Contract of Agency

Introduction
Agency is a special type of contract. The concept of agency was developed as one cannot possibly
do every transaction himself. Hence, he should have opportunity or facility to transact business
through others like an agent. Principles of contract of agency- (a) Expecting matters of a personal
nature, what a person can do himself, he can also do it through agent (e.g. a person cannot
marry through an agent, as it is a matter of personal nature). (b) A person acting through an
agent is acting himself, i.e. act of agent is act of principal. Since agency is a contract, all usual
requirements of a valid contract are applicable to agency contract also except to the extent
excluded in the Act. One important distinction is that as per Sec. 185, no consideration is
necessary to create an agency.
Who may employee an agent- Any person who is of the age of majority according to the law to
which he is subject, and who is of sound mind, may employee an agent (Sec. 183). Thus any
person competent to contract can appoint an agent.
Who may be an agent- As between the principal and third person any person can become an
agent, but no person who is not of the age of majority and of sound mind can become an agent,
so as to be responsible to his principal according to the provisions in that behalf herein contained
(Sec. 184). The significance is that a principal can appoint a minor or person of unsound mind as
agent. In such case, the principal is responsible to third parties.
Definition
According to Sec 182 defines an ‘Agent’ as “a person employed to do any act for another or to
represent another in dealings with third person”. The person for whom such act is done or who is
represented is called the principal. The relationship between the agent and the principal is called
“agency”.

Principles of Agency
Contracts of agency are based on two important principles, namely:
1. Whatever a person can do personally shall also be allowed to be done through an agent
except in case of contracts involving personal services such as painting, marriage, singing,
etc.
2. He who does not act through a duly authorized agent does it by himself, i.e., the act of the
agent are considered the acts of the principal (Sec. 226).

Difference between an Agent and a Servant

Scope of authority: An agent can create a contractual relationship between the principal and
third parties. But a servant cannot create contractual relationship between its employer and third
parties.
Remuneration: An agent receives commission for his services. A servant is generally paid wages
or salary.
On whose behalf: An agent may work for several principals at the same time. A servant can
serve only one master at a time.
Control: An agent is not subject to direct control and supervision of the principal. He is often
discretion. But a servant acts under the direct control and supervision of his master and must
follow all his reasonable order.
Liability of principal: The principal is liable for all the wrongful acts of his agent which are
within the “scope of his authority.” But the master is bound by the wrongful acts of his servant if
done in the course of servant’s employment.

Nature of Authority of Agent

According to Sec. 226, the contracts entered into through an agent, and obligation arising from
an act done by an agent, may be enforced in the same manner, and will have the same legal
consequences as if the contracts had been entered into and the acts done by the principal in the
person. In other words, the principal is liable for the acts of the agent in the same manner as if
he himself has done those acts.
The authority of the agent to bind the principal may be of the following types:
Actual or real authority: It is the authority conferred by the principal on the agent. It may be
expressed or implied (Sec. 186).
Example: A of London employed B of Mumbai to recover a debt due. B may adopt any legal
process that may be necessary for the purpose of recovering the debt and may give a valid
discharge for the same. (Illustration (a) Sec.188).
In terms of Sec. 188, an agent has the authority to do every lawful thing which is necessary to do
the act. He can do every lawful thing for the purpose.
Ostensible or apparent authority: It is the authority of an agent which appears to others.
When an agent is employed to do a particular business, those dealing with him can presume that
he has the authority to all such acts as are necessary, or incidental to such business. This
authority may coincide with actual authority and may even exceed it.
Example: The kerala high court has held in Valappad Cooperative Society Ltd. vs. Srinivasa Iyer
AIR 1964 Ker. 176, that a person authorized to carry on the business of a cooperative society
must be deemed to have the authority to purchase goods on credit not with standing that the
society had advanced high enough money for the purpose.
Section 237 incorporates the principle of the ostensible authority which covers cases where agent
has acted without authority of the principal.
Agent’s Authority in an emergency: According to Sec. 189, an agent has 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 similar circumstances.
Example: An agent for sale may have the goods repaired if it be necessary. (Illustration 9a) to
Sec. 189).

