ABSTRACT

The concept of agency under the Indian Contract Act, 1872 is pivotal in facilitating various commercial and legal transactions. An agency relationship is established when one party (the principal) confers authority upon another (the agent) to act on their behalf in legal affairs. This research paper elucidates the legal provisions, rights, and duties of agency under the Indian Contract Act, 1872 exploring the circumstances under which an agent can be appointed, and delving into the liabilities and relationship between the agent and the principal. Additionally, it presents relevant case laws and precedents set by the Supreme Court of India, shedding light on the liability of the principal-agent relationship.

INTRODUCTION

The concept of agency under the Indian Contract Act, 1872, serves as a cornerstone in the realm of commerce and legal relationships, delineating the framework within which individuals and entities transact and interact. Agency, defined as the relationship between two parties where one (the agent) acts on behalf of the other (the principal), is instrumental in facilitating myriad transactions, ranging from business deals to legal representations.

The Indian Contract Act, enacted in 1872, provides a comprehensive legal framework governing agency relationship, encompassing provisions, rights, duties, and liabilities pertinent to agents and principals. This introduction delves into the intricacies of agency law, elucidating the fundamental principles and legal constructs that underpin this vital aspect of contractual dealings.

Moreover, the establishment of an agency relationship necessitates a clear delineation of rights and duties between the principal and the agent. While the principal confers authority upon the agent to act on their behalf, the agent assumes certain responsibilities, including the obligation to act in the best interests of the principal and to adhere to instructions diligently.

The circumstances under which an agent can be appointed vary, ranging from express appointments through formal agreements to implied appointments arising from the conduct of the parties or necessity. The method of appointment influences the scope of the agent’s authority and the extent of their liabilities.

Additionally, the principal-agent relationship entails a nexus of liabilities, wherein the principal may be held accountable for the actions of the agent performed within the scope of their authority, while the agent may incur liabilities for breaches of duty or misconduct.

Furthermore, it aims to illuminate the evolving jurisprudence surrounding agency law, drawing insights from relevant case laws and precedents set by the Supreme Court of India. By providing a comprehensive overview of agency law, this abstract endeavours to elucidate the legal framework governing agency relationships and its implications for commercial transactions and legal engagements within Indian context.

Section 182 ‘Agent’ and ‘Principal’ defined – An ‘agent’ is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the ‘Principal’.

LEGAL PROVISIONS WITH REGARDS TO AGENCY UNDER INDIAN CONTRACT ACT, 1872

The legal provisions pertaining to Agency under the Indian Contract Act, 1872 are outlined in Chapter X of the Act, which encompasses Sections 182 to 238. This chapter delineates the various aspects of agency relationships, including the definition of an agent, modes of creating agency, rights and duties of agents, termination of agency, and the liabilities of principals and agents. The Sections under the above-mentioned chapter are as follows:

• Sections 182-189 talks about the Appointment and Authority of Agents.
• Sections 190-195 talks about the Sub-Agents.
• Sections 196-200 talks about Ratification.
• Sections 201-210 talks about the Revocation of Authority.
• Sections 211-221 talks about Agent’s duty to Principal.
• Sections 222-225 talks about the principal’s duty to Agent.
• Sections 226-238 talks about the Effect of agency on contracts with third persons

By organizing these provisions within Chapter X, the Indian Contract Act establishes a comprehensive framework governing the establishment, operation, and dissolution of agency relationships within the Indian legal system.

RIGHTS AND DUTIES OF AGENCY

The relationship between a principal and an agent entails a set of rights and duties, delineating the parameters within which they operate and interact. These rights and duties are essential for ensuring the smooth functioning of the agency relationship and safeguarding the interests of both parties. Below are the key rights and duties associated with agency:

1. Duties of Agent:

• Conducting principal’s business(Section 211)– He has to conduct the business of the principal according to the directions of the principal. Agents must obey all lawful and reasonable commands and directions given by the principal in the course of their agency relationship. This duty ensures that the agent acts in accordance with the principal’s wishes and exercises their authority responsibly and ethically.
• Duty of Diligence and Skill(Section 212) – Agents are obligated to exercise reasonable care, skill, and diligence in carrying out their duties on behalf of the principal. This duty entails performing tasks competently, efficiently, and with due diligence, considering the nature of the agency relationship and the specific instructions provided by the principal.
• Duty to Account (Section 213)– Agents are required to keep accurate records of all transactions and dealings conducted on behalf of the principal. This duty entails providing a detailed account of all funds, assets, or property handled by the agent and ensuring transparency in financial matters.
• Duty to communicate with principal (Section 214)– Any challenge that an agent encounters while carrying out the principal’s business must be reported. In this sense, he is expected to exercise due diligence.
• Duty of Loyalty – An agent owes a paramount duty of loyalty to the principal, requiring them to act solely in the best interests of the principal and to prioritize those interests above their own or those of third parties. This duty prohibits the agent from engaging in self-dealing, conflicts of interest, or acts that may compromise the principal’s interests.
• Duty to Follow Instructions – Within the parameters of their authority, agents must follow the principal’s reasonable and legitimate directions. If the principal gives the agent instructions, they must be followed, unless they are illegal or against public policy.
• Duty of Confidentiality – Agents are bound by a duty of confidentiality, requiring them to maintain the confidentiality of all information and communications received from the principal. This duty extends even beyond the termination of the agency relationship and prohibits the agent from disclosing confidential information without the principal’s consent.
• Duty of Disclosure – Agents have an obligation to provide full and accurate information to the principal regarding all matters relevant to the agency relationship. This duty includes disclosing any material facts, conflicts of interest, or other information that may impact the principal’s decisions or interests.

