MS EDUCONZ PVT. LTD.

LAW& AUDIT

AGENCY
27. INTRODUCTION TO CONTRACT OF AGENCY (Sec.182)

¾ Meaning of ‘agent’
An ‘agent’ is a person employed to –
• Do any act for another; or
• Represent another in dealings with third persons.

¾ Meaning of ‘principal’
‘Principal’ is the person –
• For whom an act is done by the agent; or
• Who is represented by the agent in respect of dealing with third persons.

¾ Test of agency
Where a person has the capacity to –
• Create contractual relations between the principal and a third party;
• Bind the principal by his own acts, there exists a relationship of agency.

CREATION OF AGENCY

By Operation By Express By Implied Agreement By Ratification of acts

of Law Agreement (a) Estoppel, (b) Holding Out,
(c) Necessity

28. SALIENT FEATURES OF AGENCY (Sec. 183, 184, 185 and 226)

¾ Principal is liable for the acts of agent

• The principal is liable for all the acts of an agent which are lawful and within the
scope of agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the same legal
consequences as if these contracts were made by the principal himself.

¾ Who may employ an agent?

Any person may employ an agent if –
• He is of the age of majority; and
• He is of sound mind.

¾ Who can be an agent?

• Any person may become an agent.
• Even a minor or a person of unsound mind can become an agent

¾ Liability of agent
• Generally an agent is liable to the principal
• An agent is not liable to the principal if he is a minor or is of unsound mind.

¾ Requirement of consideration
No consideration is necessary for creating an agency.

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29. MODES OF CREATION OF AGANCY (Sec.187, 189, 196, 214 and 237)

¾ Express agreement
• A person may employ another person as his agent by entering into an express
agreement with him.
• The agreement may be either oral or written.

¾ Implied agreement
Agency by estoppel
If –
- a person makes a representation (by his words or conduct) to a third
person that a certain person is his agent; and
- the third party believing such representation to be true, enters into a
contract with the pretended agent.
Then –
- the person making the representation is prevented from denying the truth
of agency. He may be held liable as a principal by such third party.
Agency of holding out
Such an agency comes into existence when a person by his affirmative or positive
conduct leads third persons to believe that person doing some act on his behalf is doing
with authority.

¾ Agency by necessity – Conditions

(i) There was an actual and definite necessity for acting on behalf of the principal.
(ii) The agent was not in a position to communicate with the principal.
(iii) The act was done for the purpose of protecting the interest of his principal.
(iv) The agent has exercised such reasonable care as a man of ordinary prudence
would have exercised in his own case.
(v) The act was done bonafide.
¾ Agency by operation of law
Agency by operation of law arises where the law treats one person as an agent of
another.

¾ Agency by ratification
Meaning
If –
- a person (viz., pretended agent) acts on behalf of another person (viz, the
principal)
- the pretended agent acts without the knowledge or consent of the
principal; and
- Afterwards, the principal accepts such act.
Then –
- Agency by ratification comes into existence.

Effects of ratification
• The principal is bound by the acts ratified by him as if such acts had been performed
by his authority.
• Ratification relates back to the actual date of the act that is ratified and not from the
date when the act ratified.

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30. ESSENTIALS OF A VALID RATIFICATION (Sec. 197 to 200)

¾ Full knowledge
No valid ratification can be made by a person whose knowledge of the facts of the case is
materially defective. In other words, the principal must have full knowledge of all the
material facts.

¾ Whole transaction
It must be done for whole transaction in fact; ratification of the part of a transaction
operates as a ratification of the whole transaction.

¾ Act on behalf of another person

The acts done by a person (i.e. pretended agent) on behalf of another person (i.e.
pretended principal) can only be ratified.

¾ By the principal
Ratification can be made by only such person for whom the act was done.

¾ Existence of principal
The principal must be in existence at the time when the act was done in his name

¾ Contractual capacity
The principal must have contractual capacity both at the time of entering into the contract
and at the time of ratification.

¾ Lawful acts.
Only those acts which are lawful can be ratified. Void, illegal, or ultra vires acts cannot
be ratified.

¾ Acts within principal’s power

Ratification can be made only for such acts which principal had the power to do.

¾ Communication
Ratification must be communicated to the third party so as to bind him

¾ Within reasonable time

Ratification must be made within reasonable time of the act purported to be ratified.

31. KINDS OF AGENTS.

A. Based on Authority
1. Special Agent 2. General Agent 3. Universal Agent
(a) Appointed to perform a (a) Appointed to do all acts (a) Appointed to do all acts for
particular transaction, e.g. connected with a the Principal.
sale of a house property. particular trade, business (b) Authority is unlimited
(b) Agent has limited or employment. (c) All acts of Agent bind his
authority (b) Authority is wide and Principal provided that his
(c) Agent cannot bind continues till agency is acts are legal and agreeable
Principal for acts other terminated. as per law of land.
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than for which he is (c) Principal may limit his

employed. authority.
(d) Principal is bound by all
acts unless it is beyond
authority of Agent.

