11

The Indian Contract Act, 1872: Agency

11.1 CONTRACT OF AGENCY

A person cannot do every business transaction by himself because of time constraint and business complexity. Therefore, business people perform many activities through another person. The person who carried out the transaction on behalf of another is known as an agent. This arrangement is known as contract of agency.

11.1.1 Agent

A person employed to do any act for another or to represent another in dealings with a third person is known as an agent.

11.1.2 Principal

The person for whom such an act is done or who is so represented is called the principal.

Example

Devdas appoints Paro to buy liquor on his behalf. Devdas is the principal and Paro is the agent. The relationship between Devdas and Paro is called ‘an agency’.

There are two important rules on which the agency is based—

1. Whatever a person can do personally, he can do through the agent.
2. He, who does an act through another, does by himself. Consequently, all the acts of the agent are the acts of the principal.

The function of the agent is thus to bring his principal into contractual relation with the third parties. In other words, the agent is merely a connecting link between the principal and the third parties.

11.2 ESSENTIALS FOR A VALID AGENCY

The essentials for a valid agency or feature of an agency are discussed as under:

11.2.1 Agreement Between the Principal and the Agent

An agency is created by an agreement between the principal and the agent. The agency may be express or implied.

11.2.2 Agent Must Act in a Representative Capacity

An agent must represent his principal and act on his behalf. The agent must have the power to create a legal relationship of his principal with the third person. Thus, the agent need not be a competent person. Even a minor or a lunatic can act as the agent.

11.2.3 Consideration

The contract of agency can be created without consideration. The fact that the principal has agreed to be represented by the agent is a sufficient ‘detriment’ to the principal to support the contract of agency.

11.2.4 Capacity of a Party

For a valid contract of agency, the principal must be a competent person to enter into a contract. Thus, a minor or a person of unsound mind cannot appoint the agent. A major and a competent agent, working for an incompetent principal, will be personally liable for his act to the third party.

On the other hand, any person may become the agent and he need not to be competent to contract. It means even a minor or a person of unsound mind may be appointed as the agent. An incompetent agent is not liable to the principal.

11.3 TEST OF AN AGENCY

To determine whether a person is or is not the agent, one should ask—‘Has that person the capacity to bind the principal and make him answerable to a third person by bringing him into legal relations with that third person and thus establish a privity of contract between that party and the principal?’

If the answer is yes, he is the agent otherwise not.

11.4 DIFFERENCE BETWEEN AN AGENT AND A SERVANT

Agent	Servant
An agent has the authority to act on behalf of the principal and to create contractual relations between the principal and third persons.	A servant does not have the authority to bind and create contractual relations between his master and third persons. The servant acts under the authority of the master.
An agent, though bound to exercise his authority in accordance with all lawful instructions, which may be given to him by his principal, is not subject to the direct control and supervision of the principal.	The servant acts under the control and supervision of the master and is bound to conform to all reasonable orders given to him in course of his work.
An agent receives commission on the basis of work done.	A servant is paid salary or wages.
The principal is liable for the wrongs of his agent if they are done within the ‘scope of the authority’.	A master is liable for the wrongs of his servant if they are committed in the ordinary course of the servant’s employment.
An agent may work for several principals at the same time.	A servant usually serves only one master.

11.5 DIFFERENCE BETWEEN AN AGENT AND AN INDEPENDENT CONTRACTOR

An independent contractor is to exercise his own discretion, as to the mode and time of doing work, for which he is engaged. The agent, on the other hand, is one who acts according to the instructions of the principal.

The independent contractor does not represent his employer, in dealing with the other persons, whereas the agent represents his principal in dealings with the third persons and can bind the principal by entering into contracts with other persons within the scope of his authority.

11.6 DIFFERENT KINDS OF AGENTS

Various kinds of agents are enumerated below.

11.6.1 General Agent

A general agent is one, who has the authority to do all the acts connected with a particular trade, business or employment, e.g., solicitors, brokers. The authority of the general agent is continuous unless it is terminated.

11.6.2 Particular Agent

A particular or a special agent is one who has the authority only to do particular transactions.

Example

An agent appointed to sell a particular house or to sell a particular piece of land.

11.6.3 Universal Agent

A universal agent is one whose authority to do all the acts which the principal can lawfully do. He has unlimited authority to bind the principal.

11.6.4 Mercantile Agent

A mercantile agent is one, who is authorized to sell or buy goods of the principal, in the customary course of his business as such an agent. He has the authority to consign goods for the purpose of sale or to buy goods or to raise money on the security of the goods.

11.6.5 Factor

A factor is the mercantile agent, entrusted with the possession of goods, who has the authority to buy, sell or otherwise deal with goods or to raise money on their security.

11.6.6 Broker

A broker is the mercantile agent who is employed to negotiate and make contracts for sale or purchase or goods on behalf of the principal. He is not given the possession of goods. He has no lien on goods.

11.6.7 Commission Agent

A commission agent is one who secures buyers for a seller of goods and sellers for a buyer of goods in return for a commission on the transaction for his labour and trouble. He buys goods in the market on behalf of his employer in his own name and on the best available terms. He may have the possession of goods or not. His position is more or less similar to that of a broker. The duties and responsibilities of the commission agent depend upon his agreement with his principal.

