A LAW OF CONTRACTS II PROJECT ON

AGENCY

TABLE OF CASES 1. Lakshminarayan Ram Gopal & Sons v. Hyderabad Government 2. United Commercial Bank v. Hem Chandra Sarkar 3. Gordon Woodruffe & co v. Shaik M A Majid & Co 4. Johnson v. Milwaukee 5. Pannalal Jankidas v. Mohanlal 6. Lilley v. Doubleday 7. De Busche v. Alt 8. Waugh v H.B Clifford & Sons 9. Robinson v. Mollet 10. Scott v Godfre 11. Summers v Solomon 12. Lalljee v. Dadabhai

CONTENTS 1. Definition of agent 2. Essentials of agency 3. Distinguishing an agent from a servant, bailee and buyer 4. Kinds of agents 5. Creation of an agency 6. Relation of principal and agent 7. relation of principal with third parties 8. Ratification 9. Termination of agency

DEFINITION OF AGENT Section 182 of the Indian Contract Act defines agent and principal as follows: An agent is a person employed to do any act for another or to represent another, in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal. The essence of this definition is towards the power of the agent to deal with third parties on behalf of his principal. The common law rule as to agency is expressed in the maxims qui per alium facit, per se ipsum facere videtur (he who does an act through another is deemed in law to do it himself), or more shortly, qui facit per alium, facit per se (he who acts by another, acts by himself). The Statute law has expressly recognised contracting through agents in the Partnership Act, 1890, the Bills of Exchange Act, 1882, and the Sale of Goods Act, 1893, but even if the statute is silent, it impliedly follows the common law rule.

ESSENTIALS OF AGENCY (i) Section 183 of the Contract Act says that the principal must be competent to contract. Anyone who has attained the age of majority according to the law which he is subject to, and is of sound mind can employ an agent. (ii) But according to section 184, since the agent incurs no personal liability while he is contracting for his principal, it is not necessary that he should be competent to contract. (iii) An agent is generally remunerated for the services rendered by him. But beyond that there is no consideration necessary for the creation of an agency according to section 185.

DISTINGUISHING AN AGENT FROM A SERVANT, BAILEE AND BUYER 1. Agent and servant The main points of difference between an agent and a servant have been laid down in Lakshminarayan Ram Gopal & Sons v. Hyderabad Government 1. They are the following:

AIR 1954 SC 364

(i)

An agent has the authority to act on behalf of the principal and to create contractual relation between the principal and a third party. Such authority is not enjoyed by a servant.

(ii)

The principal has only the right to tell what the agent has to do, but a master can tell a servant not only what to do, but also how it is to be done. Also, a servant is under the direct control and supervision of the master. But in the case of an agent it is sufficient that he does the entrusted act lawfully.

(iii)

An agent is remunerated by way of commission while a servant is paid by way of salary or wages.

(iv)

A master is liable for the wrong of his servant if it is done within the course of his employment. A principal is liable for the wrong of the agent if it is done within the scope of authority.

(v)

A servant usually serves only one master, but an agent may work for more than one principal at the same time.

2. Agent and bailee (i) The relationship of a bailor and a bailee subsists only so long as the bailee holds some goods belonging to the bailor, but this is not necessary for the subsistence of agency relationship. (ii) An agent is a representative with a power to contract on behalf of his principal. But a bailee does not have this power. These two points of difference were accepted by the Supreme Court in United Commercial Bank v. Hem Chandra Sarkar2.

3. Agent and buyer The legal position of a buyer is different form that of an agent. The Supreme Court pointed out in Gordon Woodruffe & co v. Shaik M A Majid & Co3 that even an agent can become a purchaser when he pays the price to s principal and discloses to him that fact.