B. Based on Nature of work

1. Commercial or Mercantile Agents 2. Non – Mercantile Agents.
(a) One who is authorised to sell goods or (a) Not engaged in business of selling or
consign goods for the purpose of sale buying goods, but act in their
or to buy gods or to raise money on the respective professional capacities. i.e.
security of goods. render professional services for their
(b) Includes Banker, Factor, Auctioneer, Principal
Broker, Commission Agent, & Del (b) Includes Solicitors, Attorneys, C & F
Credere Agent. Agents, Insurance Agents, etc.

32. DUTIES OF AN AGENT (Sec. 209 to 218)

1. To conduct the business in accordance with the directions given by the principal
2. To work with reasonable diligence, care and skill.
3. To render proper accounts to the principal on demand.
4. To communicate with his principal in case of difficulty and seek his instructions.
5. Not to deal on his own account unless all the material facts have been disclosed to
the principal and consent of the principal has been obtained.
If the agent, without the knowledge of the principal, deals in the business of agency
on his own account, the principal has the following rights:
(a) He may repudiate the transaction, if the agent dishonestly conceals any material
facts or the dealings of the agent prove to be disadvantageous to him.
(b) He may claim from the agent the agency business other than the agreed
remuneration.
6. Not to make any secret profit out of the agency business other than the agreed
remuneration
7. To remit to the principal all the sums received in the principal’s accounts in
accordance with the terms and conditions of contract of agency.
8. Not to delegate authority or appoint sub – agent.
9. To protect and preserve the interest on behalf of the principal’s representative in case
of his death or insolvency of the principal.
10. Not to use information obtained in the course of the agency against the principal.

33. RIGHTS OF AN AGENT (Sec. 217 to 225)

1. To retain money out of the sums received in agency business for advances made or
expenses incurred and remuneration due to him.
2. To receive the agreed remuneration. If the remuneration is not fixed, then he has the
right to recover such remuneration as is usual and customary in such business.
3. Right of lien on principal’s goods, papers and other property until the amount due to
him in respect of the same is paid.
4. An agent has the right to be indemnified by the principal against the consequences of
all lawful acts done in exercise of the authority conferred on him.
5. An agent has the right to be indemnified by the principal against consequences of
acts done in good faith that caused an injury to third person.
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6. To claim compensation for injury caused because of principal’s neglect or want of

skill.

34. WHEN AN AGENT IS PERSONALLY LIABLE? (Sec. 230 and 231)

¾ General Rule – No personal liability [ Sec.230]

In the absence of contract to contrary, an Agent cannot –
(a) personally enforce contracts entered into by him, on behalf of his Principal,
(b) be held personally liable for them.
This is because the Agent merely acts on behalf of his Principal. Thus, he enjoys
immunity from being personally sued.

Exceptions, i.e. Agent personally as well as Joint & Severally Liable

The Agent is personally liable in the following cases –
1. Foreign Principal [Sec.230] : Where the contract is made by an Agent for the sale
or purchase of goods for a merchant resident abroad.
2. Undisclosed Principal [Sec.230]: Where the Agent does not disclose the name of his
Principal.
3. Principal cannot be sued [Sec.230]: Where the Principal, though disclosed, cannot
be sued, e.g. Principal becoming of unsound mind, subsequent to appointment of
agent.
4. Acting for a Principal not in existence: Where the Agent acts for a Principal who is
not in existence at the time of making contracts, he shall be personally held liable e.g.
contracts entered into by Promoters before incorporation of a Company are made in
their personal capacity and hence personally liable.
5. Agency coupled with interest [Sec.202] : Where the Agent has an interest in the
subject matter of agency.
6. Agent guilty of Fraud [Sec.238] : Where an Agent is guilty of fraud or
misrepresentation in matters that are outside the scope of his authority, he is
personally liable, and do not affect his Principal.
7. Agent exceeds authority & act not ratified: Where an Agent acts either without
any authority or exceeds his authority, he shall be held personally liable when the
principal does not ratify his acts.
8. Agent receives or pays money: Where an Agent receives or pays money by mistake
or fraud to a third party, he shall be personally liable to such third party. Also ha can
personally sue the third party if the fraud or mistake is accountable to such third
party.
9. Express Agreement for personal liability: Where an Agent expressly aggress to be
personally bound.
10. Execution of Contract in his own name: Where an Agent executes a contract in his
own name, without disclosing that he is acting as Agent for a Principal, he shall be
personally liable, e.g. An Agent signs a Negotiable Instrument without making it
clear that he is signing it as an Agent only, he shall be held personally liable on the
same. He would be personally liable as Maker of P/N, even though he may be
described as Agent.
11. Trade custom or usage: Where trade usage or custom makes an Agent personally
liable.
12. Agent with special interest: An Agent with special interest or with a beneficial
interest, e.g. a Factor or Auctioneer, can sue and be sued personally. [Subramanya vs
Narayana]