11.6.8 Auctioneer

An auctioneer is the mercantile agent who is appointed to sell goods at the public auction. He has the authority to receive the auctioned price. He has a particular lien on the goods for his charges.

11.6.9 Del Credere Agent

A del credere agent, also called Dubash in Madras, or Banian in North India, is an agent, who, in consideration of an extra remuneration, guarantees the solvency of the parties with whom he brings the principal into contractual relations and undertakes to indemnify the principal against any damage that may be caused by the party’s failure to perform the contract. His liability like that of surety is secondary and arises only on the insolvency of the other party or other similar grounds.

11.7 MODE OF CREATING AN AGENCY

The relationship of the principal and the agent may be created in anyone of the following ways:

11.7.1 Agency by an Express Agreement—Sections 186 and 187

Normally, a contract of agency is created by an express agreement, i.e., the authority is expressly given by the principal to his agent. Such an agreement may be oral or in writing. No particular form or words is required for the appointment of the agent.

Example

Contract of agency created by power of attorney.

11.7.2 Agency by an Implied Agreement—Section 187

An agency agreement may be implied under certain circumstances from the conduct situation or relationship of the parties. The agency by implied agreement includes the following agencies also:

1. Agency by estoppel
2. Agency by holding out
3. Agency by necessity

11.7.2.1 Agency by Estoppel ‘Estoppel’ means that a person is stopped or prevented from denying the truth of a statement, which he has made. Thus, where a person by his conduct or words spoken or written leads wilfully to another person to believe that a certain person is his agent, he is estopped from denying subsequently the fact of agency. Thus, agency is created by the implication of law.

11.7.2.2 Agency by Holding Out An agency by holding out is a kind of agency by estoppel. In this case, there is some prior positive or affirmative conduct of the principal which indicates that a certain person has already become his agent.

11.7.2.3 Agency of Necessity It is some extraordinary situation that compels a person to act as the agent of some person without his consent or authority of that person. Such an agency is created as an agency by necessity.

To constitute a valid agency by necessity, the following conditions must be satisfied:

1. There must be an emergency.
2. There was a necessity to act on behalf of the principal.
3. The agent was not in a position to communicate with the principal.
4. The agent has acted honestly and in the interest of the principal.

11.7.3 Agency by Ratification—Sections 196 and 197

A ratification means confirmation of the acts already done. When a person does some acts on behalf of another person without his knowledge or authority. Later on, if the other person ratifies the acts done on his behalf. In such a case, an agency is created by the ratification. It is also known as an ex post facto agency. On the ratification, the principal is bound by the acts done by the agent. The ratification may be express or implied.

11.8 REQUISITES OF A VALID RATIFICATION—SECTIONS 198–200

To be valid, the ratification must fulfil the following conditions:

11.8.1 The Agent Must Expressly Contract Agent

In other words, a person must purport to act as the agent for a principal, who is in contemplation and at the time of the contract such a principal must be identifiable. If the agent acts for himself, such act cannot be ratified by the principal.

Example

A, without B’s authority, lends B’s money to C. Afterwards B accepts interest on the money from C. B’s conduct implies a ratification of the loan.

11.8.2 The Principal Must Be in Existence at the Time of the Contract

Thus, a company cannot ratify the contracts entered into by the promoters on its behalf before its incorporation.

11.8.3 The Principal Must Have Contractual Capacity Both at the Time of the Contract and at the Time of the Ratification

The principle is that since ratification tantamount to prior authority, the principal must be a person competent to have authorized the transaction at its inception.

11.8.4 Ratification must be with Full Knowledge of Facts

No valid ratification can be made by a person whose knowledge of facts of the case is materially defective.

11.8.5 The Act to be Ratified Must Be Lawful and Not Void or Illegal

There can be no ratification of an illegal act or an act which is void. The act to be ratified must be valid in itself and not illegal.

Example

A holds a lease from B terminable on three months’ notice. C, an unauthorized person, gives notice of termination to A. The notice cannot be ratified by B so as to be binding on A.

11.8.6 Ratification Must Be Done Within a Reasonable Time

If it is made after the expiry of a reasonable time, it will not be valid.

11.8.7 The Whole Act to Be Ratified

A person, ratifying any unauthorized act done on his behalf, ratifies the whole of the transaction of which such act formed a part.

11.8.8 Ratification Must Be Communicated

For the ratification to be effective, it must be proved that there was a communication of the ratification to the party who is sought to be bound by the act by the agent.

11.8.9 Ratification Can Be of the Acts Which the Principal had the Power to do

The act which the principal himself is incapable of doing cannot be ratified. Thus, a minor is not competent to act and hence minor’s act cannot be ratified.

11.8.10 Ratification Should Not Put a Third Party to Damages

An act done by one person on behalf of another without such other person’s authority which, if done with the authority, would have the effect of subjecting a third person to damages or of terminating any right or interest of a third person cannot, by ratification, be made to have such an effect.

11.9 HUSBAND AND WIFE

The relationship between a husband and his wife is also that of a principal and the agent. The husband is treated as a principal and the wife as his agent. The agency relation between the husband and his wife may be discussed under the following two heads:

11.9.1 Wife Living with Her Husband

When the wife is living with her husband, she has implied an authority to buy the articles of household necessaries. The following conditions should be satisfied for treating the wife as an agent of the husband:

1. The husband and wife are living together in a domestic establishment of their own.
2. The wife should be in charge of the domestic establishment.
3. The wife must have purchased articles or goods suitable to the style in which the husband chooses to live.

