CONTRACT OF AGENCY

IMPORTANT QUESTIONS FOR “CONTRACT OF AGENCY” FOR B.COM(PROG/HONS) & IPCC

CONTRACT OF AGENCY Q.1. Define the term 'agency'. What are the essentials and legal rules for a valid agency? Ans. The two terms 'agent' and 'principal' have been defined is Section 182 of the Indian contract Act. 'An agent is a person employed to do and act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented, is called the principal'. The contract which creates the relationship of 'principal' and 'agent' is called an 'agency'. Thus where X appoints Y to buy fifty bags of sugar on his behalf, X is the 'principal', Y is the 'agent' and the contract between the two is 'agency'. The essence of agency relationship is that the agent acquires a representative character and all his actions as agent make the principal liable as if they have been done by the agent only.. Essential of a Contract of Agency 1. An agreement. The agreement between the principal and agent is the first requirement of a contract of agency. The agreement may be express or implied. 2. Competency of principal. It is another important essential element of a valid agency. Section 183 provides that any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. Thus, a minor or a person of unsound mind cannot appoint an agent. In such cases the incompetent person shall not be liable for his acts to the principal. 3. No consideration is necessary. Section 185 provides that not consideration is required to create an agency. So although consideration is necessary in every contract, law specially provides that consideration is not necessary to create agency. Q.2. What are the various ways in which an agency can come into existence? Also discuss the rules for a valid ratification. Ans. Creation of Agency 1. Agency by express agreement. Normally agency is created by an express agreement, specifying the scope of authority of agent, any person who is competent to contract and is of sound mind may appoint an agent. The appointment may be in writing or may be oral. When the appointment is made by a deed it is called a power of attorney. It gives an authority to an agent to act on behalf of the person who gives authority, in accordance with the terms and conditions mentioned in it. 2. Agency by implied agreement. An implied agreement is one which arises from the conduct, situation or relationship of the parties, wherever one person places another in a situation in which that other is understood to represent or to act for him, he becomes an implies agent. Example. A owns a shop in Delhi, living himself in Kolkata and visiting the shop occasionally. The shop is managed by B, he usually purchased goods from C in the name of A for the purposes of the shop, and of paying for them out goods from C in the name of A for the purpose of the shop. Such an agency may take the following form. Agency by estoppels. According to the doctrine of estoppels where a person by his conduct or words leads someone to believe that a particular things or fact is true, he is estoppels from denying that state of things subsequently. Thus, when a person, by his conduct or statement, willfully leads another person to believe that a certain person is his agent, then he is stopped (i.e., prevented) from denying the truth of the agency. Agency by holding out. Agency by holding out is king of agency by estoppels. However, in this case there is some prior positive or affirmative conduct of the principal which indicates that a certain person who already his agent. Example. Z allowed his servant Y to purchase some goods on credit from Z. Y usually purchased goods from Z on credit and X used to pay. On one occasion X gave Y cash to purchase goods but Y misappropriated the money and purchased goods on credit in X's name. X is bound to pay to Z. Agency by necessity. Sometimes, extraordinary circumstances may arise which require that a person acts as an agent of another. In such a case though there might not have been an express or implied authority to do an act, the law Prepared By: - Mukesh Verma (M.B.A./ M.Com/B.Ed.) Email: [email protected] (welcome feed back or comments) call: 9212528831…Page | 1