1. Duties of Principal:

• Right to Indemnification (Section 222)– The agent is entitled to indemnification from the principal for any damages or liabilities that arise while the agent is carrying out their responsibilities within the bounds of their power. This indemnification covers legal expenses, damages, and other costs arising from authorized actions.

(Section 223) – Even if the agent acts in good faith and ends up breaking someone else’s rights, the principal must compensate the agent for that action.

• Non- liability of employer of agent to do a criminal act (Section 224)– If the act that is delegated is illegal in nature, the principal is not accountable to the agent. Additionally, under no circumstances can the agent be compensated for illegal activity.
• Compensation to agent for injury (Section 225)– If the Principal’s agent harms him due to his own incompetence or lack of talent, the principal is obligated to compensate the agent.

1. Rights of agent:

• Right to Lien (Section 221)– Under some conditions, the agent could be able to hold onto the principal’s belongings or papers until they are paid or reimbursed for their costs or services. Until the principle pays the agent his fair compensation, the agent is entitled to possess (keep with himself) any moveable or immovable property of the principal.
• Right of retainer – Any compensation or costs that an agent incurs while carrying out the principal’s business are his to keep.
• Right to remuneration – An agent is entitled to reimbursement for any costs incurred throughout the course of doing business after he has fully completed the agency’s work.
• Right to be Indemnified – The agent is entitled to indemnification for all legitimate actions he takes while carrying out 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 incompetence.

LIABILITIES OF A PRINCIPAL-AGENT RELATIONSHIP

The relationship between a principal and an agent is characterized by a nexus of rights, duties, and liabilities, which delineate the parameters of their interactions and obligations. Understanding these liabilities and the dynamics of the principal-agent relationship is essential for both parties to effectively navigate their roles and responsibilities. The relationship between principal and agent is characterized by mutual trust, accountability, and legal obligations. Below are the key aspects of liabilities and the relationship between principal and agent:

1. Principal’s Liability for the Acts of the Agent – The extent of principal’s liability to the third parties for the acts of the agents is determined by the following mentioned rules:

1. When Agent Acts Within the Scope of Actual and Apparent Authority-An agent is carrying out their duties in accordance with their agreement with the principal when they operate within the bounds of their actual authority. This indicates that they are doing duties or coming to decisions that are compliant with the principal’s permission. However, when an agent performs within the bounds of their seeming authority, it indicates that they are acting in a way that, given the principal’s remarks or actions, a reasonable person would assume they were authorized to do. If the agent gives the impression to others that they are authorized to act on behalf of the principle, even in the absence of a clear statement to that effect, their actions may nonetheless be binding on the principal.
2. When Agent Exceeds His Actual as Well as Apparent Authority- An agent is acting beyond what is permitted by their agreement with the principal when they act outside their actual power. It indicates that they are acting in a way that has not been authorized by the principal. Comparably, when an agent acts beyond the scope of their apparent authority, it indicates that, based on the principal’s comments or actions, a reasonable person would not think they had the authority to do so. Others may not be obligated to act on behalf of the principal even if they believe they have the authority to do so if their actions deviate from the principal’s original intent. In either scenario, the principal may not be legally bound by the agent’s activities unless the principal subsequently chooses to accept or approve them.
3. Liability for Agent’s Misrepresentation or Fraud (Section 238)– The principle might be held liable for the outcomes if an agent acts on behalf of the principal and makes false claims or commits fraud. This implies that the principal may be held legally responsible if the agent misleads someone or gives false information while performing their obligations. If the agent’s acts cause harm or loss to a third party, regardless of whether it was caused by innocent misrepresentation or deliberate deception, the principal may be held accountable for covering the costs of damages. In essence, the principle is accountable for the acts of their agent, particularly when those acts result in misconduct or dishonest behaviour. Principals must therefore take care while appointing and managing their agents in order to reduce the possibility of such liabilities.
4. Liability Based on the Doctrine of Estoppel- According to the law of estoppel, a principal is liable when an agent’s comments or acts make it impossible for them to dispute their authority. The principle may be held legally responsible for the agent’s activities if the principal gives others the impression that the agent has the authority to act on their behalf, and those people depend on that belief and incur harm. In other words, if the principal gave people reasonable grounds to doubt the agent’s authority, they cannot retract their statements or acts. Third parties that relied on the principal’s assurances and behaved in good faith are protected by this concept. It has to do with fairness and keeping principals from unjustly rejecting the acts of their agents when such activities reinforced the agent’s perceived authority.
5. Liability of Unnamed Principal –

