Paper 2 – Business Laws Chapter 2 – The Indian Contract Act,1872

Unit 9 – Agency
The Indian contract Act 1872, does not define the word “Agency”

Agent Principal
A person employed to do any act for another A person for whom such act is done or who is so
or to represent another in dealing with the represented
third persons

•Whether the person has the capacity to bind

the principal and make him answerable to the
Test of
third party.
Agency
•Whether he can establish privity of contract
between the principal and third parties

THE RULE OF AGENCY: “Qui facit per alium, facit per se”

He who acts through an agent is himself acting.

Appointment & Authorities of Agents

Who may employ an agent ? Who may be an agent?

(Sec 183) (Sec 184)

Who has attained

Major/Minor
majority

Who is of sound Person who is sound

mind mind/unsound mind

Section 185 – No Consideration is necessary to create an agency. The acceptance of the

office of an agent is regarded as sufficient consideration for appointment

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Creation of Agency

Authority to create Agency (Sec 186)

Express Authority: Implied Authority:

When it is given in words when it is to be inferred from the

spoken/written circumstances of the case, conduct of the
parties and things spoken or written, or in
the ordinary course of dealing

Implied
Agency

Agency by estoppel Agency by Agency by Effect of Ratification

(Sec 237) Necessity operation of law (Sec 196)

1. Agency by Estoppel (Sec 237): -

Where the principal by his conduct or statement willfully induces another person to believe that
a certain person is his agent, he is subsequently prevented or estopped from denying the fact of
agency:
Following Conditions must be fulfilled: -
1. The principal must have made a representation;
2. The representation may be express or implied;
3. The representation must state that the agent has an authority to do certain act although
really, he has no authority;
4. The principal must have induced the third person by such representation; and
5. The third person must have believed the representation and made the contract on the belief
of such representation.
Eg: If Piyal (the principal) has for several months permitted Sunil to buy goods on credit from
Prasad and has paid for the goods bought by Sunil, Piyal cannot later refuse to pay Prasad who
had supplied goods on credit to Sunil in the belief that he was Piyal’s agent and was buying the
goods on behalf of Piyal. Piyal is estopped from now asserting that Sunil is not his agent because
on earlier occasions he permitted Prasad to believe that Sunil was his agent and Prasad had
acted in that belief

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2. Agency by Necessity: -
 In emergency a person is authorised to do what he cannot do in ordinary circumstances.
 where an agent is authorised to do certain act, and while doing such an act, an emergency
arises, he acquires an extra-ordinary or special authority to prevent his principal from
loss.
 Eg: Raja has a large farm on which Shyam is the caretaker. When Raja is in Canada, there
is a huge fire on the farm. Shyam becomes an agent of necessity for Raja so as to save
the property from being destroyed by fire. Raja (the principal) will be liable for any
expenses, Shyam (his agent of necessity) incurred to put out the fire and save the farm
from destruction during Raja’s absence from the country
3. Agency by Operation of Law: -
 When law treats one person as an agent of other
 Eg: a partner is the agent of the firm for the purposes of the business of the firm.
4. Rights of person as to acts done for him without his authority, Effect of ratification
[Section 196]: -
 Where acts are done by one person on behalf of another, but without his knowledge or
authority, he may elect to ratify or to disown such acts
 If he ratifies them, the same effects will follow as if they had been performed by his
authority

Essentials of valid Ratification

Ratification may be expressed or Implied (Sec 197)

Ratification may be expressed or may be implied in the conduct of the person on whose
behalf the acts are done

Knowledge requisite for valid ratification (Sec 198)

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

The whole transaction must be ratified (Sec 199)

The principal cannot ratify a part of the transaction which is beneficial to him and reject
the rest

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Ratification cannot injure third person [Section 200]

When the interest of third parties is affected, the principle of ratification does not apply
Ratification cannot relate back to the date of contract if third party has in the intervening time
acquired rights

Ratification within reasonable time & Proper communication

Ratification must be made within a reasonable period of time

Ratification must be communicated to the other party.

Act to be ratified must be valid

Act to be ratified should not be void or illegal,
for e.g. payment of dividend out of capital, forgery of signatures, any other criminal offence,
or anything which is not permitted under law

Extent of Agent’s Authority

Agent’s authority in normal circumstances Agent’s authority in an emergency

(Sec 188) (Sec 189)
An agent having an authority to do an act has An agent has authority, in an emergency, to do all
authority to do every lawful thing which is such acts for the purpose of protecting his principal
necessary in order to do such act. from loss as would be done by a person of ordinary
prudence, in his own case, under similar
circumstances.
Eg: A constitutes B as his agent to carry on his Eg: A consigns perishable goods to B at Srinagar,
business of a shipbuilder. B may purchase with directions to send them immediately to C at
timber and other materials, and hire workmen, Tamandu. B may sell the good if they begin to perish
for the purposes of carrying on the business before reaching its destination