Essential features of agency

Agency has certain essential features. They are as follows:
1. Agency implies that one person (i.e. an agent) brings two other persons (i.e. a
principal and a third person) into contractual relationship.
That means an agent is a connecting link between the principal and the third person.
2. An agent is not a mere a connecting link between the principal and the third
party. He also creates a legal relationship between the principal and the third
party.
That is he makes the principal answerable to the third party for his acts and also entitles
the principal to all the benefits accruing from his acts.
3. An agency can be established to do any act which the principal could do lawfully.
That means an agency can be established only for lawful acts. If an agency is established
for an unlawful act it cannot be enforced by law.
4. Agency can be created only for those acts which can be delegated by a person to
another.
That means agency cannot be created for acts which must be done by a person himself
and cannot be delegated to an agent say painting, marrying, singing.
5. The agency relationship may be established by a contract between the principal
and the agent which may be written or oral, or may be established by
implications, as in the case of husband and wife, master and servant etc.
6. Though a valid contract requires that both the contracting parties must be
competent to contract, for a contract of agency, it is enough if only the principal
is competent to contract.
The agent need not be competent to contract. In other words an agent may be
incompetent to contract, say a minor, lunatic, idiot etc.
7. There should be the intention on the part of the agent to act on behalf of the
principal.
As such, if a person intends to act on behalf of another an agency arises even if the
contract between the parties provides that there is no such relationship. On the other hand
if a person intends to act on his own behalf and not on behalf of another there cannot arise
any agency, even if the person contends that he is an agent
 8. No consideration is necessary to create an agency.
The fact that the principal has agreed to be represented by the agent is a sufficient
detriment to the principal to support the contract the contract of agency. Though no
consideration is necessary to support a contract of agency, an agent may be paid for. That
means an agent may be paid for his services.
9. An agent is appointed with specific instructions and is authorized to act within
the scope of the instructions (i.e. the authority).
As such the agents within the scope of his authority are regarded as the acts of the
principal and such acts bind the principal as if the principal has done them himself.

Rights of Agent
An agent has the following rights against the principal:
1. Right to receive remuneration (Sees. 219 and 220):
The agent is entitled to receive his agreed remuneration, or if nothing is agreed, to a reasonable
remuneration, unless he agrees to act gratuitously. In the absence of any special contract, the
right to claim remuneration arises only when the agent has done what he had undertaken to do.
It is important that the agent can claim remuneration once he has completed his work even
though the contract is never executed on account of breach either by the principal or the third
party. For example, where an agent is appointed to secure order-s for the manufacturer, he can
claim commission on orders actually obtained by him although the manufacturer is unable to
execute them owing to a strike by the workmen.
Effect of misconduct:
An 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 misconduct. In addition, he is
liable to compensate the principal for any loss caused by the misconduct.
ILLUSTRATIONS (appended to Sec. 220):
(a) A employs B to recover 1, 00,000 rupees from C, and to lay it out on good security. B
recovers the 1,00,000 rupees and lays out 90,000 rupees on good security, but lays out 10,000
rupees on security which he ought to have known to be bad, whereby A loses 2,000 rupees. B is
entitled to remuneration for recovering the 1, 00,000 rupees and for investing the 90,000 rupees,
He is not entitled to any remuneration for investing the 10,000 rupees and he must make' good
the loss of 2,000 rupees' to A.
(b) A employs B to recover Rs 1,000 from C. Through B's misconduct the' money is not recovered
(the debt might have become time-barred because of B's negligence or leniency). B is entitled to
no remuneration for his services and must make good the loss to A.

2. Right of retainer (Sec. 217):

An agent has the right to retain, out of any sums received on account of the principal, all moneys
due to himself in respect of his remuneration, or advances made or expenses properly incurred by
him in conducting the business of agency.

