Updated: Jun 8
Written By: Siddharth Sharma, Shubham Arun, Surbhi Modak
Agency ‘A Hermes Needed by All’
In our life time every one of us has to contact an agency so that they can help us meet ends, similar to the Greek God of Messages ‘Hermes’ who enables communication by crossing the boundary and guides the two realms of Gods and humanity. Similarly an agency performs a function of guiding two different parties to meet their needs, for example: In an Indian house hold we obtain a LPG cylinder for cooking via an agency, the agency procures the LPG cylinders from a Petroleum company or as the case may be and then the distributes it to the end user that is the household, the money the agency obtains from the end user is given to the company as per their contract and some commission is given to the agency as consideration for assisting the trade between the company and the end user; similarly a travel agency , advertisement agency etc. also function on the same parameters. Hence, agency is a very important part of our life, so it becomes important for us to understand it from a legal point of view to understand the liabilities of each parties and the effect of the decision made by one party on the other party.
1.2 Essentials of Agency
A person who is employed to do any act of another, or to represent or to provide services to someone is called an “agent”. The person who is being represented, or the person for whom such act is done is called the “principal”. An important point to note is that there exists a difference between a person who is appointed to do an act from an agent. An agent not only has the representative capacity but also has the power to affect the legal relation of the principal with third persons in other words an agency implies an authority vested in a person to create a legal relation between a principal and third party [i].Similar observation has been made by the Supreme Court in Syed Abdul Khader v. Rami Reddy[ii].
1.3 Test of Determining Existence of Agency Relationship
The perimeter established by Dhawan J of the Allahabad High Court for the determination of agency relationship has been set with reference to American case wherein a demarcation is drawn between an ‘agency agreement’ and an ‘agent’. The law in India is the same. It has been held in several decisions that the fact that the parties have called their relationship an agency is not conclusive, if the incident of the relationship, as disclosed by evidence does not justify a finding of agency[iii]. The court must examine the true nature of the relationship and the functions and responsibilities of the alleged agent.
In cases where there are more than one agent and the authority given to the agent is collective, they would be bound to work together and only then the principal would be liable and where the power vested in the agents is collective and several, any one of them would have the authority to act for the principal[iv] and the act of any one agent would bind the principal. Where an agent acts for more than one principal in the same transaction, his liability is not extinguished until he satisfies his duties against all the principals in the transactions, unless otherwise agreed[v].
1.4 Eligibility to Employ Agent and become Agent
According to Section 183 of the Indian Contract Act any person who is of sound mind and has attained the age of majority is eligible to employ an agent which employs that a minor cannot appointed as an agent, However, as per section 184 of the act:
Any person can be an agent who has attained the age of majority and is of sound mind. However, an important point to note is that in ordinary circumstance an agent doesn’t incur any personal liability while contracting for his principal, therefore it is not necessary for the agent to be competent to contract[vi]. Therefore, if a minor is an agent, the minor will not be liable to his principal.[vii]
Also, as per Section 185 of Indian Contract Act no consideration is necessary for the formation of agency, an agency is generally remunerated in the in the form of commission or as per contract for the services provided. Therefore, agency acts as one of the few exceptions to the principle of “No consideration, No Contract”. A contract of agency is absolutely legal without a consideration and perfectly binding on both the parties.
1.5 Kinds of Agents
There are two kinds of agents:
An agent that is entrusted with the possession of goods is known as a factor. For Example: The LPG agency talked about in the beginning of the article is a factor agent wherein he is entrusted with the cylinders at his premises and sells the cylinders from his premise. He therefore sells the goods in his possession but such goods are actually procured from the principal[viii].
A “broker” is also a mercantile agent. He is appointed to negotiate and make contracts for the sale or purchase of property on behalf of the principal. A real estate broker is one of the most common example of this type of agent wherein the broker enters into an agreement to sell the immovable property on behalf of his principal.