2 3

(1990) 3 SCC 389 at 396: AIR 1990 SC 1329 AIR 1967 SC 181

KINDS OF AGENTS The word agent is used to describe various types of activity. The types of agents who are generally known to the business world are the following: 1. Factor The word factor in India, as in England means an agent entrusted with the possession of goods for the purpose of selling them. He is a mercantile agent whose ordinary course of business is to dispose of goods, of which he is entrusted with the possession or control by his principal. 2. Broker The broker is also a kind of mercantile agent. He is appointed to negotiate and make contracts for the sale or purchase of property on behalf of his principal, but is not given possession of the property. 3. Del credere Agent This is another type of mercantile agent. Where an agent undertakes, on the payment of some extra commission, to be liable to the principal for the failure of the third party to perform the contract, he is called a del credere agent and the extra commission for the guarantee is called the del credere commission.

CREATION OF AN AGENCY The agent-principal relation may be created in any of the following four ways: (i) (ii) (iii) (iv) by express appointment by the conduct or the situation of the parties by necessity of the case; or by subsequent ratification of an unauthorised act.

They are explained below.

1. Express appointment Any person who is competent to contract and is of sound mind can appoint an agent. This appointment can be either oral or in writing. When the agreement is made by deed it is called a power of attorney. An oral appointment is also valid event hough the contract which the agent is authorised to make has to be in writing.

2. Implied agency

Whenever a person places another in such a situation that he is understood to be representing or acting on his behalf, he becomes an implied agent. Implied agencies arise from the conduct, situation, or relationship of parties. Estoppel A well-known illustration of implied agency is agency by holding out or estoppel. This principle has been clearly stated in the American case Johnson v. Milwaukee4: Where a principal has by his voluntary act placed an agent in such a situation that a person of ordinary prudence, conversant with business usages and the nature of the particular business, is justified in presuming that such agent has authority to perform a particular act and therefore deals with the agent, the principal is estopped as against such third person form denying the agents work. Husband and wife A wife living with her husband has the implied authority to purchase the house hold articles. But there are certain limitations for the wife to bind her husband by her credit purchases. First, they should be living together. Secondly, they should be living together in a domestic establishment of their own. Thirdly, the wife can rn her husband to debt only for necessities. Lastly, the husband will not be liable if he makes a reasonable allowance to his wife for her needs. A husband has no original, inherent or implied power to act as an agent for his wife. His authority can arise from an appointment as an agent, expressly or impliedly or by ratification by his wife of acts done by him o her behalf.

3. Agency of necessity The powers of the agents are limited to certain acts that they are entrusted to do. But in the case of an emergency, he shall be expected to assume certain extraordinary powers, and if his acts are fairly done, then it shall be binding on the principal. Marine adventures This principle was first applied to the cases of marine adventures. Some unforeseeable emergencies might arise which may threaten the goods, in which case the master of the ship might not be able to communicate with the cargo owners. In such cases, the master of the ship has the right or it is his duty to sell the goods to save their value. Then the cargo owners shall be bound by the sale.

(1895) 46 Neb 480: 64 NW Rep 1100

Strangers It was once supposed that the agency of necessity is confined to cases where there is a pre-existing relation between eh principal and the agent, ad the agent in case of emergencies has to assume extraordinary powers. But the Roman law covers the cases where help is volunteered by a pure stranger under the doctrine of Negotiorum Gestio. Our law does not recognise this doctrine, but it is accepted by the English law, subject to some exceptions.

Injured persons Another occasion of agency of necessity is the urgent need of medical attendance for an injured person. A person acting on his behalf may call upon the doctor, or the doctor may voluntarily render treatment, and the person benefited is bound by he charges of the service.