3. Right of lien (Sec. 221):

An agent has the right to retain 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. This
right is, however, subject to a contract to the contrary.
Again, this lien of the agent is a "particular lien" But by a special contract an agent may have a
general lien also. It may be recalled that by virtue of Section 171 factors, bankers, attorneys of
High Court and policy brokers have a "general lien," in the absence of a contract to the contrary.
It is to be noted that this right of lien of the agent is subject to all rights and equities of third
parties against the principal, that is, if the agent has sold the goods, he will have to give delivery
to the buyer (London and Joint Stock Bank vs. Simmons).

4. Right to be indemnified against consequences of lawful acts. (Sec.222):

An agent has also the right to be indemnified against the consequences of all lawful acts done by
him in exercise of the authority conferred upon him.
ILLUSTRA TIONS (appended to Sec. 222):
(a) B, at Singapore, under instructions from A of Calcutta, contracts with C to deliver certain
goods to him. A does not send the goods to B and C sues B for breach of contract. B informs A of
the suit, and A authorizes him to defend the suit. B defends the suit and is compelled to pay
damages and costs, and incurs expenses. A is liable to B for such damages, costs and expenses.
(b) B, a broker at Calcutta, by the orders of A, merchant there, contracts with C for the purchase
of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who
repudiates the contract altogether. B defends, but unsuccessfully, and has to pay damages and
costs and incurs expenses. A is liable to B for such damages, costs and expenses.
It may be noted that the agent cannot claim indemnity. in respect of acts which are apparently
unlawful or criminal (Sec. 224). .
ILLUSTRATIONS (appended to Sec. 224):
(a) 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.
(b) B, the proprietor of a newspaper, publishes, at A's request, a libel upon C in the paper and A
agrees to indemnify B against the consequences of the publication and all costs and damages of
any action in respect thereof. B is sued by C and has to pay damages and also incurs expenses. A
is not liable to B upon the indemnity.

5. Right to be indemnified against consequences of acts done in good faith (Sec. 223):
An agent has a right to be indemnified against the consequences of an act done in good faith
though it turns out to be injurious to the rights of third persons.
ILLUSTRATIONS (appended to Sec. 223):
(a) A, a decree holder and entitled to execution of B's goods, requires the officer of the Court to
seize certain goods, representing them to be the goods of B. The officer seizes the goods, and is
sued bye, the true owner of the goods. A is liable' to indemnify the officer for the sum which he is
compelled to pay to C in consequence of obeying A's directions.
(b) B, at the request of A, sells goods on the possession of A, but which A had no right to dispose
of. B does not know this and hands over the proceeds of the sale to A. Afterwards C, the true
owner of the goods, sues B and recovers the value of the goods and costs. A is liable to indemnify
B for what he has been compelled to pay to e and for B's own expenses.

6. Right to compensation. (Sec.225):

The agent has a right to be compensated for injuries .sustained by him due to the principal's
neglect or want of skill. .
ILLUSTRATION (appended to Sec. 225):
A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The
scaffolding is unskillfully put up and B is in consequence hurt. A must make compensation to B.

7. Right of stoppage of goods in transit:

An agent has a right to stop the goods in transit to the principal (just like an unpaid seller), if
 He has bought goods either with his own money or by incurring a personal liability for the
price and
 The principal has become insolvent.

Duties of Agent
An agent has the following duties towards the principal:
1. Duty to follow principal's directions or customs (Sec. 211):
The first duty of every agent is to act within the scope of the authority conferred upon him and
perform the agency work according to the directions given by the principal. When the\agent acts
otherwise, if any loss be sustained, he must make it good to the principal, and if any profit
accrues, he must account for it.
ILLUSTRATIONS:
(a) Where the principal instructed the agent to warehouse the goods at a particular place and the
agent warehoused them at a different warehouse which was equally safe, and the goods were
destroyed by fire without negligence, it was held that the agent was liable for the loss because
any departure from the instructions makes the agent absolutely, liable (Lilley vs. Doubleday).
(b) An agent being instructed to insure goods neglects to do so. He is liable to compensate the
principal in the event of their being lost (Pannatal Jankidas vs. Mohanlal).
If the principal has not given any express or implied directions, then it is the duty of the agent to
follow the custom prevailing in the same kind of business at the place where the agent conducts
business. If the agent makes any departure, he does so at his own risk. He must make good any
loss so sustained by the principal.
ILLUSTRATIONS: (appended to Sec. 21 I):
(a) A, an agent, engaged in carrying on for B a business, in which it is the custom to invest from
time to time at interest, the moneys which may be in hand, omits to make such investments. A
must make good to B the interest usually obtained by such investments.
(b) 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, irrespective of his good intentions.