Del Credere Agent
When an agent undertakes responsibility of the third party, he is known as a del credere agent. This means that the agent voluntary gives guarantee to the principal to make good the loss in case the third party with whom the contract is entered into makes a default in performing the contract. However, as such transactions bear greater risk for the agent, he charges a commission over and above the normal rate of commission known as the del credere commission[ix].
2.1 Duties of Agent
There are some duties of general nature imposed on every agent dictated by law, unless any changes are specifically mentioned in the contract:
2.2 Duty to Execute Mandate
The first duty of every agent is to carry out the order of his principal. Any loss incurred by the agent as a result of not abiding by the orders of the principal shall be borne by the agent. Such loss shall be made good to the principal by the agent. An example of this would be, if a principal directs an agent to insure the goods with the agent, and the agent fails to do so, and the goods are destroyed or damaged, the agent shall be treated as the insurer and shall make good the loss incurred[x].
2.2 Duty to Follow Instruction or Customs
As per Section 211 of Indian Contract act an agent is bound to follow the procedure as directed by the principal in executing the business and in absence of any such directions, according to the customs which prevail in doing business of the same kind at the place where the agent conducts the 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 it[xi].
2.3 Duty of Reasonable Care and Skill
Section 212 limits the agent’s liability to “direct consequences”[xii]. It provides that the agent must make compensation 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 are indirectly caused by such neglect, want of skill or misconduct. The agent will be liable in all cases unless the principal has notice of his want of skill. Also, in case of difficulty to perform an act directed by the principal, it is the duty of an agent to use all the means possible to a prudent man to communicate with the principal and explain the difficulty in performance and ask for his guidance.
2.4 Duty not to Make Secret Profit
Any profit obtained by the agent besides his agreed remuneration shall be regarded as breach of his agency contract. An agent is also not allowed to indirectly make profit by using his position as an agent. Acceptance of bribe is one such example[xiii].Under this provision it is important to note that if the agent in the course of business of agency, converts an opportunity to his advantage, he is not required to inform the principal if the agent honestly shares the profit of such advantage with the principal in the agreed ratio[xiv].
2.5 When Can an agent delegate his Responsibility:
An agent cannot pass his responsibility to another if he has undertaken to perform an act personally. Although there are few exceptions to this provision depending upon the circumstances such as-
· Nature of Work-Where the nature of work is such that it requires the agent to appoint a sub-agent. For Example: An agent undertakes a construction project, he would then require to appoint sub agents to look after different aspects of the project.
· Trade Custom-Secondly if there is a custom by which the agent needs another person to help him out, the agent won’t be liable. For example, an architect generally appoints surveyor.[xv]
· Ministerial Action-Any work which requires an agent’s personal skill cannot be executed by anyone else but in case the work is ministerial in nature the agent may delegate it to someone else. An example of this would be the signing authority given to clerks or workers of an administrative office wherein due to the non-availability of the person in charge or huge amount of workload, the agents signing responsibility is delegated[xvi].
· Principal’s Consent- Where the principal has allowed the agent to appoint a sub-agent in written or by conduct or the principal has ratified his agent’s unauthorized action.
3.1 Remedies of Principal for Breach of Duty
“A principal has the following rights against an agent who fails to perform his duty:
to ask for an account and also demand payment of secret and illicit profit earned by him as an agent
to seek damage for disregard of the terms of agency as also for want of skill and care
to resist the claim of the agent for commission and indemnity by the plea that the agent has acted for himself, i.e., as a principal”[xvii].
4.1 Rights of Agent
1. Right to Remuneration
Every agent is entitled to a reasonable remuneration even if there is no agreement regarding the amount of remuneration that is to be paid by the principal to his agent. Where the amount of remuneration is left on the principal’s discretion then also a reasonable amount for the services rendered shall be paid. An agent will have to forego his remuneration if there has been any misconduct by the agent. If the agent fails to abide by the statutory duties, the remuneration can be withheld by the principal unless specifically mentioned in the contract.
2. Right of Retainer
According Section 217 of Indian Contract Act an agent is within his rights if he retains amount due to him or the amount incurred by providing services to the principal, out of any sums received on account of the principal in the business of the agency[xviii].