However, the husband can escape his liability if he proves that:

1. He has forbidden his wife expressly to buy goods on credit. The tradesman is also expressly forbidden to supply goods on credit to his wife.
2. The wife was supplied with sufficient articles or goods.
3. The wife was supplied necessary funds to purchase the necessaries.
4. The goods purchased were not necessaries.

11.9.2 Wife Living Apart from Her Husband

Where the wife is living apart without any fault on her part then she is legally entitled to receive maintenance from her husband. If the husband does not provide her maintenance, the wife has implied an authority to purchase the necessaries of her life and the husband is bound to pay for the same.

11.10 EXTENT OF AN AGENT’S AUTHORITY

An agent’s authority means the capacity of the agent to bind his principal. The acts of the agent, done within the scope of his authority, bind the principal.

Such an authority of the agent to bind the principal may be:

1. Actual or real authority.
2. Ostensible or apparent authority.
3. Authority in an emergency.

11.10.1 Actual Authority—Section 186

An actual authority means that authority which has been really delegated to the agent. The authority of the agent may be express or implied.

An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case or the ordinary course of dealing between the parties.

The principal is bound by the act of the agent done within his express or implied authority.

Example

A owns a shop in Dhanbad, living himself in Calcutta and visiting the shop occasionally. The shop is managed by B and he is in the habit of ordering goods from in the name of A for the purposes of the shop and of paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods from C in the name of A for the purpose of the shop.

11.10.2 Ostensible or Apparent Authority

When the agent is employed for a particular business, persons dealing with him can presume that he has the authority to do all such acts as are necessary for such a business. Such an authority of the agent is called an ostensible or an apparent authority. The ostensible or an apparent authority is the authority of the agent as it appears to others. It often coincides with the actual authority.

11.10.3 Authority in Emergency—Section 189

The agent has an authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence in his own case under the similar circumstances. When the agent has acted beyond the authority in emergency, the principal is bound by the act of the agent.

11.10.4 When the Agent Exceeds His Authority

When the agent acts beyond the scope of his authority, he will be personally liable and the principal cannot be held liable.

Example

A consigns goods to B at Calcutta, with directions to send them immediately to C at Cuttack. B may sell the goods at Calcutta if they will not bear the journey to Cuttack without spoiling.

11.11 DELEGATION OF AUTHORITY BY AN AGENT

11.11.1 Delegation of Authority—Section 190

The rule is that the agent who has obtained power from the principal to act must act himself. He is not entitled to delegate his authority to another person without the consent of his principal. The rule is expressed in Latin maxim—‘Delegatus non-protest delegare’, i.e., a delegate cannot further delegate. It simply means that delegated powers cannot further be delegated. One cannot delegate that which one has himself undertaken to do. So, the agent cannot, without the permission of the principal, delegate his authority and ask some other person to do the thing.

The agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally.

11.11.2 Exceptions to the Rule of ‘Delegatus Non-protest Delegare’

In the following exceptional cases, the agent can delegate his authority:

1. Where the principal is aware of the intention of the agent.
2. Where there is an emergency, or unforseen circumstances.
3. Where the nature of the authority requires it.
4. Where the act is purely ministerial.
5. Where the power of the agent to delegate can be inferred.
6. Where the principal permits the appointment of a sub-agent.
7. Where the custom of trade permits delegation.

11.12 SUB-AGENT—SECTION 191

A ‘sub-agent’ is a person employed by and acting under the control of the original agent in the business of the agency. The sub-agent is the agent of the original agent. As between the original agent and the sub-agent, the relationship is that of the principal and the agent.

11.12.1 Where a Sub-agent Is Properly Appointed—Section 192

Where the sub-agent is properly appointed, the principal is, so far as regards the third persons, represented by the sub-agent as is bound by and responsible for the acts as if he were the agent originally appointed by the principal.

The agent is responsible to the principal for the acts of the sub-agent. The sub-agent is responsible for his acts to the agent but not to the principal except in case of fraud or wilful wrong.

11.12.2 Where a Sub-agent Is Not Properly Appointed—Section 193

Where an agent, without having an authority to do so, has appointed a person to act as a sub-agent stands towards such person in the relation of a principal to the agent and is responsible for his acts both to the principal and to third persons; the principal is not represented by or responsible for the acts of the person so employed, nor is that person responsible to the principal.

11.13 SUBSTITUTED AGENT OR CO-AGENT—SECTION 194

A substituted agent is an agent named by the original agent to act on behalf of principal. Thus, the substituted agent is the agent appointed by the original agent to act for the principal. The substituted agent acts under the direct control of the principal and not under the original agent.

The agent is not concerned with the efficiency of the substitute.

Example

A directs B, his solicitor, to sell his estate by auction and to employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent but is A’s agent for the conduct of the sale.

In selecting a co-agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and if he does this, he is not responsible to the principal for the act or negligence of the co-agent.