implies such an authority in favour of that person on account of the necessity that had arisen. But, to constitute a valid agency by necessity, the following condition must be satisfied: (i) There should be real emergency and necessity to act on behalf of the principal. (ii) The agent should not be in a position to communicate with the principal or to obtain his instructions. (iii) The agent should act bonafide in the interest of the principal. 3. Agency by ratification. The term 'ratification' may be defined as the confirm-ation of acts already done by the agent without authority. The doctrine of ratification gives the person on whose behalf the act is done an option either to adopt the act by ratification or to disown it. If such other person subsequently ratifies (i.e. accept or confirm) the act on his behalf, a valid agency will be created by ratification. In such cases the contract of agency comes into effect from a retrospective date. Ratification thus amounts to prior authority. Section 197 provides; "Ratification may be express or implied in the conduct of the person on whose behalf the acts are done". Examples. (a) Without authority buys goods for B. Afterwards B sells them to C on his own account. B's conduct implies ratification of the purchase made for him by A. (b) A, without B's authority, lends money to C. Afterwards B accepts interest o this money from C. B's conduct implies a ratification of the loan. Effect of ratification. The effect of ratification is that it binds the principal as if the acts had been performed by his authority. Ratification is retrospective and relates back to the time of performance of the unauthorized act. Essential of a Valid Ratification. A valid ratification has to fulfil the following conditions: (i) The agent must act on behalf of the principal. It is necessary that the act in question must have been done on behalf of the person who is to ratify it. The agent must purport to act on behalf of an identifiable principal. (ii) The Principal must be in existence and competent to contract at the time to contract by the agent. Since ratification relates back to the date when the con-tract was made buy the agent, it is important that the principal must be in existence and competent at the time of original contract and at the time or ratification. Thus an act done on behalf of minor without his authority cannot be ratified on attaining majority and a company cannot ratify a contract made in its name before its incorporation. (iii) The acts to be ratified should be valid and lawful. The acts purported to be ratified by the principal should be legal and not void from their inception. An act which is void from the very beginning cannot be ratified. (iv) The principals must have full knowledge of material facts. Section 198 provides that 'no valid ratification can be made by a person, whose knowledge of the facts is materially defective.' There must be full knowledge of what those facts were. (v) Whole transaction must be ratified. Ratification must relate to the whole act. A contract cannot be ratified 'in part and repudiated in part'. A ratification of part of a transaction operates as a ratification of the whole transaction. Example. if an agent purchases without authority 20 bonds, if is not open to the principal to ratify 12 of them without approving of the other eight bonds. (vi) Within a reasonable must be communicated. The ratification to be valid must be made within a reasonable time after the act is done. For instance, a contract to be performed within a stipulated period should be ratified before the time of performance. (vii) Ratification must be communicated. There can be no valid ratification of the act unless it is communicated to the other party. It should be communicated to the party who is sought to be bound by the act done by the agent. (vii) Ratification must not injure a third person. The acts which become injurious to others by ratification cannot be ratified. Q.3. When is an agent personally Liable to the Third Party?

Prepared By: - Mukesh Verma (M.B.A./ M.Com/B.Ed.) Email: [email protected] (welcome feed back or comments) call: 9212528831…Page | 2


Ans. Personal Liability of an Agent to third Party. As agent is only a connecting link between his principal and third party. He cannot, as a rule, personally enforce the contract entered into by him on behalf of his principal, nor can he be personally liable of such contracts in the absence of a contract to the contrary. But there are circumstances under which the agent incurs personal liability. These are: 1. Where are agent expressly agrees. If an agent, while contracting with a third party, expressly agrees to be personally liable on the contract, he can be held personally liable for any breach of contract. 2. When the agent acts for a foreign principal. Where an agent contracts for the sale or purchase of goods for a merchant residing abroad, he is presumed to be personally liable. 3. Where the agent acts for an undisclosed principal. Where an agent does not disclose the name of the principal, he is personally liable. But when he contracts for an unnamed principal there is only a presumption of his personal liability. 4. When the agent acts for a principal who cannot be sued. An agent incurs personal liability when he contracts on behalf of a principal, who though disclosed, cannot be sued. Thus, an agent who contracts for a minor, the minor being not liable, becomes personally liable. 5. Where the agent acts for a non-existing principal. When an agent enters into a contract on behalf of a fictitious or non-existing principal, in such case, the agent is personally liable on the contracts. No agent can bind a non-existing principal. 6. When an agent receives or pays money by mistake or fraud. When an agent pays some money by mistake or fraud, he has a right op recover it back from the receiver it back from the receive. Similarly, when a third party pays to an agent some money under mistake or fraud, the agent can be sued for refund of the amount. 7. When the agent has an interest in the subject matter of the contract. Where an agent himself has an interest in the subject-matter of the contract, the agent is personally liable to the extent of his interest in the subject-matter. 8. When the agent exceeds his authority. When an agent exceeds his authority or represents to have a kind of authority which he in fact does not have, he commits breach of warranty of authority and is personally liable to third party for any loss caused to him by reason of acting under the false representation. 9. Trade usage or custom. In certain cases, the trade usage or custom trade provides that the agent shall be personally liable for his acts. In such cases agent is personally liable. 10. Where the agent signs a contract ort negotiable instrument in his own name. Where the agent signs a negotiable instrument or a contract without making it clear that he is signing on behalf of the principal, the agent will be personally liable in that case. Q.4:- Write a short note on “ Agency by Ratification”. ? Ans :- If a person acts on behalf of another without his knowledge, and afterwards the other accepts such act, then it is called Agency by ratification. Rules of Ratification:  It can be made only if the person was in existence at the time of the act.  It must be made by the person form whom an act was purported to be done.  It may be either express or implied by the conduct of the person for whom the act was done.  It must be of the whole act and not part.  The person ratifying must have full knowledge of the facts.  Illegal, void acts can not be ratified. Q.5:- Write a short note on “Agency by ostensible authority. Ans:- The authority of the principal is inferred by conduct, ostensible authority on account of estoppels and holding out. 3(i) Agency by Estoppels:- If a person represent or permits another to act on his behalf, and a third party believing it to be true enter into a contract with the fake agent, then the person representing is stopped from denying the agent’s authority. Prepared By: - Mukesh Verma (M.B.A./ M.Com/B.Ed.) Email: [email protected] (welcome feed back or comments) call: 9212528831…Page | 3