Also, unless there is a contract an agent is entitled to keep goods, paper and other property to that specific subject-matter in respect of which the charges are due to himself until the amount due to him has been paid or accounted. Right to lien is lost as soon as the possession of the property is lost.
Also, an agent is to be indemnified against any consequence arising out of any lawful act done by the authority conferred upon him.
3. Right to Compensation
The principal must make compensation to his agent if his agent gets hurt due to principal’s neglect or the exposure to risk. An agent makes a principal liable by his acts against third parties in particular, however where the principal shows an error in judgement or commits a mistake in providing directions to the agent, he should compensate the agent fairly.[xix]
5.1 Relations of Principal with Third Parties
Obligations arising out of the contract entered by the agent, may be enforced in such manner as if the principal had entered the contract himself. The obligation will arise only according to the authority conferred on him by the principle in a lawful manner necessary to accomplish the task, authority may be express or implied.
Agency though a topic dealt under the Indian Contract Act is actually regarded as the true test of partnership under the Partnership Act, 1932. The ability of a partner to bind all the partners in a firm who are for that act treated as the principal is the feature which distinguishes a partnership firm from any other type of business concern. Therefore, agency plays an important role not only under specific agency contracts but also under the partnership agreements.
Agency is part of general contract which in which a middleman who communicate and executes a business transaction in the best way possible for his principal. Also, an agent needs to work in a lawful manner so that he can be remunerated by his principal or he can sue his principal to cover his expenses incurred by him in order to render the services as per the contract. Although there are some non-uniformity which exists, such as in the case of a hire-purchase transaction, it was stated that the dealer is a party to the hire-purchase transaction in his own right and not as a representative of any other party, through for many purpose he is an intermediary between the two others.[xx] The other view considered the dealer as an agent of the finance company for many purpose law.[xxi] Similarly, there are many such matters on which the law of agency is not settled which makes it difficult to determine the accurate path to determine the result of a conflict. As a result of such conflict, the Agent is left with only one right of retaining the property of the principal till the time justice is served. Nevertheless, agency is an important part of our day-to-day life and in the due course of time we can hope the discrepancies will be resolved.
Reference [i] I.T.C v P.M Rathod & Co, (1960) 1 SCR 401 [ii] (1979) 2 SCC 601 [iii] AMERICAN JURISPRUDENCE,2ND Edn, Vol 3 , p 431 [iv]Guthrie v. Armstrong , (1820) 5 and Ald 628 [v]Raghar Dayal v. Piare Lal. AIR 1933 Lah 93 [vi]De Souza Re, AIR 1932 All 374 [vii]Foreman v. Grean Western Rly Co, (1878) 38 LT 851 [viii]Stevens v. Biller, (1883) 25 Ch D 31 [ix]Couturier v. Hastie, (1852) 8 Exch 40 [x]Tichel v. Short, (1950) 2 Ves Sen 239 [xi]Lilley v. Doubleday, (1881) 7 QBD 510 [xii] Pannalal Jankidas v Mohanlal, (1950) 1 SCR 979 [xiii] Harrington v. Victorian Graving Dock Co, (1878) 3 QBD 549 [xiv] Novdisk Insulin Laboatoriam v. C.L. Bencard, (1953) Ch 430 [xv] Moon v. Witney Union, (1837) 43 RR 802 [xvi] Mason v. Joseph,(1804) 1 Smith KB 406 [xvii] V.G Ramachandran Law of Agency ,401 Manek v. Jwala, AIR 1947 Bom 135 [xviii] Bombay Saw Mills Co, Re, IRL (1888) 13 Bom 314 [xix] Federal Insurance Co v. Nakona Singapore (P) Ltd,(1992) 1 Current LJ 539 CA Singapore [xx]Mercantile Credit Co v Hamblin,(1965) 2 QB 242 [xxi]Branwhite v. Worcester Works Finance,(1969) 1 AC 552