Concept Of Agency In Indian Contract Act - The Complete Concept And Landmark Judgments

Coverage of this Article

KEY TAKEAWAYS

-The aim of this article to understand the concept of agency better and look at various landmark judgments.

INTRODUCTION

-The article addresses the features and roles of an Agent pursuant to the Indian Contract Act, 1872.

Agency by ratification

-A Principal may later confirm an act performed on his behalf without his knowledge or approval. If the act is validated, an agency relationship will be established, and it will be as if he had previously allowed the individual to serve as his Agent. Ratification might be expressed verbally or in writing (by act or conduct). Ratification is defined under Section 196 of the Indian Contracts Act, 1872.

An Agent's Rights

-Right of retainer– An Agent has the right to keep any income or costs he receives while representing the Principal.

LANDMARK CASES

-Kuchwar Lime & Stone Co. v. Dehri Rohtas Light Railway Co. Ltd. & Anr.

-FACTS: The appellant Company's carriage to Banjari station had booked a quantity of coal on the respondent Railway's line, and the appellant Company had to pay the freight on the consignment.

Narandas Morardas Gaziwala & Ors vs S. P. Am. Papammal& Anr.:

-Narandas Morardas Gaziwala and Ors., a partnership firm based in Surat that dealt in lace and silver thread, had relations with another firm, Krishna and Company, who functioned as their Agents for selling their goods on commission basis throughout the three districts of Madras.

-The Indian Contract Act gives no mechanism for an Agent to sue the Principal for the account's rendition. The legislation is not exhaustive, and the Agent's ability to sue the Principal for accounting is an equitable right that arises in unusual situations, rather than a statutory right.

Harshad J. Shah & Anr v. L.I.C. of India & Ors.

-A bearer-cheque with the name of the Agent on it was handed over to a LIC general Agent (R3) for the payment of premium (R1). (This payment was paid after the grace period had expired.) The cheque was cashed and deposited with the LIC by the Agent. However, the insured was involved in an accident and died the day before the real deposition (August 9). (Aug 10). The insured's widow (A2) (as the policy's nominee) filed a claim with the LIC at the Gujarat State Consumer Disputes Redressal Commission. LIC declined to pay, alleging a premium payment default.

State of Madras v. Jayalakshmi Rice Mill Contractors Co. and Ors.

-The Food Procurement Order allowed licensees (rice millers in the East Godavari, West Godavari, and Krishna districts) to purchase rice and paddy from producers and sell it in the market at Government-set rates. It was requested that the difference between the prices at which they were acquired and the prices at which they were instructed to be sold be paid to the government.

CONCLUSION

-A person who acts on behalf of another is known as an Agent. Many transactions are carried out via Agents because companies cannot act on their own; they are legal fictions.

KEY TAKEAWAYS

• The aim of this article to understand the concept of agency better and look at various landmark judgments.
• Contracts for an agency are extremely frequent in business law.
• The Indian Contract Act, 1872 regulates the agency contracts and the relation between Agents and Principal.
• There have been several cases regarding the matter of agency under ICA.
• In all modern legal systems, the agency is an integral part of the current social order. It contributes in particular to organising the division of labour in national and international economies, allowing a Principal to expand his own sphere of activity considerably by allowing one or more persons to work for him.

INTRODUCTION

The article addresses the features and roles of an Agent pursuant to the Indian Contract Act, 1872. In India, the Agent and Principal share a contractual relationship and are thus regulated by the contract provisions between them. The basic framework of the laws and regulations, which regulate generally the execution, and development of any sort of contract including the agency agreement, is provided in Chapter X of the Indian Contract Act, 1872. There is a legal connection between two individuals in agency contracts, in which one person acts for the other person. An Agent is termed the person on behalf of the other, and the person from whom the Agent has the power to act is called the Principal.

The connection between them is called an agency when one party delegated some authority to another and the later acts in a more or less autonomous manner on behalf of the first party. It is possible to have express or inferred agency. The laws pertaining to agency are covered in Chapter X of the Indian Contract Act of 1872. Because almost all commercial transactions in the world are conducted through agency, it is critical to understand the law surrounding agency. The law of agency is based on the Latin maxim “qui facit per alium, facit per se,” which means, “He who acts through another is deemed in law to do it himself”.