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13. Action against Agent or Principal [Sec 233] : Where the Agent is personally liable,
a person dealing with him may hold - (a) either him or (b) his Principal or (c) both of
them liable. The liability of Principal and Agent is “joint and several”.
14. Exclusive liability [Sec. 234]
Where a person has made a contract with an Such Third person cannot later on, shift
Agent and – the liability on to –
• Induces such Agent to act upon it in the • The Agent, or
belief that only his principal would be • The principal, respectively.
held liable,
• Induces the principal to act upon it in the
belief that only his Agent would be held
liable.

35. AGENCY COUPLED WITH INTERST (Sec 202)

• When agency is created for securing some benefit to the agent over and above his
remuneration as an agent, it is called as agency coupled with interest.
• The interest should exist at the time of creation of agency. If the interest arises after the
creation of agency then it would not be called as agency coupled with interest.
• Agency coupled with interest cannot be terminated to the prejudice of such interest.
• Agency coupled with interest does not terminate even on the death or insanity of the
principal.
• Thus, such agency is irrevocable to the extent of such interest.

36. IRREVOCABLE AGENCY (Sec.202 and 204)

¾ Agency coupled with interest

Such agency cannot be terminated to the extend of such interest

¾ Part exercise of authority by the agent

Where the agent has partly exercised the authority, the principle cannot revoke the
authority so far as regard such acts and obligation as arise from already done in the
agency

¾ Personal liability incurred by agent

Where the agent has incurred personal liability, the agency is irrevocable

37. DELEGATION OF AUTHORITY (Sec.190)

¾ General rule
The general rule is that an agent cannot lawfully employ another act, which he has
expressly or impliedly undertaken to perform personally.

¾ Exceptions
(a) There is a custom or usage of trade to that effect.
(b) Where power of the agent to delegate can be inferred from the conduct of the
both the principle and the agent.
(c) When the principal is aware of the intention of the agent to appoint sub agent by
the does not object to it.
(d) When principle permits appointment of a sub-agent.
(e) If the nature of the agency is such that the sub-agent is necessary.

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(f) Where the acts to be done is purely ministerial not involving confidence or use of
discretion.
(g) Where unforeseen emergencies arise rendering appointment of a sub-agent
necessary.

38. LEGAL RELATIONSHIP BETWEEN THE PRINCIPLE AND SUB-AGENT AND

AGENT (Sec.190, 192 and 193)

¾ If sub-agent is properly appointment

(a) Principal is bound to the third parties for the acts of sub-agent.
(b) The agent is responsible to the principal for the acts of sub-agent.
(c) The sub-agent is responsible to the agent for the acts done by him.
(d) The sub – agent is not responsible to the principle, except in case of fraud or willful
wrong.

¾ If sub – agent is not properly appointed.

(a) Principal is not bound to the third parties for the acts of sub – agent.
(b) The agent is responsible to the principle and third parties for the acts of sub – agent.
(c) The sub – agent is responsible to the agent for the acts done by him.
(d) The sub – agent is not responsible to the principle.

39. LIABILITY OF PRINCIPAL TO THIRD PARTIES FOR THE ACTS OF AGENT

(Sec. 226 to 228)

¾ Principal is liable for the acts of agent

• The principal is liable for all the acts of an agent which are lawful and within the
scope of agent’s authority.
• The contracts entered into by the agent on behalf of the principal have the same legal
consequences as if these contracts were made by the principal himself.

¾ When agent exceeds his authority

Whether the acts done within the authority are separable from the acts done beyond
authority.
If yes – The principal is not bound for excess acts done by the agent.
If no – The principal is not bound by the transaction and the principal can repudiate the
whole transaction.

40. TERMINATION OF AGENCY (Sec.201 to 210)

A. By the acts of parties

¾ By agreement
The principal and the agent may mutually agree to terminate the agency, at anytime.

¾ By revocation
• When the agency is coupled with interest, the principal cannot revoke the agency to
the prejudice of such interest.
• The principal can revoke the authority at anytime 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.
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• When agency if for fixed period, the principal must make compensation to the agent
for premature revocation of agency without sufficient cause.
• Revocation may be expressed or implied from the conduct of the principal

¾ By the agent renouncing the business of agency

• Renunciation may be expressed or implied from the conduct of the agent.
• When agency is for fixed period, the agent must make compensation to the principal
for premature renunciation of agency without sufficient cause.

B. By operation of law
1. Completion of business of agency
2. Death or insanity of the principal or agent
3. Where the principal or the agent, being a company is dissolved
4. Destruction of subject matter of agency
5. Principal becoming insolvent
6. Expiration of period where agency was for a fixed period.

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