11.14 DIFFERENCE BETWEEN A SUB-AGENT AND A SUBSTITUTED AGENT

1. The sub-agent does the work under the direct control of the agent whereas the substituted agent works under the instructions of the principal.
2. There is no privity of contract between the sub-agent and the principal and therefore:
   1. the sub-agent cannot sue the principal for his remuneration and b. the sub-agent is not directly answerable to the principal but both the principal and the sub agent can sue the agent.
3. It is the agent who is responsible to the principal for the acts of the sub-agent but the agent is not responsible to the principal for any act or negligence of the substituted agent.
4. The original agent, who names the substituted agent, drops out completely from the transactions, whereas the agent, who appoints the sub-agent, still continues to function and is still answerable.

11.15 DUTIES OF AN AGENT

Duties of an agent are the rights of the principal. The duties of an agent may be broadly classified under the following heads:

11.15.1 Duty to Follow the Instruction of Principal—Section 211

The agent is bound to conduct the business of his principal according to the directions given by the principal. In the absence of any such directions according to the custom which prevails at the place where the agent conducts such a business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal and if any profit accrues, he must account for.

Example

B, a broker in whose business it is not the custom to sell on credit, sells goods of A on credit to C, whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the loss to A.

11.15.2 Duty to Carry Work with Care and Skill—Section 211

The agent is bound to conduct the business of the agency with reasonable care and skill. The standard of reasonable care required from the agent depends upon the nature of the business and the circumstances of each case. The agent is required to make compensations to his principal in respect of the direct consequences of his own neglect, want of skill or misconduct but not in respect of loss or damage which is indirectly or remotely caused by such neglect, want of skill or misconduct.

Example

A, air agent for the sale of goods, having authority to sell on credit, sells to B on credit without making the proper and usual enquiries as to the solvency of B. B at the time of such sale is insolvent. A must make compensation to his principal in respect of any loss thereby sustained.

11.15.3 Duty to Render Accounts to the Principal—Section 213

The agent is bound to render the proper account to his principal on demand. It is the absolute duty of the agent.

11.15.4 Duty to Communicate with the Principal—Section 214

It is the duty of the agent in cases of difficulty to make reasonable efforts to communicate with his principal and to obtain his instruction.

11.15.5 Duty Not to Deal on His Own Account—Section 215

The role of the agent is fiduciary in nature and therefore the agent must conduct his business in good faith. He should not deal on his own account. If the agent deals on his account without the principal’s consent or without full disclosure, the principal may cancel the contract.

Example

A directs B to sell A’s estate. B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wishes to buy the estate for himself but conceals the discovery of the mine. A allows B to buy, in ignorance of the existence of the mine. A, on discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option.

11.15.6 Duty Not to Make Secret Profit—Section 216

If the agent, without the knowledge of his principal, deals in the business of the agency on his own account, instead of on account of his principal, the principal is entitled to claim from the agent, any benefit which may have resulted to him from the transaction.

11.15.7 Duty to Pay Sums Received for the Principal—Sections 217 and 218

It is the duty of the agent to his principal, all monies received on his behalf. However, the agent can deduct lawful expenses he has incurred for the agency work and the commission from this amount.

11.15.8 Duty to Protect Interests of the Principal in Case of His Death or Insolvency—Section 209

On the death or insanity of the principal, the agent is terminated. However, in such a case it becomes the duty of the agent to take all the reasonable steps to protect the interest of the principal.

11.15.9 Duty Not to Delegate—Section 190

The agent cannot delegate his authority to perform his act in express or implied manner unless the custom of trade or the nature of the agency so requires.

11.16 RIGHTS OF AN AGENT

Rights of the agent are the duties of the principal. The rights of the agent may be discussed under the following heads:

11.16.1 Right to a Retainer—Section 217

The 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 the advances made or the expenses properly incurred by him in conducting such business and also such remuneration as may be payable to him for acting as the agent.

11.16.2 Right to Receive the Remuneration—Sections 219 and 220

The agent has the right to receive the agreed remuneration from the principal. If the remuneration is not fixed, the agent is entitled to receive reasonable remuneration. The agent is entitled to receive the remuneration only when it becomes due. Usually, the remuneration becomes due when the agent completes the work undertaken.

The agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business, which he has misconducted.

11.16.3 Right of Lien—Section 221

In the absence of any contract to the contrary, the agent is entitled to retain the goods, papers and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for, to him.

11.16.4 Right to Be Indemnified—Section 222

The principal is bound to indemnify the agent against the consequences of all the lawful acts within his authority.

Example

A employs B to beat C and agrees to indemnify him against all consequences of the act. B thereupon beats C and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.

11.16.5 Right of Compensation—Section 225

The agent has the right to receive compensation for the loss suffered due to the principal’s negligence or want of skill.

11.17 POSITION OF A PRINCIPAL AND AN AGENT IN RELATION TO THIRD PARTIES

If the agent acts within the scope of his authority, the principal is bound by the act of the agent. The position of the principal as regards the contracts made by the agent with the third party may be discussed under following heads:

1. Where the agent contracts for the named principal.
2. Where the agent contracts for the unnamed principal.
3. Where the agent contracts for the undisclosed principal.

11.18 PRINCIPAL RELATIONSHIP WHERE AN AGENT CONTRACTS FOR A NAMED PRINCIPAL

The position of the principal for the acts of the agents where the name and existence of the principal are disclosed is as follows:

11.18.1 Acts of the Agents Are Within His Authority—Section 226

The principal is bound by all lawful acts of the agent, which are done within the scope of his authority. It means the act of the agent is the act of the principal.

