Introduction
A Contract of Agency is a vital concept under Sections 182–238 of the Indian Contract Act, 1872. It governs the legal relationship in which one person, called the principal, authorizes another person, called the agent, to act on their behalf. The agent can create legal relations between the principal and third parties, making it an essential tool in commerce, business, and law.
Agencies simplify business operations, allowing principals to manage their affairs through trusted representatives. This arrangement emphasizes fiduciary duty, authority, and accountability between the principal and the agent.
Definition (Section 182)
Section 182 defines agency as:
“An agent is a person employed to do any act for another or to represent another in dealing with third persons.”
Here, the principal is the person for whom the act is performed, and the agent is the person who performs the act. The relationship is typically contractual, though it can arise by necessity or operation of law.
Essentials of a Contract of Agency
Consent of Parties
Both the principal and the agent must mutually consent to the agency relationship. Consent must be free, lawful, and competent.
Capacity of Principal and Agent
- The principal must have the capacity to enter into the contract.
- The agent must have the ability to perform the authorized act.
- Minors or persons of unsound mind cannot usually act as agents.
Authority of Agent
The agent can act expressly (explicit instructions) or impliedly (custom or necessity). The scope of authority defines the binding effect on the principal.
Act on Behalf of Principal
The agent acts for and on behalf of the principal, creating legal obligations between the principal and third parties.
Legal Relationship with Third Parties
Acts performed by the agent within authority bind the principal, not the agent personally, unless the agent exceeds authority or acts fraudulently.
Types of Agency
1. Express Agency
Agency created by express agreement between principal and agent.
Example: A written contract authorizing a person to sell goods on behalf of the principal.
2. Implied Agency
Agency inferred from the conduct, custom, or necessity.
Example: A shop manager acting on behalf of the owner without a written agreement.
3. Agency by Necessity
Occurs in emergencies where the agent acts to protect principal’s interests without prior authorization.
Example: Ship captain incurring expenses to save cargo in danger.
4. Agency by Ratification
When a principal approves an act performed by a person who acted without authority, it becomes legally binding.
Example: Principal ratifying a contract signed by an unauthorized agent.
5. Agency by Estoppel
The principal prevents denial of the agent’s authority due to conduct that misled third parties.
Duties of the Agent
Duty to Follow Principal’s Instructions
Agent must act according to the principal’s directions unless impossible or illegal.
Duty to Act with Care and Skill
Agent must exercise reasonable care, diligence, and competence in performing duties.
Duty to Render Accounts
Agent must maintain records and render accounts of all transactions.
Duty Not to Make Secret Profit
Agent cannot benefit secretly from the agency without the principal’s consent.
Duty to Communicate
Agent must inform principal about relevant matters affecting the agency.
Rights of the Agent
Right to Remuneration
Agent is entitled to agreed payment or, in its absence, reasonable remuneration for services.
Right to Retain Goods or Money
Agent can retain goods or money received for the principal as a lien until payment or expenses are settled.
Right to Indemnity
Principal must indemnify agent against lawful acts done in agency duties.
Right to Compensation for Loss
Agent may claim compensation if loss occurs while performing authorized acts.
Duties of the Principal
Duty to Compensate
Principal must pay agreed remuneration and compensate for authorized expenses.
Duty to Indemnify
Principal must bear liabilities arising from lawful acts done by the agent.
Duty to Perform Contractual Promises
Principal must honor agreements made by the agent within authority.
Termination of Agency
Agency can be terminated by:
- Mutual Agreement between principal and agent.
- Revocation by Principal (if not coupled with interest).
- Renunciation by Agent with notice.
- Completion of Purpose for which agency was created.
- Death or Insanity of principal or agent.
- Bankruptcy of principal or agent.
- Change in Law making agency illegal.
Difference Between Agent and Employee
| Basis | Agent | Employee |
|---|---|---|
| Relationship | Represents principal | Works for employer |
| Authority | Can bind principal | Cannot bind employer unless authorized |
| Remuneration | Agreed or commission-based | Salary/wages |
| Liability | Acts for principal | Acts in personal capacity |
| Scope | Negotiates, contracts, manages | Follows employer instructions |
Important Case Laws
- Hely-Hutchinson v. Brayhead Ltd (1968) – Authority of agent may be implied from conduct.
- Watson v. Buckley (1911) – Principal liable for acts done within agent’s authority.
- Yusuf v. R.A. Patel (1980) – Ratification binds principal retrospectively.
- Everet v. Williams (1725) – Illegal acts of agent not enforceable against principal.
Conclusion
The Contract of Agency is a key legal instrument enabling principals to act through agents in business and legal matters. It establishes clear rights, duties, and liabilities, ensuring accountability, trust, and efficient commercial transactions. Sections 182–238 of the Indian Contract Act provide a comprehensive legal framework for agency relationships in India.
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