Example:- A informs B in the presence of X that X is his agent. Subsequently, B enters into an agreement with X believing X to be the agent of A. in this case, X has become A’s agent by Estoppels. 3(ii) Agency by holding out:- If any person holds himself out to be an agent of another, then a relationship of principal and agent takes place. The holding out happens through willful conduct done in order to create a deliberation impression on some person regarding the existence of the agency. In this case, the person concerned is stopped from denying that he is the agent of the principal. Q.6. "A delegate cannot further delegate". Elaborate the statement to describe the relationship between a principal and a sub-agent. Ans. Agency is a personal relationship based on mutual trust and confidence between the principal and the agent. Section 190 provides that an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform. Thus, an agent cannot delegate his powers to a third person. The maxim applicable in this case is 'delegate non protest delegate'. This means that a person to whom authority has been delegated cannot delegate that authority to another. The reason for this rule is that confidence in a particular person s at the root of the contract of agency. Therefore, the agent should perform his responsibilities himself. In other words the appointment of sub-agent by agent, is not allowed by law. Section 191 gives the definition of sub-agent in these words: 'A sub-agent is a person employed by and acting under the control of the original agent in the business of the agency, the relation of sub-agent and original agent is that of agent and principal. But to this general rule there are certain Excretions, where the agent is permitted to delegate his authority. In the following cases: 1. Where the principal has expressly allowed his agent to appoint sub-agent. His consent may also be implied from the circumstances. 2. Where the nature of work demands that a sub-agent should be appointed. 3. Where there is a custom of trade t that effect. 4. Acts which are of routine nature and can be done by the agent or delegated by him. 5. Where in the course of agent's appointment, unforeseen emergencies arise which render it necessary to delegate his authority. 6. Where the principal knows that the agent intends too appoint a sub-agent. Consequences of Appointing sub-agent. The legal relation between the principal and the sub-agent depends upon whether the appointment of the sub-agent proper or improper. In case of proper appointment. Where the sub-agent is properly appointed, the following consequences emerge as per Section 192: 1. As regards third person, the principal is represented by sub-agent he is the agent .He is bound by and is responsible for all the acts of sub-agent. 2. The agent is responsible to the principal for the acts of the sub-agent. There is not privity of contract between the principal and the sub-agent and therefore he cannot sue the sub-agent. 3. The sub-agent is not directly responsible to the principal, expect for fraud and willful wrong. The sub-agent is responsible to the agent. In Calico Printer's Association vs. Barclay's Bank, a sub-agent failed to insure goods belonging to principal which were destroyed by fire. But the principal could not recover against the sub-agent. A sub-agent is, however, bound by all the duties of an ordinary agent. In case of improper appointment. The following consequences arise as per Section 193 when the appointment of sub-agent is improper: 1. The principal is represented by such sub-agent and so he is not liable for any of the acts of sub-agent. Prepared By: - Mukesh Verma (M.B.A./ M.Com/B.Ed.) Email: [email protected] (welcome feed back or comments) call: 9212528831…Page | 4