11.18.2 Agent Act in Excess His Authority—Section 227

The principal is liable only for the acts done within the authority. The principal’s liability for the work done by the agent beyond his authority may be discussed under the following two points:

11.18.2.1 When Work of an Agent Is Separable When the agent does some work beyond the authority, which is separable from the authorized work, the principal is bound by the authorized work of the agent.

11.18.2.2 When Work is Not Separable—Section 228 When the agent does some work beyond the authority, which is not separable from the authorized work, the principal is not bound by whole of the work. He may cancel the whole transaction.

11.18.3 Consequences of Notice Given to Agent—Section 229

Any notice given to or information obtained by the agent shall have the same legal consequences as if it had been given to or obtained by the principal. This means that the knowledge of the agent is the knowledge of the principal.

11.18.4 Principal Inducing Belief that Agent’s Unauthorized Acts Are Authorized—Section 237

The principal is liable for the unauthorized acts of the agent if the principal, by his conduct, has created an impression on the third party that the agent has the authority to do such an act.

11.18.5 Misrepresentation or Fraud by an Agent—Section 238

The principal is liable for the misrepresentation or fraud committed by his agent while acting in the course of his business. However, the principal is not liable for any misrepresentation or fraud of the agent which does not fall within the agent’s authority.

11.19 PRINCIPAL’S RELATION WHERE AN AGENT CONTRACTS FOR AN UNNAMED PRINCIPAL

When the agent contracts with the third party after disclosing the fact that he is the agent but does not disclose the name of the principal, in such a case, the principal is known as unnamed principal. The position of the agent contracting for and on behalf of an unnamed principal is as under:

1. In case of the agent contracting for a principal is still liable for the contract of the agents unless, of course, there is a trade custom or a term of express or implied to the effect which makes the agent personally liable.
2. In such a case, where the name of the principal is not disclosed, the third party who contracts with the agent, knowing that there is a principal, cannot sue the agent.
3. If the agent declines to disclose the identity of the principal, when asked by the third party, he will become personally liable on the contract.

11.20 PRINCIPAL’S RELATION WHERE AN AGENT CONTRACTS FOR AN UNDISCLOSED PRINCIPAL

In certain cases, the agent not only conceals the name of the principal but also the fact that he is the agent. This is known as the ‘doctrine of undisclosed principal’. In such cases, the agent conveys to a third person an impression that he is contracting as a principal himself, i.e., independent party.

In such a case, the relationship between the principal, agent and third party may be discussed as under:

11.20.1 Position of an Agent

As the agent has contracted in his own name, he is personally liable to the third party. He has all the rights of the agent as against the principal. He can be sued by the third party. He can sue the third party.

11.20.2 Position of a Principal

The principal may obtain performance of the contract, subject to the rights and obligations, subsisting between the agent and the third party. He can be sued by the third party. An undisclosed principal cannot intervene if some express or implied terms of the contract exclude him from doing so.

11.20.3 Position of a Third Party

On discovery of the fact that there is a principal, the third party may file a suit either against the principal or agent or both. If the third party decides to file a suit against the principal, he must allow the principal, the benefit of all the payments received by him from the agent.

11.21 PERSONAL LIABILIES OF AN AGENT

Usually, the agent cannot personably be liable for the contract entered into by him on behalf of the principal. However, the agent is personally responsible in the following cases.

11.21.1 When the Agent Acts for a Foreign Principal—Section 230

Where the contract is made by the agent for the sale or purchase of goods for the principal residing abroad, in such a case, it is presumed that the agent is personally liable.

11.21.2 When the Agent Acts for an Undisclosed Principal—Section 230

Where the agent acts for an undisclosed principal, he is personally liable, though the principal, on being discovered by the third party is also liable.

11.21.3 When Agent Acts for an Incompetent Principal—Section 230

When the principal is incompetent to enter into the contract, e.g., in the case where the principal is a minor or where the principal cannot be sued, e.g., where he is a foreign sovereign, the agent is personally liable as the credit is presumed to have been given to the agent and not to the principal.

11.21.4 When the Contract Expressly Provides

In case the agent agrees to do, he becomes personally responsible.

11.21.5 When the Agent Acts for a Principal Not in Existence

When the agent contracts for the principal who is fictitious or non-existent, in such a case, the agent is personally liable. For example—The promoters of a company, yet to be incorporated, enter into the contract on behalf of the company. In such cases, the company, i.e., the principal is not in existence till it is finally incorporated.

11.21.6 When the Agent Signs a Contract in His Own Name

The agent when he signs the contract in his own name but without any qualifications, though he may be known to be the agent, is taken to contract personally.

11.21.7 When the Agent Acts Beyond His Authority

When the agent exceeds his authority and the principal does not ratify such acts of the agent, the agent in such cases is personally responsible to the third parties.

11.21.8 Where There Is a Misrepresentation or Fraud by Agent

The agent is personally responsible if he makes misrepresentations or frauds acting in the course of the business of the principal.

11.21.9 Where the Trade, Usage or Custom Makes the Agent Personally Liable

If a trade, usage or custom make the agent personally liable, he is so liable unless there is the contract to the contrary.

