. 

  1. Duty to follow the principal’s directions. (section 211)

The agent has to follow the directions of the principal[15].

  1. Duty to show proper skill and care. (section 212)

The agent has to show proper skill and care in normal scenarios. If the agent did not show proper skill and care in the matter, then he will be liable to pay damages to his principal for the loss suffered by him[16].

  1. Duty to render proper accounts. (section 213)
  2. Duty to communicate with the principal. (section 214)
  3. Duty not to deal with his account. (section 215 and 216)

If an agent deals on his account without the principal’s prior consent, the principal has the following two rights:

  1. To repudiate the act. (section 215)
  2. To claim from the agent any benefit which may have resulted to him from the transaction. (section 216): agent cannot take any personal gain out of the transactions of the agency nor can he make any secret profits while acting as agent[17].
  3. Duty to pay sums received for the principal (sections 217 and 218)

RIGHTS OF AGENT AND DUTIES OF PRINCIPAL

An agent’s remuneration does not become due to him until the completion of the act assigned to him[18]. The Agent is entitled to get the money once he completes the assigned work[19]. If the business is misconducted, no remuneration is given in that case (section 220).

An agent may retain such sum as remuneration as may be payable to him for acting as agent.

An agent is entitled to retain goods, (movable/ immovable) until a commission is paid to him.

Indemnify for lawful act (sec. 222), Indemnity for civil wrongs (sec. 223). In both the above the employer has to indemnify the agent. No indemnity in case of criminal offenses (sec. 224)[20].

If there is neglect on the part of the principal, the agent is entitled to get damages for the same.

TERMINATION OF AGENCY (201-210)

These are certain conditions in which the Contract of the agency can be canceled or get itself terminated. This termination can be done by the principal or the agent accordingly. This is how an agency contract can be terminated:

The contract of agency can be revoked by the principal, such revocation can be express or implied (sec. 207). Reasonable notice is a mandatory requirement under section 206 for termination of agency[21]. But such revocation cannot be made when the agent has an interest in the subject- matter (sec. 202).

  1. By the completion of the business of the agency[22].
  2. By the death or insanity of either the principal or the agent.
  3. By insolvency of the principal.

Revocation can be done subject to the following rules:

  1. The revocation may be express or implied. (sec. 207)
  2. No revocation of agency when the agent has an interest in the subject matter (sec. 202)[23]
  3. Revocation is possible before the authority has been exercised. (sec. 203): there can be no revocation if the authority has been partly exercised (sec. 204).
  4. Principal to compensate, if there is premature revocation without justification (sec. 205)
  5. The principal should give reasonable notice of revocation (sec. 206)

Termination of agency also terminates sub-agency. (sec. 210)

CONCLUSION

The Indian Contract Act lists several ways in which a contract of agency may be established. There are several ways to establish a legal relationship between a principal and an agent in which the agent represents the principal in interactions with third parties. These include express agreement, implied authority, ratification, estoppel, necessity, or operation of law. The ability to contract between the principal and the agent is necessary but not for the development of the agency. The Indian Contract Act of 1872 and general legal principles, as well as specific rights and duties of the principal and agent, come into play when an agency is created. The idea of agency is crucial in the contemporary business environment, as it allows the principal to broaden his operations and connect with more clients via the agent. The principal and the agent must be aware of and take precautions against the risks and liabilities that come with the agency[24]. Consequently, establishing an agency requires mutual trust and confidence between the principal and the agent, and it should be done carefully and thoroughly.

[1] Indian Contract Act, 1872, Sec. 182.

[2] Indian Contract Act, Sec. 182.

[3] All you need to know about the agent-principal relationship is https://blog.ipleaders.in/all-you-need-to-know-about-the-agent-principal-relationship/.

[4] T.C. Mathai & Anr v. The District & Session Judge, (1999) 3 SCC 614.

[5] FEATURES OF CONTRACT OF AGENCY 1, https://www.academia.edu/7934789/FEATURES_OF_CONTRACT_OF_AGENCY_1.

[6] Indian Majority Act, 1875, Sec. 3.

[7]Indian Contract Act, 1872.

[8] Indian Contract Act, 1872, Sec. 188.

[9] Armagas Ltd. v. Mundogas S.A., (1986) 68 N.R. 300 (HL).

[10] Savery v. King.

[11] Keighley Maxted & Co. v Durant, (1901) AC 240.

[12] Risbourg v. Bruckner.

[13] Indian Contract Act, 1872, Sec. 193.

[14] Indian Contract Act, 1872, Sec. 194.

[15] Pani Bai v. Sire Kanwar, AIR 1981 Raj 184.

[16] Keppel v. Wheeler, (1927) 136 LT 203.

[17] De Bussche v. Alt., (1878) 8 CHD (CA) 286.

[18] What are the Rights of Agent and Duties of Principal, https://deepakmiglani.com/rights-of-agent-and-duties-of-principal/?

[19] Smt. Saraswati Devi v. Moti Lal, AIR 1982 Raj 108.

[20] Adamson v. Jarvis, (1827) 4 BING 66.

[21] M/S. Popular Shoe Mart v. K. Srinivasa Rao and another, https://www.livemint.com/Money/5t587oXX6docUjoU46n92O/Ask-Mint-Money–Reasonable-notice-is-mandatory-for-terminat.html.

[22] Nalco Project – Sritam | PDF | Law of Agency | Indemnity, https://www.scribd.com/document/423507884/Nalco-project-Sritam-docx.

[23] Bhagwanbhai Karamanbhai Bharvad v. Arogyanagar Co-Op., AIR 2003 Guj 294.

[24] Editors of Toppr.com, Creation of Agency, Toppr.com (last visited Nov. 14, 2023, 12:39 PM) Creation of Agency: Types of Agency Contract, Concepts (toppr.com).

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is of a personal nature.

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