All businesses, large and small, use agencies to carry out their tasks. As a result, laws governing agencies are an essential part of business law. Three major parties are involved in Principal and Agent relationships: The Principal, the Agent, and a Third Party.

In Section 182 of the Indian Contract Act of 1872, and Agent’ is defined as a person hired to perform any act for another or to represent another in dealings with third parties. The person for whom such an act is performed, or who is so represented, is referred to as the "Principal" in Section 182. As a result, the Principal will be the one who has delegated his power.

Under Section 183, anybody whose mind is sound and who has reached the age of majority can appoint an Agent. In other words, anyone able to negotiate may lawfully designate an Agent. Unhealthy people and minors are unable to designate an Agent. Similarly, according to Section 184, an individual who reaches the majority age and is of sound mind can become an Agent. As the Agent is answerable to the Principal, a sound mind and a mature age are necessary.

According to Section 186 the authority of an Agent can be both, expressed or implied. Further in Section 187, it is mentioned that authority is said to be express when delivered in spoken or written language and Agency is considered to be implied if the facts and circumstances of the case are to be inferred. The Agent may take any legal action in carrying out the task of the Principal. This means that the Agent can do whatever is necessary to complete the Principal's task.

There are four basic forms of implied authority

Incidental authority- to perform anything beyond the proper exercise of explicit authority.

Usual authority - to do what people in the similar position normally do.

Customary authority- conducts anything in accordance with the pre-established customs.

Circumstantial authority- to do something under the conditions.

An Agent may delegate a job that the Principal has assigned to him to someone else on occasion. Normally, an Agent cannot delegate a task that he is responsible for to another person, unless he is forced to do so. A sub-Agent is a person hired by and operating under the direction of the original Agent in the agency's business, as defined under Section 191 of the Indian Contract Act of 1872. In most cases, an Agent cannot assign a task that has been delegated to him. The concept is founded on the premise that when a Principal chooses an Agent, he is putting his faith and trust in the Agent's work, but he might not have the same faith and trust in the work of another individual.

Agency by ratification

A Principal may later confirm an act performed on his behalf without his knowledge or approval. If the act is validated, an agency relationship will be established, and it will be as if he had previously allowed the individual to serve as his Agent. Ratification might be expressed verbally or in writing (by act or conduct). Ratification is defined under Section 196 of the Indian Contracts Act, 1872.

For example, without Amir's consent or knowledge, Farhan purchased apples on his behalf. Amir eventually sold the apples to someone else. Amir's action implies that he ratifies of Farhan's buy.

In accordance with Section 197 of the Indian Contract Act of 1872, ratification on behalf of a person in a position to decide the choice of ratifying or rejecting the transaction may either be expressed or inferred.

According to Section 198, Indian Contract Act 1872, if another person ratifies an act, the individual must be fully aware of the circumstances. Ratification is deemed invalid if a person who is aware of the circumstances of the case does not ratify the act.

According to Section 199 of the Indian Contract Act, 1872, if a person ratifies an act of another person, the ratification is to be regarded for a full transaction, but not for one act.

In accordance with Section 200 of the Indian Contract Act, 1872, any act perpetrated by a person on behalf of another person without authority, knowledge or power, and that would result in damages to a third party or the ratification of any rights or interests of that third party, cannot be made by ratifying the law.

An Agent has 6 duties towards his Principal:

1. He must carry out the Principal's business in accordance with the Principal's instructions.
2. An Agent is obligated to execute the business he is responsible for with the same level of expertise that a person in his position would normally possess.
3. When the Principal requests it, an Agent is required to show the necessary accounts to the Principal.
4. Any problem that an Agent encounters while doing the Principal's business must be communicated to the Principal. In this sense, he is expected to exercise due diligence.
5. If any significant information is withheld or the business is not carried out as ordered by the Principal, the Principal has the right to terminate the contract.
6. If the Agent conducts the business in the manner in which he desires rather than according to the Principal's instructions, the Principal may seek reimbursement from the Agent for any benefits he may have reaped as a result of his actions.

The Principal has 4 duties towards the Agent:

1. The Principal is obligated to indemnify the Agent for any authorised activities performed by him while acting as an Agent.
2. The Principal is obligated to indemnify the Agent for any act performed in good faith that results in a violation of third-party rights.
3. If the authorised conduct is illegal in character, the Principal is not responsible to the Agent. In addition, the Agent will not be compensated for any unlawful activities.
4. If the Principal injures his Agent as a result of his own incompetence or lack of expertise, he must compensate him.