11.21.10 Where Authority Is Coupled with an Interest

The agent has locus standi to sue in his own name in all cases where he has interest in the subject matter of the agency.

11.21.11 Pretended Agent—Sections 235 and 236

A person who untruly represents himself to be the authorized agent of another and induces a third person to enter into the contract or otherwise deals with him is called a pretended agent.

If the pretended agent includes the third party to enter into the contract with him then he is personally liable to the third party for the loss of damage suffered due to such dealing.

However, if the principal ratifies the acts of the agent then he will not be personally liable. Again if the third party already knew about the truth then the agent is not liable.

In cases where the agent is personally liable, a person dealing with him may hold either him or his principal or both of them liable.

11.22 TERMINATION OF AN AGENCY

A termination of an agency means the end of a relationship of the principal and his agent. The termination of the agency may broadly be discussed under the following two heads:

1. The termination of the agency by the act of parties.
2. The termination of the agency by the operation of law.

11.23 TERMINATION OF AN AGENCY BY THE ACT OF PARTIES

The agency relationship may be terminated by the act of parties. The agency can be terminated by either the principal or the agent in the following manner:

11.23.1 By an Agreement

The agency can be created by an agreement in the same way it can be terminated by the agreement.

11.23.2 By Revocation of an Authority

The principal may revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal. The principal cannot revoke the authority given to his agent after the authority has been partly exercised.

11.23.3 By Renunciation of Agency by Agent

The agency is terminated if the agent renounces the business of the agency. A renunciation means giving up.

Note:

For a revocation and renunciation of an agency—Sections 205–207

1. A reasonable notice must be given of such revocation or renunciation otherwise the damage thereby must be made good to the one by the other.
2. The revocation and renunciation may be express or may be implied in the conduct of the principal or the agent, respectively.
3. Where there is an express or in implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent or the agent to the principal as the case may be for any previous revocation or renunciation of the agency without a sufficient cause (Section 205).

11.24 TERMINATION OF AN AGENCY BY THE OPERATION OF LAW

The agency relationship may be terminated by the operation of law in the following manner:

11.24.1 By Performance

When the transaction is completed, the agency terminates automatically.

11.24.2 By Efflux of Time

Where the agency is for a fixed period of time, it terminates on the expiry of that time. It is not important whether the work is completed or not.

11.24.3 By Death or Insanity

Death or insanity of the principal or the agent terminates the agency.

11.24.4 By Insolvency

The agency is terminated when the principal is declared insolvent. An insolvent cannot enter into the contract.

11.24.5 On Destruction of Subject Matter

The agency is terminated when the subject matter of the contract of agency is destroyed.

11.24.6 On Winding Up of Company

The agency is also terminated when the principal or agent is the company and it goes in winding up.

11.24.7 On Principal Becoming an Alien Enemy

The agency is terminated when the principal and the agent are citizens of two different countries and war breaks out between these two countries.

11.25 IRREVOCABLE AGENCY

An irrevocable agency means an agency which cannot be revoked by the principal. The agency is considered as the irrevocable in the following cases.

11.25.1 Where the Agency Is Coupled with an Interest

Where the agency is coupled with interest which is a case where the agent has interest in the subject matter of the agency. In this case, the agency cannot be terminated except where there is an express provision. The agency coupled with an interest does not come to an end on the death, insanity or the insolvency of the principal.

The interest of the agent must exist at the time of creation of the agency. Moreover, the interest of the agent must be substantial and not ordinary. It must be over and above his remuneration as the agent.

11.25.2 Where an Agent Has Incurred a Personal Liability

Where the agent contracts in his own name and makes himself a personal liability for his act. In such case, the agency becomes irrevocable.

Example

‘A’ appoints ‘B’ as his agent and ‘B’ purchases, as per the orders of ‘A’, ‘rice’ in his personal name. A cannot revoke the authority.

11.25.3 Where an Agent Has Partly Exercised an Authority

Where the agent has partly exercised the authority, the authority cannot be revoked.

Example

‘A’ appoints ‘B’ as his agent to procure 10 bags of rice and ‘B’ procures in the name of ‘A’ then ‘A’ cannot revoke his authority.

LIST OF LANDMARK JUDGEMENTS

1. Grover and Grover vs Mathews (1910)

   The principal should be competent to contract at the time of the act of the agent. If it is so then a valid ratification can take place.

2. Mulchand vs State of M. P. (1968)

   The ratification by the principal is possible where the act must be lawful and void. The act void-ab-initio cannot be ratified.

3. Badriprasad vs State of M. P. (1966)

   Once the action of the agent is ratified by the principal, it relates back to the date of action of the agent and not from the date of ratification, i.e., it tantamount to prior authority.

4. Debenham vs Mellon (1880)

   The married woman living with her husband is presumed to have powers to pledge credit of her husband for necessaries.

5. Green vs Barlett (1863)

   The agent is entitled to commission as long as the work is done due to his efforts.

6. Ryan vs Pilkington (1969)

   The principal is bound by the agent’s acts done within his implied authority.

7. Bawdwn vs London Insurance Co. (1892)

   A knowledge of the agent is the knowledge of the principal.

8. London County Freehold and Leasehold Properties Ltd vs Bakerlay Property and Insurance Co. (1936)

   The principal is liable for the misrepresentation or fraud committed by his agent while acting in the course of his business.

