This article has been written by Akshaya M. Kshirsagar pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).
Table of Contents
Introduction
An Agent essentially is a person hired by another person for carrying out certain acts on his behalf. But, hold on! It is not as simple as it sounds. Under the law governing agency, the relationship between two people is of a fiduciary nature, meaning, one person (known as the Principal) having power over another (known as Agent) hires that person to act on his behalf and reposes trust and confidence in him. Such a relationship may be formed with or without consideration (this is an exception to the rule that agreements sans consideration are void) depending upon the understanding between the Agent and Principal. To put it “legally”, an Agent is a person hired/employed to do any act for a Principal and is someone who is authorized by the Principal to deal with third parties on his behalf.
Agency vis-à-vis employment/work for Hire Contracts
I know you must be wondering that this is exactly what an employment contract or a work-for-hire agreement is. Well, the main point of difference is the degree of representation and delegation of work involved in all these three agreements. While an employee is technically a representative of his employer, he may or may not be authorized to act in the capacity of the employer. Similarly, in work for hire agreements, a person is hired for his services, his role is limited to the particular service asked from him, he neither represents the person hiring him nor does he have authority to act on his behalf. So there you go! Now that we have cleared the confusion, let us see what are agency agreements, their need, scope, and extent of liability of the agent and principal, so on and so forth.
Agent and principal under Indian law
The Indian Contract Act, 1872 defines Agent and Principal as follows:
Section 182: An ‘Agent’ is a person employed to do any act for another, or to represent another in dealings with a third person. The person for whom such an act is done, or who is so represented, is called the ‘Principal’.
Agency therefore consists of the following three elements:
i. Principal: A person who is significantly in a higher position than the other person and the one who employs the Agent.
ii. Agent: A person who has been employed to represent and act on behalf of the Principal.
iii. Third Party: Person/s with whom the Agent deals on behalf of the Principal.
a. Who is competent to become an Agent and Principal?
The standard requirements for parties competent to enter into a contract as provided under Section 10 of the Indian Contract Act are also applicable to persons to be competent to be a Principal and Agent.
Section 183: This section deals with who may employ an Agent. It lays down two requirements for a person to employ an Agent in the capacity of a Principal. They are as follows;
i. Majority – The Principal must be above the age of majority as per the law to which he is subject to, at the time of employing the Agent.
ii. Sound Mind – The Principal should be of sound mind at the moment of employing the Agent.
Section 184: This section states that any person can become an Agent even if he is a minor or of unsound mind. However, an Agent who is a minor or is of unsound mind cannot be held liable to/responsible towards the Principal.
b. Types of Agents/Agencies
The various types of Agents are classified as per the nature of work to be delegated by the Principal. Some of the most common types of Agents are as follows:
i. Sub-Agent: An Agent appointed by an Agent to sub-delegate acts.
i. Special Agent: Appointed for carrying out specific act/s only.
ii. General Agent: Appointed for carrying out all the acts which are delegated to him during the subsistence of the agency agreement.
iii. Broker: Acts as a middleman/negotiator between buyer and seller. Also known as a Commission Agent.
iv. Auctioneer: Acts as the holder of goods of the person who wants to sell them at a public auction.
Need for agent agreements and creation of agency
As is the case with any other form of agreement, an agreement between an Agent and Principal also holds a great amount of importance. To facilitate the effective delegation of work by the Principal to an Agent, a clear and unambiguous set of terms and conditions is a must.
Why would one need an agent/agency agreement and how is it created?
Now, you would say why do I need a specific agreement for telling someone to do my work? Well, the answer lies in the legal maxim “Qui facit per alium facit per se” meaning, “He who acts through another does the act himself”. Simply put, when a Principal hires a person as his Agent, all the acts carried out by the Agent are assumed to be carried out by the Principal and any liability arising out of such acts is that of the Principal alone.
Our Indian law recognizes an Agent-Principal relationship even if it is not in writing. Such a relationship may be formed either through express or implied agreement, by ratification or by necessity.
i. Express agreement may be one in writing or verbal.
ii. In Implied agreements, the conduct or behavior of the parties and the surrounding circumstances may determine a relationship of agency.
iii. Agency by Ratification means that consent has been given to an act already done by a person who had no previous authority to do the same or has acted beyond the periphery of a consented act.
iv. Agency by Necessity implies exactly as it sounds; act done in a situation of emergency without any express authorization. Here, the necessity has to be real and the circumstances should be such that when they arose, there was an immediate need to do something and this immediacy was such as to render it impossible for the Agent to communicate it to the Principal.
However, express agreements are said to be the safest form of agency agreements. This is because the parties are bound by the terms of the agreement and can lay down the extent of rights and liabilities expected from the agency.
a. Important elements of an Agent/Agency Agreement:
There are certain key elements of a Principal-Agent Agreement which define the rights and duties of both the parties towards each other. They are as follows:
Duties of an Agent:
i. The first and foremost duty of an Agent is to conduct the business of the Principal as directed by the Principal. The Agent should carry out the work delegated by the Principal responsibly.
ii. The Agent has the duty to carry out the business of the Principal with such skill and diligence that is possessed generally by persons engaged/conducting similar business.
iii. The Agent is bound to render correct and proper accounts to the Principal whenever asked for.
iv. The Agent is under a duty to communicate and take instructions from the Principal in the event of any difficulty.
v. The Agent is bound to pay the Principal all amount received by him through the business delegated to him by the Principal, subject to the deductions as agreed between the parties.
Rights of an agent:
i. The Agent has a right to receive such sum of monies for expenditure incurred by the Agent while conducting the business along with proper remuneration for acting as an Agent.
ii. The Agent is entitled to retain all goods, property, papers etc. to himself until the Principal clears all his dues payable as commission and services rendered by him to the Principal.
The above rights are subject to a contract to the contrary and as such, they can be changed as per the terms of the contract.
Duties of Principal:
i. It is the Principal’s duty to indemnify the Agent for the consequences of all acts carried out by the Agent while exercising the authority conferred upon him by the principal.
ii. The Principal is under a duty to compensate the Agent for any injury caused to him due to the Principal’s neglect or want of skill.
These duties are non-negotiable and not subject to any contract to the contrary. Hence, the same cannot be avoided.
b. Termination or Revocation of an Agency Agreement:
An Agency Agreement stands terminated or revoked in the following circumstances:
i. when the Agent’s authority is revoked by the Principal; or
ii. when the Agent has renounced the business of Agency; or
iii. when the purpose/business for which the Agent was appointed is complete; or
iv. when either the Principal or the Agent dies or becomes of unsound mind; or
v. when the Principal has been declared insolvent under any law for the time being in force dealing with insolvency and debtors.
Conclusion
The law surrounding Agent-Principal Relationship aims at providing security and unambiguity in the delegation of work and authority to carry out business. Although an Agent Agreement is similar to a standard employment contract, the nuances regarding the nature of delegation and responsibility are the distinctive factor that draws a fine line between the two. Agent-Principal Agreements lay down a foundation and bind the parties to fulfill their respective duties and acknowledge each other’s rights at the same time. These agreements provide clarity as to the nature, duration, and extent of authority to be delegated and hence, give structure to an otherwise extensive scope of such relationships.
References
i. https://legislative.gov.in/sites/default/files/A1872-09.pdf
ii. https://blog.ipleaders.in/key-covenants-agency-agreement/
iii. https://legalvision.com.au/agency-agreement-work/
iv. https://www.netlawman.co.in/ia/agency-finer-details-in-the-indian-context
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