When an agent acts on behalf of a principle without disclosing the principal’s identity, that circumstance is referred to as the liability of an unnamed principal. In these situations, the agent is free to sign agreements or carry out transactions without revealing the identity of the principal. The principal is nonetheless legally liable for the acts and debts arising from the agent’s activity even when their identity is kept a secret. This implies that the unidentified principal may be held liable for the agent’s performance under any agreement the agent makes with a third party. However, the third party must establish the existence of the principal-agent connection and demonstrate that the agent was acting within the bounds of their authority in order for any rights or claims to be enforced against the unnamed principle. Essentially, even though the principal’s identity is not revealed, they are still bound by the actions of their agent.

• Liability of Undisclosed Principal –

The liability of a pretended agent occurs when someone falsely claims to be an agent acting on behalf of a principal. In these situations, the fictitious agent deceives other people into thinking that they are authorized to sign contracts or conduct business on the principal’s behalf when in reality, they are not. The fictitious agent may nevertheless subject the supposed principal to liabilities or responsibilities even in the absence of true authorization. The principal may be held accountable for the deeds or agreements made by the fictitious agent if the third party relies on the fictitious agent’s assertion of authority and thinks it to be true. By demonstrating that the fictitious agent lacked genuine authority and that the third party knew or ought to have known this, the principal can protect themselves from this kind of responsibility. Essentially, even if the principal’s identity is not revealed, they are still bound by what their agent does.

1. Liability of Pretended Agent (Section 235)–

When someone poses as an agent and works on behalf of the principal, they are liable under the doctrine of pretended agent responsibility. In these situations, the fictitious agent deceives people into thinking that they are authorized to sign contracts or conduct business on behalf of the principal when, in reality, they are not. A fictitious agent may nevertheless subject the pretending principal to liabilities or responsibilities even in the absence of real power. Principal may be held accountable for the deeds or agreements made by pretended agent if a third party relies on the agent’s claim of power and does so at their own risk. Principal may, however, disclaim this liability by demonstrating that the fictitious agent lacked genuine authority and that the third party knew or ought to have known this.

1. Personal Liability of Agent to Third Party –

An agent who is personally liable to a third party may be held directly liable for their own deeds or promises made to that third party. This suggests that the agent may be held personally liable for any damages, losses, or liabilities that arise from acting outside the bounds of their power, acting improperly, or breaking a contract with a third party. Even though the agent is acting on behalf of a principal, they could still be held accountable for their own acts in court. In these kinds of situations, the third party may file a lawsuit against each agent separately in order to recover damages or seek other remedies. Essentially, the agent’s assets and finances may be at stake if they act improperly or neglect their responsibilities towards third parties while acting within the scope of their agency.

Some other ways of liability in a Principal-Agent relationship are as follows –

1. Vicarious Liability:

Vicarious liability refers to the legal responsibility of a principal for the actions of their agent performed within the scope of their authority. If an agent, while acting within the scope of their authority, causes harm or loss to a third party, the principal may be held vicariously liable for the agent’s actions. This principle of vicarious liability ensures that principals bear responsibility for the consequences of their agents’ authorized actions, thereby incentivizing them to exercise control and supervision over their agents.

2. Liability for Unauthorized Acts (Section 237):

Principals are generally not liable for acts performed by agents beyond the scope of their authority unless they ratify such acts. If an agent exceeds their authority or acts outside the scope of their agency, the principal may disavow or repudiate such unauthorized acts, thereby avoiding liability. However, if the principal ratifies the unauthorized acts by either expressly or implicitly approving them, they become bound by the actions of the agent and may incur liability.

3. Agent’s Liability to Principal:

Agents owe fiduciary duties to their principals, including the duty of loyalty, care, and obedience. If an agent breaches their duties or acts negligently or fraudulently, they may be held liable to the principal for any resulting losses or damages. The agent’s liability to the principal extends to indemnifying the principal for losses incurred as a result of the agent’s misconduct or negligence, provided that the agent acted within the scope of their authority.

4. When the Agent is Acting for a Non-existing Principal:

In situations where an agent represents a non-existent principal, they bear personal liability for the agreement. For example, the agent is personally liable even though they are contracting on behalf of the corporate, which has not yet been formed.