9. United Commercial Bank vs Hem Chandra Sarkar (1990)

   The important distinction between the bailee and the agent is that the bailee does not represent the bailor. The bailee has no power to make contracts on the bailor’s behalf. While the agent represents the principal.

10. Swarswati Devi vs Moti Lal (1982)

    Where the commission was payable to an estate agent as and when he introduces a ready and willing customer, the agent becomes entitled to his commission when such a customer was introduced even if the principal refused to sign the contract.

11. Armstrong vs Jackson (1977)

    If the agent deals on his account without the principal’s consent and without disclosing full facts to the principal, the principal may cancel the contract.

12. Timblo Irmaos Ltd vs Jorge A. M. Sequeira (1977)

    The power to sell will not authorize the agent to borrow money or to pledge goods unless clear authority in this regard is granted to the agent.

13. Smart vs Sandars (1948)

    For the creation of the agency coupled with interest, the interest of the agent must be existing at the time of creation of the agency.

14. Debenham vs Mellon (1880)

    The husband is bound to pay for the credit purchase made by his wife, only if husband and wife are living together in a domestic establishment of their own and the wife should be in charge of the domestic establishment.

15. Lilley vs Double Day (1881)

    If the agent fails to act according to the direction or customs then he is liable to the principal for any loss suffered by the principal due to such an act of the agent.

16. Williams vs North China Insurance Co. (1876)

    On the ratification, the principal is bound by the acts already done by the agent.

17. Keighley Maxted and Co. vs Durant (1901)

    The ratification is valid and effective when the agent has acted on behalf of the principal.

18. Kelner vs Baxter (1866)

    For a valid ratification, the principal must be competent to contract and in existence at the time of contract by the agent.

19. Anderson vs Ramsay and Co. (1903)

    It is the duty of an agent not to make secret profit. If the agent makes secret profit, the principal can claim such a benefit from the agent.

TEST YOUR KNOWLEDGE

1. Every person has the right to employ an agent lawfully. Comment.

   (Ref. Para-11.1)

2. What are the essentials of a valid contract of an agency?

   (Ref. Para-11.2)

3. Consideration is not required for creating a contract of agency. Comment.

   (Ref. Para-11.2)

4. What is the real test of an agency?

   (Ref. Para-11.3)

5. Distinguish between an agent and an independent contract.

   (Ref. Para-11.5)

6. Distinguish between a special agent and a general agent.

   (Ref. Para-11.6)

7. Write a short note on different kinds of agents.

   (Ref. Para-11.6)

8. Explain the various modes of creation of agency.

   (Ref. Para-11.7)

9. Write a short note on the doctrine of ‘holding out’.

   (Ref. Para-11.7)

10. Write a short note on the agency by ratification.

    (Ref. Para-11.7)

11. What do you understand by the agency by ratification? What is the effect of ratification?

    (Ref. Para-11.7,11.8)

12. The ratification of agency is valid even if the knowledge of the principal is materially defective. Comment.

    (Ref. Para-11.8)

13. The wife is always assumed to be an agent of her husband. Is it a correct statement?

    (Ref. Para-11.9)

14. Comment. He, who acts through an agent is himself acting.

    (Ref. Para-11.10)

15. ‘Delegatus non-protest delegare’. Explain the Latin maxim.

    (Ref. Para-11.10)

16. Distinguish between an agent and a servant.

    (Ref. Para-11.4)

17. Discuss the nature and extent of the authority of an agent.

    (Ref. Para-11.10)

18. Write a short note on a sub-agent.

    (Ref. Para-11.12)

19. An agent cannot appoint a sub-agent. Comment.

    (Ref. Para-11.12)

20. Write a short note on a substituted agent.

    (Ref. Para-11.13)

21. Distinguish between a sub-agent and a substituted agent.

    (Ref. Para-11.14)

22. State the duties of an agent to his principal.

    (Ref. Para-11.15)

23. What are the rights of an agent?

    (Ref. Para-11.16)

24. Discuss the provisions in respect of remuneration of the agent.

    (Ref. Para-11.16)

25. What will be the position of the principal where the agent contracts for the named principal?

    (Ref. Para-11.18)

26. What will be the position of the principal where the agent contracts for the unnamed principal?

    (Ref. Para-11.19)

27. Write a short note on an undisclosed principal.

    (Ref. Para-11.20)

28. When will an agent be personally liable?

    (Ref. Para-11.21)

29. Describe the various modes by which the authority of an agent may be terminated?

    (Ref. Para-11.22,11.23,11.24)

30. Write a short note on an irrevocable agency.

    (Ref. Para-11.25)

