INTRODUCTION
The law of agency is one of the most important branches of mercantile
and commercial law. In modern business transactions, it is not always
possible for a person to personally perform every legal or commercial
activity. Therefore, people often appoint others to act on their behalf.
The legal relationship that exists between such persons is known as a
contract of agency.
The concept of agency is governed by Sections 182 to 238 of the Indian
Contract Act, 1872. Under this relationship, one person, known as the
agent, is authorized to act for another person, called the principal, in
dealings with third parties. The acts performed by the agent within the
scope of authority are legally binding on the principal. Agency is widely
used in trade, commerce, banking, insurance, companies, partnership
businesses, and international transactions.
The relationship of principal and agent is based on trust, confidence,
and good faith. Since the agent acts on behalf of the principal, the law
imposes several rights and duties on both parties to maintain fairness
and accountability. The law also provides different methods through
which the agency relationship may come to an end.
This assignment explains the meaning and essentials of a contract of
agency, rights and duties of principal and agent, termination of agency,
and important judicial decisions relating to agency law.
1. Contract of Agency
Meaning of Agency:-
According to Section 182 of the Indian Contract Act, 1872:
> “An agent is a person employed to do any act for another or to represent
another in dealings with third persons.”
* The person represented is called the principal.
Thus, agency is a legal relationship where the agent acts on behalf of the principal
and binds the principal through his acts
Essentials of Contract of Agency :-
a) Agreement between Principal and Agent
There must be an agreement, express or implied, between the principal and the
agent.
b) Competency of Principal
Under Section 183, any person who is of the age of majority and of sound mind
may employ an agent.
c) Agent Need Not Be Competent
According to Section 184, even a minor may act as an agent, though he cannot be
held personally liable to the principal.
d) Intention to Create Agency
The agent must act on behalf of the principal and represent him in dealings with
third parties.
e) Consideration Not Necessary
Section 185 states that no consideration is necessary to create an agency
Types of Agency:-
Agency can be classified into different types based on the manner of creation
and authority given to the agent.
1. Express Agency
An agency created by direct agreement between the principal and the agent,
either orally or in writing.
Example:
A person appoints a lawyer through a written agreement.
2. Implied Agency
An agency created by conduct, circumstances, or relationship between parties.
Example:
A partner acting on behalf of a partnership firm.
3. Agency by Necessity
An agency arising in emergency situations where a person acts to
protect another’s interests without prior permission.
Example:
A carrier selling perishable goods to prevent loss.
4. Agency by Estoppel
When a principal’s conduct leads a third party to believe that a person
is an agent, the principal cannot later deny the agency.
Example: A shop owner allows a worker to act like a manager before
customer
5. Agency by Ratification
When a person acts on behalf of another without authority are
principal approves or confirms the act.
Example:
A person buys goods for another without permission, and later the
owner accepts the purchase.
*Rights and Duties of Principal and Agent
Rights of Agent:-
a) Right to Remuneration
An agent has the right to receive agreed commission or remuneration
after completing the work.
b) Right of Retention
The agent may retain goods, money, or property of the principal until
dues are paid.
c) Right of Indemnity
Under Sections 222 and 223, the principal must compensate the agent
for lawful acts done in exercise of authority.
d) Right to Compensation
The agent can claim compensation for injuries suffered due to the
principal’s negligence.
Duties of Agent :
a) Duty to Follow Instructions
The agent must act according to the instructions of the principal .
b) Duty of Reasonable Care and Skill
The agent should perform duties honestly and with proper care.
c) Duty to Maintain Accounts
The agent must keep correct accounts and provide them when
demanded.
d) Duty to Communicate
The agent should communicate with the principal in difficult situations.
e) Duty Not to Make Secret Profit
An agent must not make secret profits at the expense of the principal.
f) Duty of Loyalty and Good Faith
The agent must act in the best interests of the principal.
Rights of Principal :
a) Right to Recover Damages
The principal may recover damages if the agent acts negligently or
beyond authority
b) Right to Secret Profits
Any secret profit made by the agent belongs to the principal.
c) Right to Proper Accounts
The principal can demand proper accounts from the agent.
d) Right to Terminate Agency
The principal has the right to revoke or terminate the authority of the
agent according to law
Duties of Principal:
a) Duty to Pay Remuneration
The principal must pay agreed commission or remuneration.
b) Duty to Indemnify Agent
The principal must indemnify the agent for lawful acts done on his
behalf.
c) Duty to Compensate
The principal is liable for injuries caused to the agent due to negligence.
3. Termination of Agency
Termination of agency means the ending of the relationship between
principal and agent.
Under Sections 201 to 210 of the Indian Contract Act, agency may
terminate in the following ways:
Modes of Termination
a) By Revocation by Principal
The principal may revoke the authority of the agent before it is
exercised.
b) By Renunciation by Agent
The agent may renounce the agency by giving notice to the principal.
c) Completion of Business
Agency terminates when the business for which it was created is
completed.
d) Expiry of Time
If agency is for a fixed period, it ends after expiry of time.
e) Death or Insanity
Agency terminates upon death or insanity of either principal or agent.
f) Insolvency of Principal
When the principal becomes insolvent, agency terminates.
g) Destruction of Subject Matter
Agency ends if the subject matter is destroyed.
Irrevocable Agency;
An agency coupled with interest cannot be revoked to the prejudice of
the agent’s interest.
*An agency cannot be revoked when:
~The agency is coupled with interest.
~The agent has partly exercised authority and incurred liability.
Example: If an agent has advanced money and has an interest in the
property, the agency becomes irrevocable.
Relevant Case Laws
1. Pannalal Jankidas v. Mohanlal (1951)
In this case, the Supreme Court held that an agent who acts dishonestly
and causes loss to the principal is liable to compensate the principal.
The case emphasized the duty of honesty and good faith of an agent.
Importance:
This case established that agents must act loyally and avoid
misconduct.
2. Lakshminarayan Ram Gopal & Son Ltd. v. Government of
Hyderabad (1954)
The Supreme Court explained the distinction between an agent and an
independent contractor. The court stated that an agent acts under the
control and authority of the principal
Importance:
This case clarified the essential features of an agency relationship
3. Said v. Butt (1920)
The court held that an agent acting within authority is not personally
liable for contracts entered into on behalf of the principal.
Importance:
The case highlighted the representative character of agency.
CONCLUSION
The contract of agency is an essential part of commercial and business
law. It allows one person to act on behalf of another and create legal
relations with third parties. The relationship between principal and
agent is based on trust, confidence, loyalty, and mutual understanding.
The Indian Contract Act, 1872 provides detailed rules regarding
creation of agency, rights and duties of principal and agent, and
termination of agency. These provisions ensure protection and fairness
for both parties. The law also imposes duties such as honesty,
obedience, reasonable care, and accountability upon agents while
giving them rights to remuneration, indemnity, and compensation.
Termination of agency may occur through revocation, renunciation,
death, insanity, insolvency, completion of work, or operation of law.
Judicial decisions have further clarified the principles governing agency
relationships and their legal consequences.
In conclusion, the law of agency plays a vital role in facilitating trade,
commerce, administration, and modern business activities. Without
agency relationships, large-scale commercial operations would become
difficult and inefficient. Therefore, agency law remains one of the
foundations of the modern legal and economic system.