RELATIONS OF PRINCIPAL AND AGENT Duties of the agent The mutual rights and duties of the agent and the principal are provided in the contract that they enter into. But the following are the duties of general nature that the law imposes on an agent. (i) duty to execute mandate

The first and foremost duty of the agent is to carry out the mandate of the principal. If he fails to do the work that he is appointed to do, then he shall be held responsible for the loss that the principal suffered in this respect. In Pannalal Jankidas v. Mohanlal5: A commission agent purchased goods for his principal and stored them in a godown pending their despatch. He was under the instruction to insure the goods. He charged the premium for insurance, but failed to insure them. The goods were lost in an explosion in the Bombay harbour. The agent was held liable to compensate the principal for the loss minus the compensation received from the government for the same. (ii) duty to follow instructions or customs

the agent is bound to follow the instructions given by the principal in doing the act for which he is appointed. If there are no such instructions given, he shall be doing it

AIR 1951 SC 144

according to the customs that prevail while doing that kind of an act when the agent conducts such business. If the agent fails to do so, and if any loss arises as a result of his abstinence, the agent shall make good the loss to the principal, and if he accrues any profit, he shall be made accountable for it. In Lilley v. Doubleday6: an agent was instructed to warehouse his principals goods a t a particular place. He placed a part of them at a different warehouse which was equally safe. But the goods were destroyed without negligence. He agent was held liable for the loss.

(iii)

duty of reasonable care and skill

Section 212 lays down the want of standard care and skill of an agent. Every agent is bound to carry on the business of agency with reasonable care and skill. If he does not act with such reasonable diligence and the principal suffers a loss as a direct result of his negligence or want of skill, he is bound to make compensation.

(iv)

duty to avoid conflict of interest

The agent occupies a fiduciary position. Therefore it is his duty not to do anything in his personal interest that might conflict with the interest of the principal. If the agent deals on his own account in the business of agency without getting the consent f the principal or without acquainting him with any of the material facts which he comes to know on the subject, the principal can repudiate the transaction on the ground that some of the material facts has been concealed or that the transaction has been disadvantageous to him. A well known illustration is the case of De Busche v. Alt7: A plaintiff consigned a ship to a company in china for sale at 90,000 payable in cash. With the consent f the plaintiff, the company appointed the defendant, a Japanese agent, to sell the ship. The defendant attempted to sell the ship, but having failed to find a customer, bought the ship himself and without disclosing this, he remitted the above sum through the company to the plaintiff. Soon thereafter a war broke out and ships were again in great demand. A Japanese prince bought it from the defendant at 1, 60,000. The plaintiff sued the defendant to recover the profit made on resale.

6 7

(1881) 7 QBD 510 (1878) 8 Ch D 828

He was held to be bound to account for the profit. But nothing would have been wrong if he has disclosed the fact of the ownership.

(v)

duty not to make secret profit

If an agent deals in the business of the agency on his own account rather than on the account of the principal, and without the knowledge of the latter, the principal is entitled to claim any benefit that the agent might have received from that transaction. The relation of an agent with that of the principal is a fiduciary one and requires absolute good faith in the conduct of agency. Any advantage obtained by the agent over nad above his agreed remuneration and which he would not have been able to make but for his position as an agent, is considered as secret profit. Again, as a duty to be honest towards the principal, the agent should not disclose any confidential information received from him. if it happens so, the principal can terminate the contract and hold the agent liable for the damages if any.

(vi)

duty to remit sums

The agent is supposed to pay all sums received on his account to the principal after deducting his lawful charges. Proper performance of this duty requires that the agent maintains proper accounts of the principals money or property and render it to him on his demand.

(vii)

duty to maintain accounts

Maintenance of accounts is necessary for the proper functioning of the work of the agent. The duty to provide access to records survives the termination of the contract. It would be extremely damaging and inconvenient to the principal if it is not so.

(viii)

duty not to delegate

Delegatus non potest delegare is a well known maxim of the law of agency. The principal chooses a particular agent because he has trust and confidence in his integrity and competence. Therefore the agent cannot further delegate the work which has been delegated to him. however there are certain exceptions where the agent can delegate the work entrusted to him depending upon the nature of the work, trade custom, ministerial action, principals consent etc.

Rights of agent (i) right to remuneration

Every agent is entitled to remuneration. Section 219 says that in the absence of any special contract, payment for the performance of any act is not due until the completion of such act. This provision puts forward two questions, first, when the act is complete, and second, is the act a result of the agents services. The answers to these two questions shall depend upon the terms and conditions specified in the particular contract. An agent who is guilty of misconduct shall not be entitled to commission. Also, the principal is entitled to recover any loss suffered by him due to the agents misconduct.