Conditions to be satisfied to Constitute valid agency in emergency

Agent should not have an There should have been

Agent should have acted
opportunity in the given actual & commercial
bonafide & for benefit of
time to communicate to necessity to act
principal
principal promptly

The agent must have been in

Agent should have adopted possession of the goods
most reasonable & practical belonging to his principal and
courses which are the subject of
contract

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Sub- Agents

Sec 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 appointment of sub agent is not lawful

“Delegatus non potest delegare”

The agent is a delegatee and a delegatee cannot further delegate

Exceptions where an agent can appoint Sub- Agent:

1. The appointment of a sub agent would be valid if the terms of appointment Sub agent
originally contemplated it is agent of
2. customs of the trade may provide for appointment of sub agents principal

3. Unforeseen emergency arise which make it necessary for agent to delegate

Representation of principal by sub-agent properly appointed [Section 192]:

Principal Liable for act of agents to Third parties

Agent Responsible for act of sub agents Principal

Sub Agent Responsible for his acts Agent (always)

Principal – only in case of fraud/wilful wrong

Agent’s responsibility for sub-agent appointed without authority [Section 193]:

Agent Responsible for his acts Principal

Third persons

Principal is responsible for the acts of the sub agent

Sub Agent is only answerable to the agent & not principal

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Substituted Agent

Substituted Agent is a person appointed by agent to act for the principal with the knowledge and
consent of the principal

They are the agents of the principal

Eg: 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.

Agent’s duty in naming such person (Sec 195)

An agent is bound to exercise the same amount of discretion as a man of ordinary prudence would
exercise in his own case

If he does this, he is not responsible to the principal for the acts or negligence of the agent so
selected.

Eg: A instructs B, a merchant, to buy a ship for him. B employs a ship surveyor of good reputation
to choose a ship for A. The surveyor makes the choice negligently and the ship turns out to be
unseaworthy and is lost. B is not, but the surveyor is, responsible to A

Difference b/w Sub Agent & Substituted Agent

Basis Sub Agent Substituted Agent

Direction of work Work under the control & direction Works under the instructions of
of agent the principal
Delegation of task Agent delegates his tasks to sub Agent does not delegate his task
agent to Substituted Agent
Privity of Contract No Privity of Contract b/w Principal Privity of Contract b/w Principal &
& Sub agent Substituted agent
Responsibility Responsible to agent alone & not Responsible to the principal and
generally responsible to Principal not to the original agent who
appointed him
Suit for remuneration Cannot sue the principal for Can sue the principal
remuneration for remuneration due to him
Improper Appointment May be improperly appointed Can never be improperly appointed
Agent’s Liability The agent remains liable for the The agent's duty ends once he has
acts of the sub-agent as long as the named the substituted agent.
sub agency continues
Agent’s responsibility The agent is responsible to the The agent is not responsible to the
principal for the acts of the sub principal for the acts of the
agent substituted agent.

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Duties and Obligations of an Agent (SIR ACD)

1. Not to make Secret Profits: -

 Secret profit means any advantage obtained by the agent over and above his agreed
remuneration
 It is the duty of an agent not to make any secret profit in the business of agency

2. Follow Instructions /Customs: -

 In case principal gives directions – agent must follow the directions
 In case agent does not give directions according to the customs which prevails in doing
business of the same kind at the place where the agent conducts such business
 When the agent acts otherwise and any loss is sustained by the principal, he must
indemnify him, and, if any profit accrues, he must account for it.
 Eg: B, a broker, in whose business it is not the custom to sell on credit, sells goods of A
on credit to C. C, before payment, becomes insolvent. B will have to indemnify A for the
losses

3. Duty of Reasonable care and skill:-

 The agent is always bound to act with reasonable diligence, and to use such skill as
he possesses; and to 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 of damage which are indirectly or remotely caused by such neglect, want of skill
or misconduct

4. Duty to Render proper Accounts:-

 Rendering accounts does not mean showing the accounts but the accounts supported by
vouchers

5. Duty not to Deal on his own account :-

 Agent should not deal on his own account without first obtaining the consent of the
principal, otherwise the principal may—
(a) repudiate the transaction, (Section 215)
(b) claim from the agent any benefit which may have resulted to him from the
transaction. (Section 216)
 Eg: 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

6. Duty not to use any Confidential information received in the course of agency against the
principal.

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Rights of an Agent

Right to retain out of

Right to Agent's lien on
sums received on
Remuneration principal's property
principal's account

Right of indemnification
Right of indemnification
against acts done in good
for lawful acts
faith