2. Duty to carry out the work with reasonable skill and diligence (Sec. 212):
The agent must conduct the business of the agency with as much skill as is generally possessed
by persons engaged in similar business, unless the principal has notice of his want of skill.
Further, the agent must act with reasonable diligence and to the best of his skill.
If the agent does not work with reasonable care, skill (unless the principal has notice of his want
of skill) and diligence, he must make compensation to his principal in respect of 'direct
consequences' of his own neglect, want of skill or misconduct. But he is not so liable for indirect
or remote losses.
ILLUSTRATIONS (appended to Sec. 212):
(a) A, a merchant in Calcutta, has an agent B, in London, to whom a sum of money is paid on A's
account, with orders to remit. B retains the money for a considerable time. A, in consequence of
not receiving the money, becomes insolvent. B is liable for the money and interest from the day
on which it ought to have been paid, according to the usual rate, and for any further direct loss
such as loss by variation of rate of exchange, but nothing further.
(b) A, an agent for the sale of goods, having authority to sell goods 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.
(c) A, an insurance broker, employed by B to' effect an insurance on a ship, omits to see that the
usual clauses are inserted in the policy. The ship is afterwards lost. In consequence of the
omission of the clauses nothing can be recovered from the underwriters. A is bound to make good
the loss to B.
(d) A, a merchant in England, directs B, his agent at Bombay, who accepts the agency, to send
him 100 bales of cotton by a certain ship. B. having it in his power to send the cotton omits to do
so. The ship arrives safely in England. Soon after her arrival the price of cotton rises. B is bound
to make good to A the profit which he might have made by the 100 bales of cotton at the time the
ship arrived, but not any profit he might have made by the subsequent rise.

3. Duty to render accounts (Sec. 213).

It is the duty of an agent to keep proper accounts of his principal's money or property and render
them to him on demand, or periodically if so provided in the agreement.

4. Duty to communicate (Sec. 214):

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating
with his principal, and in seeking to obtain his instructions, before taking any steps in facing the
difficulty or emergency.

5. Duty not to deal on his own account (Sees. 215 and 216):
An agent must not deal on his own account in the business of agency; i.e., he must not himself
buy from or sell to his principal goods he is asked to sell or buy on behalf of his principal; without
obtaining the consent of his principal after disclosing all material facts to him. If the agent
violates this rule, the principal may repudiate the transaction where it can be shown that any
material fact has been knowingly concealed by the agent, or that the dealings of the agent have
been disadvantageous to the principal. The principal is also entitled to claim from the agent any
benefit which may have resu1ted to him from the transaction. '
ILLUSTRATIONS:
(a) A, directs B to sell A's estate. B buys the estate for himself in the name of C. A, on
discovering that B has bought the estate for himself, may repudiate the sale, if he can show ,that
B has dishonestly concealed any material fact or that the sale has been disadvantageous to him.
[Illustration (a) appended to Section 215]
(b) 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. [Illustration (b) appended to Section
215]
(c) A directs, B, his agent, to buy a certain house for him. B tells A that it cannot be bought and
buys the house for himself. A may, on discovering that B has bought the house, compel him to
sell it to A at the price he gave for it. [Illustration appended to section 216]

6. Duty not to make any profit out of his agency except his remuneration (Sees. 217
and 218):
An agent stands in a fiduciary relation to his principal and therefore he must not make any profit
(secret profit) out of his agency. He must pay to his principal all moneys (including illegal grati-
fication, if any) received by him on principal's account. He can, however, deduct all moneys due
to himself in respect of his remuneration or/and expenses properly incurred. If his acts are not
bonafide, he will lose his remuneration and will have to account for the secret profit to his
principal.