(ii)

right of retainer

Section 217 enables the agent to retain any amount received on the principals account in the business of the agency, until his expenses which has arisen as a result of the agency or his remuneration for acting as an agent has been paid. The right can be exercised on any sums received on account of the principal in the business of the agency.

(iii)

right of lien

in addition to the right of retainer, the 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 according to section 221. The conditions for this right are: a) the agent should be lawfully entitled to receive from the principal a sum of money by way of commission earned or disbursements made or services rendered in the proper execution of the business of agency. b) The property over which the lien is to be exercised should belong to the principal and it should have been received by the agent in his capacity and during the course of his ordinary duties as agent. c) The agent has only a particular lien. A particular lien attaches only to that specific subject matter in respect of which the charges are due. No other property can be retained.

(iv)

right to indemnity

The principal is under a duty to indemnify the agent against all liabilities incurred in the execution of his agency. This may be enforced by the agent by action against the principal, by exercise of any lien which he has, or by way of set-off. There is no right of indemnity in respect of liabilities incurred through the agents negligence or the breach of the terms of his agency.

RELATION OF PRINCIPAL WITH THIRD PARTIES AUTHORITY OF AN AGENT The authority of an agent means his capacity to bind the principal. It refers to the sum total of the acts that have been agreed between principal and agent that the agent should do on behalf of the principal. When the agent does any of such act he is said to act within his authority.

Actual authority Section 186 of the Act states that the authority can be expressed or implied. Section 187 gives the definitions of the same as follows: an authority is said to be expressed 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; things spoken or written, or the ordinary course of dealing, maybe accounted circumstances of the case. Actual authority of the agent is the authority conferred on him by the principal. It is of two types: express and implied. 1. Express authority Where the authority is conferred by words, spoken or written, it is called express authority. A power of attorney is an example. The scope of express authority is worked out by construction of the words used in the document. Where the third party has knowledge of the limitation on the agents authority or could have discovered it by reasonable examination of the documents of authority, he would be bound by it. An agent cannot borrow on behalf of his principal unless he has clear authority to do so. Where the agent has the power to borrow, the fact that he borrowed beyond the authorised limit, does not prevent the third party from holding the principal liable, because the third party has no mens of ascertaining that fact. Similarly, the fact that an

agent has acted fro improper motive does not take the case beyond the scope of his authority. 2. Implied authority Implied authority is an instance of real or actual authority for it is conferred upon the agent by the conduct of the principals interpreted in the circumstances of the case. Thus the extend of an agents authority, whether expressed or implied, depends upona) the nature of the act or business he is appointed to do; b) things which are incidental to the business or are usually done in carrying it out; c) usual customs and usages of the trade.

3. Incidental authority An agent who is appointed for a particular purpose may have implied authority to do acts incidental to the execution of that authority. For example, a solicitor, or counsel engaged to conduct litigation, may have implied authority to compromise the suit8. On the other hand, an agent employed to sell a thing has generally no authority to receive payment for it. The question whether he has authority to warrant its quality is one of fact, depending on the circumstances of each case.

4. Customary authority A principal who employs an agent to act for him in a particular market impliedly authorises the agent to act in accordance with the custom of that market. He is bound by the custom even if he is not aware of it. But the inference that the principal authorises the agent to act in accordance with the custom cannot be drawn if the custom is inconsistent with the instructions given by the principal to the agent, or with the very relationship of principal and agent. The custom is then said to be unreasonable and the principal is not bound by it unless he knows of it. Thus in Robinson v. Mollet9 there was a custom in the tallow market by which an agent employed by several principals was allowed to buy in bulk to satisfy the needs of all. The custom was held unreasonable since its effect was to turn an agent into a seller. This was inconsistent with the relationship of principal and agent since an agent must buy for his principal as cheaply as he can, while a seller sells at the highest price he
8 9

Waugh v H.B Clifford & Sons (1875) L.R 7 H.L 802

can get. But in Scott v Godfre10 a custom of the Stock Exchange permitting stockbrokers to buy enough shares for several principals from a single seller was held reasonable because all the parties intended that contracts should be made between the seller and the various buyers.