An Agent's Rights

The following are the five rights that an Agent has:

Right of retainer– An Agent has the right to keep any income or costs he receives while representing the Principal.

Right to remuneration– When an Agent has completely completed the agency's business; he has the right to be reimbursed for any expenditure incurred in doing so.

Right of Lien on Principal's Property- Until the Principal pays him his appropriate payment; the Agent has the right to retain (keep) any moveable or immovable property of the Principal.

Right to Indemnification– The Agent has the right to be compensated for all authorised activities he performs while executing the Principal's business.

Right to Compensation– The Agent is entitled to compensation for any harm or loss he sustains as a result of the Principal's lack of competence and competency.

LANDMARK CASES

Kuchwar Lime & Stone Co. v. Dehri Rohtas Light Railway Co. Ltd. & Anr.

CITATION: 1969 AIR 193

FACTS: The appellant Company's carriage to Banjari station had booked a quantity of coal on the respondent Railway's line, and the appellant Company had to pay the freight on the consignment. Because of the poor quality of the coal, the Company refused to accept delivery of a portion of the consignment, which arrived in Banjari on November 12, 1954. After some discussion between the parties and with the Coal Controller, the Railway sold the coal at public auction on June 2, 1955, after providing the appellant with a notice. It then filed suit against the Company, alleging unpaid freight and demurrage charges for 202 days, during which six waggons carrying coal were held, and ‘sought a judgement for Rs. 17,625/14/- after deducting the amount realised from the sale of the coal.

ISSUES:

• Is the consignee liable for payment if he refuses to accept the shipment?
• Is the railway entitled to full demurrage or must it unload and claim demurrage for a reasonable period?

HELD:

The consignee could only be held responsible for wharfage, according to the Supreme Court. The argument that the consignee can only be held liable for demurrage if he accepts delivery of goods was found to be without merit. Even if the consignee does not take delivery, the Railway is generally allowed to make him responsible for demurrage if the waggon is held for his benefit.

Narandas Morardas Gaziwala & Ors vs S. P. Am. Papammal& Anr.

CITATION: 1966 SCR 38

FACTS:

Narandas Morardas Gaziwala and Ors., a partnership firm based in Surat that dealt in lace and silver thread, had relations with another firm, Krishna and Company, who functioned as their Agents for selling their goods on commission basis throughout the three districts of Madras. On the firm's breakup, Murugesa Chettiar, one of the partners, took over all of the firm's assets and obligations. Krishna & Co. got indebted in 1951 as a result of their activities. On April 1, 1951, Murugesa Chettiar (plaintiff) signed a promissory note in the amount of Rs. 7,500/- in favour of Narandas Morardas Gaziwala, the amount determined to be due and payable by Krishna & Co. The plaintiff filed a claim at Kancheepuram's District Munsif's Court, requesting that accounts be rendered from April 1, 1951 until the date of the action in order to determine the amount owing and payable to him. At response, the Surat business filed a lawsuit against the plaintiff in the Court of Subordinate Judge, Chingleput, trying to collect the money owed under the promissory note. By agreement of the parties, the cases were tried simultaneously.

ISSUES:

(i) Is it possible for the plaintiff, as an Agent, to sue the defendant-Surat business for accounts?

(ii) Is the plaintiff allowed to put up a parole agreement to establish the condition antecedent to the promissory note's enforceability?

HELD:

SUPREME COURT:

The Indian Contract Act gives no mechanism for an Agent to sue the Principal for the account's rendition. The legislation is not exhaustive, and the Agent's ability to sue the Principal for accounting is an equitable right that arises in unusual situations, rather than a statutory right.

The Supreme Court agreed with the HC that the transactions for which the plaintiff is entitled to commission are unique in that the Principal only knows them. As a result, the Supreme Court decided that the plaintiff has the right to sue the Surat business for accounts because of the unique conditions of this case (remuneration was based on the number of transactions).

The Court also agreed with the HC's conclusion that the Surat business had made direct sales to consumers in violation of the plaintiff's exclusive agency agreement.

Harshad J. Shah & Anr v. L.I.C. of India & Ors.