1. Right to Retain out of sums received on principal’s account (Sec 217) :-

 Can retain amount against the following payments: -
a. all moneys due to himself in respect of advances made
b. in respect of expenses properly incurred by him in conducting such business
c. such remuneration as may be payable to him for acting as agent

2. Right to Remuneration (Sec 219): -

 Eligible for remuneration as per the contract
 Absence of terms in contract - he is entitled for usual remuneration which is customary in
the business
 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 misconducted
 Eg: A employs B to recover Rs. 1,00,000 from C, and invest it in securities that give good
returns. B recovers the amount and lays out Rs. 90,000 on good securities but lays out Rs.
10,000 on securities which he ought to provide poor returns, whereby A loses Rs. 2,000. B
is entitled to remuneration for recovering the Rs. 1,00,000 and for investing the Rs.
90,000. He is not entitled to any remuneration for investing the Rs. 10,000, and he must
indemnify A for Rs. 2000

3. Agent’s lien on principal’s property (Sec 221): -

 Agent can retain goods, papers & other property of principal until the amount due to
himself for commission, disbursement and services in respect of the same has been paid or
accounted for him
 Conditions to be satisfied:-
a. Agent should be lawfully entitled to receive the sum
b. The property over which the lien is to be exercised should belong to the principal

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 Agent’s right to lien is lost in the following cases:-

a. When the possession of the property is lost
b. When the agent waives his right
c. The agent’s lien is subject to a contract to the contrary

4. Right to indemnity:

a. Right of indemnification for lawful acts (Sec 222): -

The principal is bound to indemnify the agent against all consequences of lawful acts
done in exercise of his authority
Eg: ‘A’ residing in Delhi appoints ‘B’ from Mumbai as an agent to sell his merchandise.
As a result ‘B’ contracts to deliver the merchandise to various parties. But A fails to
send the merchandise to B and B faces litigations for non- performance. Here, A is
bound to protect B against the litigations and all costs, expenses arising of that.

b. Right of indemnification against acts done in good faith (Sec 223): -

Where the agent acts in good faith on the instruction of principal, agent is entitled
for indemnification of any loss or damage from the principal.
Eg: Where P appoints A as his agent and directs him to sell certain goods which in fact
turned out to be not those belonging to P and if third parties sue A for this act, A is
entitled for reimbursement and indemnification for such act done in good faith.

c. Non-liability of employer of agent to do a criminal act (Sec 224) :-

Where one person employs another to do an act which is criminal, the employer is not
liable to the agent, either upon an express or an implied promise, to indemnify him
against the consequences of that act.

5. Right to compensation for injury caused by principal’s neglect (Sec 225):-

Every principal owes to his agent the duty of care, and not to expose him to unreasonable
risks.

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Principal’s Liability to Third parties

Principal is liable for the acts When agent’s act exceeds When agent’s act exceeds
of the agent done within the authority & that excess part is authority & that excess part is
scope of agent’s authority separable , then principal is non -separable, the principal
liable only to the extend of cannot be held liable
authorised acts
Eg: A, being B’s agent with Eg: A, being owner of a ship Eg: : A authorizes B to draw
authority to receive money on and cargo, authorizes B to bills to the extent Rs.200 each.
his behalf, receives from C, a procure an insurance for B draws bills in the name of A
sum of money due to B. C is Rs.4,00,000 on the ship. B for Rs. 1,000 each. A may
discharged of his· obligation procures a policy for repudiate the whole transaction
to pay the sum in question to Rs.4,00,000 on the ship, and
B another for the like sum on
the cargo. A is bound to pay
the premium for the policy on
the ship, but not the premium
for the policy on the cargo

Liability of principal inducing belief that agent’s unauthorized acts were authorized
(Sec 237)

If the principal by his words or conduct induced third party to believe that acts and obligations
were within the scope of agent’s authority, then the principal shall be liable even if agent has
acted outside the scope of his authority

Consequence of notice given to Agent (Sec 229)

Notice given to Agent has the same legal consequence as the notice given to Principal

Eg: A is employed by B to buy from C certain goods of which C is the apparent owner, and buys
them accordingly. In the course of the treaty for the sale, A learns that the goods really
belonged to D, but B is ignorant of that fact. B is not entitled to set off a debt owing to him from
C against the price of the goods. Thus, the knowledge of the agent is treated as the knowledge of
the principal.