5. Apparent authority Where a person represents to a third party that he has authorised an agent to act on his behalf, he may, as against the third party, not be allowed to deny the truth of the representation, and be bound by the agents act whether he in fact had authorised it or not. In Summers v Solomon11, for instance, the defendant employed a manager to run a jewellers shop and regularly paid for jewellery ordered by the manager from the claimant for resale in the shop. The manager left the defendants employment, ordered further jewellery in the defendants name, and absconded with it. The defendant was held liable to pay for this jewellery since his conduct had led the claimant to believe that the manager had authority to pledge his credit, and he had not informed the claimant that that authority had come to an end.

RATIFICATION The doctrine of ratification comes into pay when a person has done something or acted on behalf of another without his knowledge or consent. The person on whose behalf the act is done is given an option either to adopt the act by ratification or to disown it. Ratification is thus a kind of affirmation of unauthorised acts. This is explained in section 196. Further, section 197 states that ratification can be either expressed or implied.

Conditions of ratification A valid ratification has to fulfil certain conditions. Some of them are as follows:

(i) On behalf of another It is necessary that the act in question must have been done on behalf of the person who wants to ratify it. The section, however, does not insist upon the name of he principal being disclosed.
10 11

(1901) Q.B 726 (1875) L.R 7 H.L

(ii)

Competence of principal

since ratification relates back to the date when the contract was originally made by the agent, it is necessary that the principal who purports to ratify it must be in existence of the time of the contract and should also be competent.

(iii)

What acts can be ratified

only lawful acts are open to ratification. An act which is void from the very beginning cannot be ratified. Similarly acts which would become injurious to others by ratification cannot be ratified.

(iv)

Knowledge of facts

section 198 declares: no valid ratification can be made by a person whose knowledge of the facts is materially defective.

(v)

Whole transaction

a person cannot ratify a part of the transaction which is beneficial to him and repudiate the rest. So a ratification of a part of a transaction operates as a ratification of the whole of the transaction.

(vi)

Within reasonable time

Ratification to be effective must come within reasonable time. If a time is fixed for performance of the contract, ratification must come before that time; otherwise it will be too late.

TERMINATION OF AGENCY Section 201 provides the following modes of termination of the relationship between the agent ad the principal: (i) By revocation

Section 203 says that the principal may revoke his agents authority and that puts an end to the agency. Section 207 further states that the revocation may be expressed or implied from the conduct of the principal. Revocation is subject to the following conditions: a) revocation operates prospectively

b) notice precedent to revocation c) liability to compensate d) agency coupled with interest.

(ii)

By renunciation by agent

an agent may renounce the business of agency in the same manner in which the principal has the right of renunciation. If the agency is for a fixed period, the agent would have to compensate the principal for any previous renunciation without any sufficient cause, and, a reasonable notice of renunciation is necessary.

(iii)

Completion of business

an agency is automatically and by operation of law determined when its business is completed.

(iv)

Death or insanity

an agency is terminated automatically on the death or insanity of the principal or the agent.

(v)

Principals insolvency

an agency ends when the principal is adjudicated as insolvent.

(vi)

On expiry of time

Where an agent has been appointed for a fixed term, the expiration of the term puts an end to the agency, whether the purpose of the agency has been accomplished or not12.

12

Lalljee v. Dadabhai

BIBLIOGRAPHY

1. Mercantile Law, Avtar Singh 2. Chitty on Contracts, 24th Edition, Vol 2, Maxwell and Sweet 3. Law of Contract and Specific Relief , 9th Edition, Eastern Law Book Company