5. When the Agent Acts for an Incompetent Principal:

The agent bears personal responsibility for the contracts when they are executed on behalf of an incompetent principal, such as a minor or someone who is not of sound mind.

UNDER WHICH CIRCUMSTANCES AN AGENT CAN BE MADE

The appointment of an agent can occur under various circumstances, each characterized by its own legal implications and requirements. These circumstances dictate the manner in which the agency relationship is established and the scope of authority conferred upon the agent.

Understanding the circumstances of agent appointment is crucial for determining the validity, scope, and limitations of the agency relationship. Principals and agents should be cognizant of the legal implications associated with each mode of appointment to ensure compliance with legal requirements and avoid potential disputes or liabilities.

• Section 184(Who may be an agent) of the Indian Contract Act, 1872 says – As between the principal and third person any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained.

Below are the key circumstances under which an agent may be appointed:

1. Section 186of the Indian Contract Act, 1872 says about Agent’s authority may be expressed or implied –

Express Appointment:

An express appointment occurs when the principal explicitly designates an individual or entity as their agent through a formal agreement or contract. The appointment may be made orally or in writing. The express appointment typically specifies the duties, authority, and compensation of the agent, providing clarity and certainty to both parties.

Implied Appointment:

Instead of originating from a clear verbal or written agreement, an inferred appointment results from the behaviour or acts of the parties involved. Customary practices or industry norms, as well as the facts surrounding the agent-principal relationship, can all be used to infer implied authority. In cases where a principle often permits someone to act on their behalf without raising any concerns, for instance, an implied agency relationship may exist even in the lack of a formal agreement.

2. Agency by Estoppel:

When a principle misleads a third party into thinking that someone is their agent by words or deeds, it is known as agency by estoppel. This binds the primary to the activities of the alleged agent. A principal might not be able to refute the existence of an agency connection if their actions lead a third party to believe that a certain person is authorized to act on their behalf. The reasonable expectations of third parties who depend on the agent’s seeming authority in their interactions with the principal are safeguarded by this principle.

3. Agency by Necessity:

When an emergency or other pressing circumstances necessitate the appointment of an agent to safeguard the principal’s interests, agency by necessity results. Since it may be inconvenient or impossible for the principal to formally appoint an agent in these situations, the law recognizes that an agency relationship is implied to handle the exigency. The agent’s power is restricted to taking measures that are required in the emergency situation to safeguard the principal’s interests.

4. By Holding Out:

This may come from the relationship between the management and the employee. An administrator is a representative of the company. An agency by waiting is one that is maintained as a result of a business connection of any kind.

5. By Ratification:

Ratification is the principal’s later acceptance and adoption of an action that was first taken by the agent without permission.

According to Section 196 of Indian Contract Act, 1872, “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 previous authority.”

PRECEDENTS SET BY SUPREME COURT ON THE LIABILITY OF THE PRINCIPAL-AGENT RELATIONSHIP

1. LIC of India vs. Consumer Education and Research Centre (1995)–

• In this landmark case, the Supreme Court of India examined the liability of the principal (LIC) for the actions of its agents (insurance agents) in misrepresenting insurance policies to consumers.
• The court held that the principal (LIC) was vicariously liable for the acts of its agents committed within the scope of their authority, emphasizing the principle of agency law that holds principals accountable for the actions of their agents.
• This case underscored the importance of principals exercising control and supervision over their agents and reinforced the principle of vicarious liability in agency relationships.

1. Bhopal Sugar Industries Ltd. vs. STO (1977)–

• It is noteworthy to mention that the Supreme Court, in this case, approved of the following observations made there: “A contract of agency, however, differs essentially from a contract of sale in that an agent, upon taking delivery of the property, does not sell it as his own property but sells it as the principal’s property and under his instructions and directions.” Additionally, since the agent does not own the products, the principal is obligated to compensate him for any losses he may incur. This is yet another dominant factor which distinguishes an agent from a buyer pure and simple.

CONCLUSION

The legal provisions governing agency relationships, as delineated in the Indian Contract Act, establish the parameters within which principals and agents must operate, ensuring clarity and predictability in their interactions. These provisions outline the methods of appointment, the scope of authority, and the rights and duties of both parties, fostering transparency and accountability. Principals are generally held responsible for the actions of their agents within the scope of their authority, emphasizing the need for proper oversight and control.

In conclusion, agency under the Indian Contract Act, 1872, plays a crucial role in facilitating commercial transactions and legal representations, offering a structured framework for parties to engage in mutually beneficial relationships. By understanding the legal provisions, rights, duties, circumstances of appointment, liabilities, and case laws governing agency relationships, principals and agents can navigate their roles effectively, fostering trust, accountability, and success in their endeavours.

BY,

AARCHI TIBDEWAL

Guided and supervised by Adv. Aameer Vishwas Kale