MULTIPLE-CHOICE QUESTIONS

1. A person appointed to contract on behalf of another person is known as a/an
   1. principal.
   2. agent.
   3. independent contractor.
   4. servant.
2. A person who appoints another person to do work on his behalf is known as a/an
   1. principal.
   2. agent.
   3. independent contractor.
   4. servant.
3. Which of the following is not an essential element of a valid agency?
   1. Principal must be competent to contract.
   2. Agent must be competent to contract.
   3. Both of above.
   4. None of the above.
4. Which of the following is not an essential element of a valid agency?
   1. Agent must act in representative capacity.
   2. There must be express or implied agreement.
   3. Both of above.
   4. None of the above.
5. A single agent can be appointed by more than one person by a power of attorney signed jointly by all the principals.
   1. True
   2. False
6. The wife is considered to be an implied agent of the husband for the purpose of buying household necessaries on credit.
   1. True
   2. False
7. A mercantile agent to whom the possession of the goods is given for the purpose of selling the same is known as a/an
   1. broker.
   2. factor.
   3. commission agent.
   4. insurance agent.
8. Which of the following agents cannot exercise a right of general lien?
   1. A factor.
   2. A banker.
   3. An auctioneer.
   4. All of these.
9. Which of the following statements is not true?
   1. An agent is not personally liable for the acts done by him within the scope of his authority.
   2. Principal is liable for wrongful acts of his agent, done within the scope of his authority.
   3. Both of above.
   4. None of the above.
10. Which of the following statements is not true?
    1. An independent contractor is personally liable for the acts done by him while working for his employer.
    2. A bailor is personally liable for the acts of a bailee, done during the period of bailment.
    3. Both of above.
    4. None of the above.
11. Which of the following statements is not true?
    1. An agent should conduct business according to his principals’s instructions.
    2. An agent is liable to account for any secret profit made by him.
    3. Both of above.
    4. None of the above.
12. Which of the following statements is not true?
    1. An agent is not liable for any misinformation given to the principal.
    2. An agent should not deal on his own account.
    3. Both of above.
    4. None of the above.
13. The agent becomes entitled to receive his remuneration on the fulfillment of which of the following conditions?
    1. When the act undertaken by the agent is completed.
    2. When the concluded transaction is the result of the agent’s services and efforts.
    3. Both (i) and (ii) above.
    4. None of these, as remuneration is payable without any condition.
14. Which of the following is not a right of the agent?
    1. Right of lien.
    2. Right to be indemnified.
    3. Right to remuneration.
    4. Right to make secret profits.
15. A person appointed by the original agent to act in the business of the agency but under the control of the original agent is known as a/an
    1. agent.
    2. sub-agent.
    3. substituted agent.
    4. del credere agent.
16. A person, appointed by the original agent, to act for and under the control of the principal, is known
    1. agent.
    2. sub-agent.
    3. substituted agent.
    4. del credere agent.
17. A power of attorney, executed by several persons jointly, in favour of one person is valid.
    1. True, as there can be more than one principals of one agent.
    2. False, as there can be only one principal of one agent at a time.
18. Where one person allows another person to assume an appearance of authority, to act on his behalf, such a position is known as
    1. express authority.
    2. implied authority.
    3. ostensible authority.
    4. none of these.
19. Which of the following statements is not true?
    1. Principal is liable for fraud committed by his agent, acting in the course of his business.
    2. Principal is bound by the agent’s acts done in the scope of his authority.
    3. Both of above.
    4. None of the above.
20. Which of the following statements is not true?
    1. Authority given to sell goods, also authorizes the agent to borrow money and pledge the goods.
    2. Authority given to borrow money makes the principal liable, even if the agent borrows beyond the authorized limits.
    3. Both of above.
    4. None of the above.
21. Where the agent contracts with a third party, without disclosing the name and existence of his principal, in such a case on knowing about the principal, the third party may file a suit against the
    1. principal alone.
    2. agent alone.
    3. both of them jointly.
    4. either the agent or the principal or both.
22. Where the agent contracts for a principal, who is not competent to contract, in such a case the agent is
    1. personally liable.
    2. not personally liable.
    3. exceeding authority.
    4. none of these.
23. In which of the following cases, the agency is not terminated?
    1. Completion of agency business.
    2. Death of the principal or agent.
    3. Insolvency of the principal.
    4. Agent exceeding the given authority.
24. In case, the principal revokes the agency, he
    1. remains bound by the agent’s acts, done prior to revocation.
    2. is not bound by the agent’s acts, done prior to revocation.
    3. is bound by the agent’s subsequent acts also.
    4. liable to punishment, as revocation is illegal.
25. The third party, who contracts with an agent without any knowledge of termination of the agent’s authority, can enforce the contract against the principal.
    1. True
    2. False
26. Which of the following agency is irrevocable?
    1. Agency for a fixed period.
    2. Agency for a single transaction.
    3. Agency coupled with an interest.
    4. Continuing agency.
27. ‘A’ owns a shop. ‘B’ manages the shop. ‘A’ as owner orders purchases. ‘B’ also as the
    1. Yes
    2. No
    3. Cannot say.
28. What is the name given to an agency which cannot be terminated?
    1. Revocable agency.
    2. Agency for a single transaction.
    3. Irrevocable agency.
    4. Agency created in necessity.
29. Substituted agent is appointed by whom?
    1. Government.
    2. Court.
    3. Principal.
    4. Agent.
30. A person appointed by the original agent to act in the business of the agency but under the control of the original agent is known as a/an
    1. agent.
    2. sub-agent.
    3. del credere agent.
    4. substituted agent.

ANSWER KEYS

1. ii
2. i
3. ii
4. iv
5. i
6. i
7. ii
8. iii
9. iv
10. ii
11. iv
12. i
13. iii
14. iv
15. ii
16. iii
17. i
18. iii
19. iv
20. i
21. iv
22. i
23. iv
24. i
25. i
26. iii
27. i
28. iii
29. iii
30. ii