CITATION:1997 (5) SCC 64

RELATED PROVISION:(Ostensible Authority, Section 237 of Indian Contract Act)

FACTS:

A bearer-cheque with the name of the Agent on it was handed over to a LIC general Agent (R3) for the payment of premium (R1). (This payment was paid after the grace period had expired.) The cheque was cashed and deposited with the LIC by the Agent. However, the insured was involved in an accident and died the day before the real deposition (August 9). (Aug 10). The insured's widow (A2) (as the policy's nominee) filed a claim with the LIC at the Gujarat State Consumer Disputes Redressal Commission. LIC declined to pay, alleging a premium payment default.

ISSUES:

1. Can the insured's payment of premium to the LIC's general Agent be considered a payment to the insurer, resulting in the insured's responsibility being discharged?
2. Is it possible to hold the LIC accountable under the theory of apparent authority?

Held

SUPREME COURT:

(S.C. Agrawal and G.B. Pattanaik, JJ)

1. LIC did not provide any type of incentive. The doctrine of seeming power, which underpins S. 237, cannot be used, especially where the LIC has made a specific provision in the Regulations/Rules, which are statutory in character.
2. The LIC was operating in line with the Regulations/Rules by disclaiming its obligation. The provision was created in the public interest to safeguard the Corporation from an Agent’s fraud, and LIC was functioning legitimately at the time.

State of Madras v. Jayalakshmi Rice Mill Contractors Co. and Ors.

CITATION: AIR 1959 AP 352

FACTS:

The Food Procurement Order allowed licensees (rice millers in the East Godavari, West Godavari, and Krishna districts) to purchase rice and paddy from producers and sell it in the market at Government-set rates. It was requested that the difference between the prices at which they were acquired and the prices at which they were instructed to be sold be paid to the government. The different millers paid over the difference in accordance with the Government's instruction, then filed proceedings to reclaim those monies, claiming that they alone were entitled to the price difference and that the Government had no right to collect it from them.

ISSUES:

1. Are the stocks owned by the plaintiffs the exclusive property of the plaintiffs?
2. Are the plaintiffs, in relation to the selling of paddy and rice, Government Agents?
3. Do the plaintiffs have the right to benefit from the growth in paddy and rice prices?
4. Does the Government's order ordering the collection of the surcharge fall within Section 3 of the Essential Supplies (Temporary Powers) Act of 1946?
5. Is the Government's decision ordering the levy of the surcharge unlawful, ultra vires, and in violation of the conditions of the licence and agreement?
6. Is it true that the plaintiffs are not allowed to challenge the orders issued under Section 16 of the Essential Supplies (Temporary POWERS) Act in a court of law?

HELD:

High Court, Andhra Pradesh:

1. The fact that the agreement mentions a procurement Agent is not convincing proof of the Principal-Agent relationship, because the term given to a transaction by the parties cannot be the primary criteria.
2. Unlike an Agent, the plaintiffs did not represent the Government in their operations, but only served as a conduit for the purchase and sale of goods and were subject to the direction and control of the Government Commission. However, this is insufficient to establish agency. They weren't even buyers or sellers, since it was a case of a person possessing a licence to do an act in accordance with the terms of the licence. Plaintiffs were not entitled to the difference as profit since they were designated licensees (under the Food Procurement Order). Profits would solely go to the Government.
3. The mere fact that the amount sought to be recovered was referred to as a "surcharge" by the government is insufficient to determine the nature of a specific demand, and no "levy" or "tax" was imposed. Under Clause (f), Sub-section (2) of the Essential Supplies (Temporary Powers) Act, the Government has the authority to require stockholders to sell the commodity to people specified by the Government.

CONCLUSION

A person who acts on behalf of another is known as an Agent. Many transactions are carried out via Agents because companies cannot act on their own; they are legal fictions. All corporate transactions, even those involving governmental entities, are done in this manner. Agencies can be formed explicitly or implicitly. Whether the "Agent" is truly an "Agent," the scope of the Agent's authority and the parties' responsibilities are all problems that often arise in agency law.

In Commercial Law, contracts creating an agency relationship are quite prevalent. These might be explicit or oblique. When a person delegated his power to another person, that is, appointed them to execute a certain task or a group of jobs in a defined field of work, an agency is formed. The establishment of a Principal-Agent relationship gives both parties rights and responsibilities. Therefore, there has been a growing demand for legal representation as company units are involved in distant transactions (through the employment of factors or commercial Agents) or are increasing in size (as in the case of the firm, the house, and the corporation).