7. Duty on termination of agency by principal's death or insanity (Sec. 209):

When an agency is terminated by the principal dying or becoming of unsound mind, the agent
must take, on behalf of the representatives of his late principal, all reasonable steps for the
protection and preservation of the interests entrusted to him.

8. Duty not to delegate authority (Sec. J 90):

Subject to six exceptions stated earlier (under the heading Delegation of Authority), an agent
must not further delegate his authority to another person, but perform the work of agency
himself.
Delegation of Authority
The general rule is that an agent is not entitled to delegate his authority to another person
without the consent of his principal. ‘Delegatus non protest delegare’ is the maxim which means
that a person to whom the authority has been given cannot delegate that authority to another.
Sec. 190 also prohibits delegation of such authority. This is because when the principal appoints a
particular agent to act on his behalf, he relies upon the agents’ skill, integrity and competence.
Sub- agent:
A sub- agent is a person employed by, and acting under the control of, the original agent in the
business of the agency (sec. 191). This means he is the agent of the original agent. The relation
of the sub-agent to the original agent is, as between themselves, that of the agent and the
principal.
Exceptions: sec 190 provides that an agent may appoint a sub-agent and delegate the work to
him if-
 there is a custom of trade to that effect, or
 the nature of work is such that a sub agent is necessary
Example:
(a) A banker authorized to let out a house and collect rent may entrust the work to an
estate agent [Mahinder v/s Mohan, A.I.R.(1939)all.188]
 (b)A banker instructed to make payment to a particular person at a particular place may
appoint a banker who has an office at that place [Summan singh v/s national city bank, A.I.R.
(1952) punj.172]
There are some more exceptions recognized by the English law. These exceptions are also
recognized in India and are as follows:
 Where the principal is aware of the intention of the agent to appoint a sub-agent but does not
object to it.
 Where unforeseen emergencies arise rendering appointment of a sub-agent necessary.
 Where the act to be done is purely ministerial not involving confidence or the use of
discretion.
 Where the power of the agent to delegate can be inferred from the conduct of both the
principal and the agent.
 Where the principal permits appointment of a sub-agent.

Relationship between principal and sub-agent.

As a general rule, an agent cannot delegate his authority to a sub-agent. But in certain
exceptional cases, he is permitted to do so. In such cases, the delegation of authority to a sub-
agent is proper. In all other cases, the appointment of a sub-agent is improper. The legal relation
between the principal and the sub-agent depends upon the crucial question, as to whether the
appointment of the sub-agent is proper or improper.
 Where a sub-agent is properly appointed.
(a) The principal is bound by the acts of the sub-agent as if the sub-agent were an agent
originally appointed by the principal (sec 192, para1)
(b) The agent is responsible to the principal for the acts of the sub-agent (sec.192, para2)
Example: A, a carrier, agreed to carry 70 bags of cotton waste from morvi to bhavnagar by a
truck. A asked A1, another carrier to carry the goods. The goods were damaged in transit. Held, A
was liable even though it was proved that A1 was the carrier [jugaldas v/s harilal, A.I.R (1956)
guj.88]
(c) The sub-agent is responsible for his act to the agent, but not to the principal, except in the
case of fraud or willful wrong (sec.192, para 3)
 Where a sub-agent is not properly appointed.
Where an agent, without having authority to do so, has appointed a sub-agent, the agent is
responsible for the acts of the sub-agent to the principal and to the third parties. The principal, in
such a case, is not represented by or responsible for the acts of the sub-agent, nor is the sub-
agent is responsible to the principal (sec.193).