2. the agent is responsible to his principal as well as to third party for the acts of his sub-agent. 3. The sub-agent is not responsible to the principal at all. He will be answerable only to the agent. It may be mentioned that the principal may take suitable action against his agent for wrongfully appointing a subagent. Q.7. Who is Substituted Agent. Distinguish between sub-agent and substituted agent. Ans. Substituted Agent. In some case, principal asks agent to appoint another person to do some work (which is normally not done by the agent). In such case, the another person appointed by agent is not sub-agent, but is agent of the principal itself. Fir convenience, such person may be called 'Substituted Agent'. Section 194 deals with this matter. It states when an agent holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub-agent but an agent of the principal for such part of the business of the agency as is entrusted to him'. Example1. A directs B, his solicitor, to sell estate by auction and to employ an auctioneer for the purpose, B name C, an auctioneer, to conduct the sale. C is not sub-agent but is A's agent for the conduct of the sale. Example2. A authories B, merchant in Kolkata to recover the money due to A from C. B instructs D, a solicitor, to take legal proceeding against C, for the recover Y of the money. D is not a sub-agent but is a solicitor for A. Distinguish between Sub-agent and Substituted Agent. Both sub-agent and substituted agent are appointed by the agent. However, there are the following points of difference between the two: 1. Appointment. A sub-agent is appointment by the agent. But a substituted agent may be appointed by agent or principal. 2. Responsibility. A sub-agent is responsible to the original agent. But the substituted agent is responsible to the principal for all his acts. 3. Direction and control. A sub-agent works under the control of the agent but a substituted agent a privity of contract is established between the principal and the substituted agent worked under the control of the principal. 4. Privity of contract. After the appointment of substituted agent a privity of contract is establishment between the principal and the substituted agent, hence both can sue each other. But there is no Privity of contract between the principal and the sub-agent. 5. Liability. The agent is responsible to the principal for the acts of the sub-agent but he is not liable for the acts of the substituted agent, provided he has taken due care in selecting him. Q.8. Discuss briefly the modes in which the agency can be terminated. Ans. Termination of Agency. Termination of agency occurs when the relationship between the principal and the agent comes to an end. Like any other contract, the contract of agency may terminate by the act of the parties or by operation of law. So broadly speaking, the modes of termination of agency may be explained under the following two headings: 1. By the act of the parties. 2. By operation of law. (A) By the act of the Parties. An agency may be terminated by act of the parties in the following ways: 1. By agreement between principal and agent. The parties are free to terminate the contract of agency mutually. Such as agreement may be made at any time and at any stage. 2. By revocation of agent's authority by the principal. The principal can revoke the authority of the agent any time before the authority has been exercised so as to bind the principal. Revocation may be express or may be implied. 3. By Renunciation of agency by the agent. The agency is terminated if the agent himself renounces the business of agency. Revocation is subject to the following conditions: (i) Revocation can be done only before the authority has been exercised by the agent. Prepared By: - Mukesh Verma (M.B.A./ M.Com/B.Ed.) Email: [email protected] (welcome feed back or comments) call: 9212528831…Page | 5


(ii) Where an agency has been created for a fixed period, a reasonable notice should be given of such revocation. (iii) Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent for any revocation without sufficient cause. Moreover, such revocation should be after should be after aresonable notice. (iv) The agent may renounce the business of agency in the same manner in which the principal ha the right of revocation. If the agency is for fixed period, the agent would have to compensate the principal for any loss caused due to earlier termination of agency without sufficient cause. Moreover, a reasonable notice should be given to the principal. (B) Termination of Agency by Operation of Law The principal / agent relationship may be terminated by operation of law in the following circumstance: 1. Completion of business. The agency is automatically terminated when the business is completed for which it was made. 2. Death or insanity of either party. When the agent or the principal dies or becomes of unsound mind, the agency is terminated. When the termination thus takes place the agent must take, on behalf of the representatives of the late principal, all reasonable steps for the protection and preservation of the interest entrusted to him. 3. Insolvency of principal. Insolvency is a disqualification in entering into a contract and so insolvency of principal terminates agency. But as regards insolvency of the agency, the law is silent. 4. On expiry of fixed period. Where an agency has bee appointed for a fixed term, the expiry of the term puts an end to agency whether the purpose of the agency has been accomplished or not. 5. on destruction of the subject-matter. Where the subject-matter in respect of which agency was created has bee destroyed, the agency comes to an end. 6. On principal becoming an enemy. Sometimes agency becomes unlawful by the happening of an event after the agency is created. For example, if the agent and principal reside in two different countries and war breaks out between the two, the contract of agency gets terminated. When Termination of Agency takes Effect (Section 208). As between the principal and the agent, termination of agency is effective only when it becomes known to the agent, but so far as third party is concerned, termination of agency takes effect when it is known to it. It means that the principal must give a public notice of termination of agency so that it is effective with regard to third party as well. Even in case of death or insanity of the principal, the agency terminated only when it comes to the knowledge of the agent. Q.9. When can an agency be not revoked? Ans. Irrevocable agency. An agency is irrevocable in the following cases: 1. Where the agency is coupled with interest [Section 202]. Where the agent has himself an interest in the subject matter of agency, the agency is said to be coupled with interest. Such an agency is created with the object of protecting or securing any interest of the agent. So where a creditor is employed for valuable consideration as an agent to collect money from third parties and pay himself the debt due to the principal debtor. The principal thereby confers an interest on the agent and authority cannot be revoked unilaterally during the subsistence of the interest in the absence of an expressed contract to the contrary. Even the death or insanity of the principal does not terminate the authority in this case. 2. Where an agent has incurred personal liability, the agency becomes irrevocable, for the principal cannot be permitted to withdraw, laving the agent exposed to risk or liability he has incurred. 3. When the authority has been partly exercised by the agent, it becomes irrevocable in particular with regard to obligations which arise from acts already done [Section 204]. ---------------------------------------------------------------END------------------------------------------------------------------------

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CONTRACT OF AGENCY

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