Principal’s liability for the agent’s fraud, misrepresentation or torts (Sec 238)

Misrepresentations made or fraud committed by agent acting within his authority – Principal shall
be liable

Misrepresentations made or fraud committed by agent outside his authority – Principal cannot be
held liable

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Personal Liability of Agent to Third parties

According to Sec 230, Agent cannot be personally held liable. He can neither sue nor be sued
on contracts made by him on his principal’s behalf

Exceptions: Cases where Agent shall be personally held liable

•When an agent has entered into a contract for the sale or purchase of goods on
Foreign behalf of a principal resident abroad
Principal

•when the agent does not disclose the name of the principal
Undisclose
d Principal

•Where the principal, though disclosed, cannot be sued, the agent is presumed to
Incompete be personally liable
nt Principal

• If the agent pretends but is not an actual agent, and the principal does not
Pretended rectify the act but disowns it
Agent

•When the agent exceeds his authority, misleads the third person in believing that
Agent
the agent he has the requisite authority in doing the act
exceeds
Authority

Rights of Third parties

1. Rights of parties to a contract made by undisclosed agent (Sec 231):-

If the principal discloses himself before the contract is completed, the other contracting
party may refuse to fulfil the contract, if he can show that, if he had known who was the
principal in the contract, or if he had known that the agent was not a principal, he would not
have entered into the contract.

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Eg: SS bought for himself a ticket of IPL match at Wankahde Stadium through AB because
on personal grounds Stadium management would not have issued the ticket to SS. Stadium
management may repudiate the contract and refuse SS to enter the stadium

2. Performance of Contract with agent supposed to be principal (Sec 232): -

When agent does not disclose that he is acting as an agent and the principal requires the
performance of the contract then the principal can obtain such performance subject to the
rights and obligations subsisting between the agent and the other party to the contract.
Eg:- A, who owes 50,000 rupees to B, sells 1,00,000 rupees worth of rice to B. A is acting as
agent for C in the transaction, but B has no knowledge nor reasonable ground of suspicion
that such is the case. C cannot compel B to take the rice without allowing him to set off A’s
debt.

3. Option to Third Person – sue the Agent or the Principal:

a. Right of person dealing with agent personally liable (Sec 233): -

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.
Eg: A enters into a contract with B to sell him 100 bales of cotton, and afterwards
discovers that B was acting as agent for C. A may sue either B or C, or both, for the price
of the cotton.

b. Consequence of inducing agent or principal to act on belief that principal or agent will
be held exclusively liable (Sec 234): -

When a person who has made a contract with an agent induces the agent to act upon the
belief that the principal only will be held liable, or induces the principal to act upon the
belief that the agent only will be held liable, he cannot afterwards hold liable the agent or
principal respectively.

Termination of Agency (Sec 201)

Renunciation by Completion of Death of Principal

Revocation
agents business or the agent

Principal or agent
Insolvency of
becoming of Expiry of time
principal
unsound mind

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1. Revocation:
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 so far as regards such acts and obligations as arise for acts already done in the
agency

Compensation for revocation by principal (Sec 205): -

If there is premature revocation of agency without sufficient cause, the principal must
compensate the agent, for such revocation
Notice of Revocation (Sec 206):-
Principal must give reasonable notice of revocation to agent otherwise, he can be liable to pay
compensation for any damage caused to the agent
Revocation/ renunciation may be expressed or implied (Sec 207):-
Revocation of agency may be expressed or implied in the conduct of the principal.
Eg: A empowers B to let A’s house. Afterwards A lets it himself. This is an implied revocation of
B’s authority
2. Renunciation by agent :

If the agency is for a fixed period, the agent would have to compensate the principal for any
premature renunciation without sufficient cause and a reasonable notice of renunciation is
necessary.

If the agent renounces without proper notice, he shall have to make good any damage thereby
resulting to the principal

3. Completion of business

An agency is automatically and by operation of law terminated when its business is completed.

4. Death/Insanity
An agency is determined automatically on the death or insanity of the principal or the agent.
Winding up of a company or dissolution of partnership has the same effect. Act done by agent
before death would remain binding
5. Principal’s Insolvency
An agency ends on the principal being adjudicated insolvent.

6. On expiry of Time
An agency comes to an automatic end on expiry of its term.

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Agency is Irrevocable

Section 202 states that ”where the agent has himself an interest in the property which forms
the subject matter of the agency, the agency cannot, in the absence of an express contract, be
terminated to the prejudice of such interest.”

Eg: A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due
to him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death

Effects of Termination (Sec 208)

When termination of agent’s authority takes effect as to agent, and as to third persons
[Section 208]:
The termination of the authority of an agent does not, so far as regards the agent, take effect
before it becomes known to him, or, so far as regards third persons, before it becomes known
to them
Eg: : A directs B to sell goods for him and agrees to give B five per cent commission on
the price fetched by the goods. A afterwards, by letter, revokes B’s authority. B, after the
letter is sent, but before he receives it sells the goods for Rs. 1,00,000. The sale is binding on
A, and B is entitled to Rs. 5,000 as his commission

Agent’s duty on termination of agency by principal’s death or insanity [Section 209]:

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

Termination of sub -agent’s authority (Sec 210)

The termination of the authority of an agent causes the termination of the authority of all
sub-agents appointed by him.

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