Termination or Determination of Agency

Agency may be terminated in any of the following ways:
I. By act of parties: ( Sec. 201) Agency may be terminated by act of the parties in any of the
following ways:
 By Mutual Agreement: Agency may be terminated by the parties by an agreement at any
time by mutual consent. An agency may be terminated by the terms of the original agency
agreement or by a subsequent agreement acceptable to both the principal and the agent.
Termination may be predetermined by the passing of a specified period of time or by the
completion of certain designated tasks.
 By Breach of one of the parties: Should either the principal or the agent breach the agency
agreement by renunciation of future obligation or by failure to perform as agreed in the
contract, the agency will have been terminated. The party creating the breach, as in all other
types of contracts will be liable to the other for damages.
Example: Suppose an engineer – designer in the employ of Data Processing Corporation quit
the job without obtaining a company release. The corporation could hold the engineer liable
for any damages suffered by his breach of the employment contract.
 By Revocation of the agency by the Principal: Contracts of agency containing no terms as
to duration are said to exist at will. The principal has the right to revoke the agency
agreement and discharge the agent for incompetence, disloyalty, or similar shortcomings. If
 the principle exercises his right of revocation, he must pay the agent what is due him under
the agreement.
Example: An extra salesman was employed by Data Processing Corporation to help out
during the showing off new equipment that was being released to the trade. When the
salesman’s services were no longer needed, Data Processing revoked the agency by notifying
the salesman that he was no longer needed and paid him for his services. As no duration was
mentioned in the original contract agreement, the agency was said to exist as well.
 By completion of performance: When the business for which the agency was constituted is
completed or performed, the agency is terminated.
Example: when an agent is appointed to sell a house is sold.

II. By operation of Law: Agency agreements may be terminated for reasons beyond the control
of either the principal or the agent. In such cases termination is said to result from operation of
law.
 Death: With the exception of an agency coupled with an interest, the death of either party
terminates the agency immediately. Notice to a third party is not necessary, as the law
assumes notice to all at the time of death.
 Illness: An agency relation is terminated if the Agent is too ill to perform his duties. Under
ordinary circumstances, the illness of the principal has no effect upon the operation or the
termination of the agency.
 Insanity: The insanity of either the principal or the agent terminates the agency. If the
principal becomes insane, however, and the agent makes a valid agreement with a third party
who has no knowledge of the insanity, the contract will be allowed to stand. In this way,
insanity differs from death as a terminating factor.
 Bankruptcy: the bankruptcy of either party terminates the agency. In case of bankruptcy of
the principal, the agency is terminated because title to the principal’s property is vested in a
trustee for the benefit of his creditors.
 Impossibility of Performance: the destruction of the subject matter or the imprisonment of
the agent makes performance impossible. Therefore, the agent is terminated.
Example: Burke was hired by Data Processing Corporation to make a series of photographs of
a new computer which had been recently been completed for overseas shipment. Before
Burke could take the pictures, he was arrested as a suspect involving a capital crime. Failure
to secure bail resulted in Burke’s imprisonment. Impossibility of performance owing to Burke’s
imprisonment will terminate the agent agreement.
 War: A contract of agency is inoperative in time of war if the agent or the principal is an
enemy alien.
Example: Data Processing Corporation engaged an electronic engineer who had entered the
United States as a displaced person from a European country. Hostilities broke out between
the United States and the country of which he was a citizen. Because the engineer was an
enemy alien and in a position to aid the enemy through work being done by his employer, he
is subject to dismissal. The revocation of the agency agreement by Data Processing cannot be
used by the engineer as a cause of action for breach of contract.

III. Other modes of termination of agency:

 By efflux of time: Where an agency is for a fixed period of time, it is terminated on the
expiry of time whether the purpose for which the agency is constituted is accomplished or not.
 By destruction of the subject matter: when the subject matter of the agency is destroyed,
the agency is terminated.
 By incapacity of principal or agent: where a principal or a agent possesses any
disqualification essential to a contract, agency is terminated.
 Principal or agent becoming an alien enemy: where the principal or the agent belongs to
different countries and they become alien enemies, the agency is terminated.
 By object of agency becoming unlawful: when by the happening of an event which
renders agency or its object unlawful, the agency is terminated.