Agency
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This article is written by Kavana Rao from Symbiosis Law School, Noida. This article helps us to understand and scrutinize the agency laws in India and Kuwait and further compare them.

Introduction

The law of agency exists when there is a relationship that exists between one party or the person who would be a principal who engages the other party who would be the agent to act for him. Under the law of the agency, the agent is legally authorized to act on behalf of the principal and there exists a relationship of mutual agency, where the principal will be responsible for those acts of the agents that are within the authority of the agent.

Agency laws in India

Chapter X of the Indian Contract Act, 1972 (ICA), which has its basis from the principles of the English common law which deals with the laws relating to the agency.  It governs the rights and duties of the agents and the principals entering into an agency agreement. The agency laws in India are governed under different statutes like the Indian Contract Act, Specific Relief Act, 1963, Income Tax, 1961, Consumer Protection Act, 2019, Trademarks Act, 1999 the Competition Act, 2002, Labour law, etc

In international agreements, the Foreign Exchange Management Act, 1999 (FEMA) and the Reserve Bank of India (RBI) regulates the terms of the agreement entered into by an Indian national/corporate with a foreign partner, which eases the entry of a foreign trader to the Indian market.

Creation of agency

In India, there are a number of ways in which the agency is created by:

  • Direct or express appointment- When a principal, in writing or speech appoints another person as his agent, an agency is created between the two parties.
  • Implied agency- When the agent is not appointed directly is implied or understood through circumstances, conduct, and the relationship between the parties. Agency by Necessity- When one person acts on behalf of the other to save the person from any loss or damage, without explicitly being appointed as an agent, this would lead to an agency out of necessity.
  • Estoppel- In a circumstance where one person behaves in such a manner in front of a third person, so as to represent himself as an authorized agent on behalf of someone and the principal approves of this representation, then an agency of estoppel is created.
  • Ratification- When a person acts as an agent on behalf of the principal without his knowledge, and the principal later ratifies this act, then an agency by ratification is created between the two.

Typical rights and obligations of the agent

Rights

  • Right of retainer

 An agent has the right to keep any salary or costs he receives while acting for the principal.

  • Right to remuneration

When an agent has accomplished the acts that he had been delegated, he has the right to be reimbursed for any expenses incurred in doing so.

  • Right of lien on principal’s property

Until the principal gives him his due remuneration, the agent has the right to hold (keep) any moveable or immovable property of the principal.

  • Right to indemnification

The agent has the right to be reimbursed for all authorized activities he does while performing the principal’s business.

  • The agent has the right to compensation

The agent should be compensated for any injury or loss suffered by its lack due to the lack of skill and competency of the principal. 

Duties

The agent has the duty to perform his or her tasks as per the terms of the agreement and as instructed by the principal. He or she must also not accept any obligation which proves to be inconsistent with the interests of the principal. He or she is also not permitted to unduly enrich himself or herself through the agency contract. 

Consideration

Section 185 of the Indian Contract Act, 1872 states that the agency does not require consideration for the formation of the contract of agency. 

Tax

In India, any income from the contract of agency is subject to taxation under the Income Tax Act, 1961 and is also entitled to tax deductions, subject to the tax treaty between India and that particular country in case of agency contracts between the two countries.

Termination

As per Sections 201 to 210 of the Indian Contract Act, 1872, an agency will be terminated on multiple occasions and the revocation of the agency contracts can either be expressed or implied.

The contract of the agency can be terminated in the following ways:

  1. Revocation by the principal or renunciation by the agency. This is given under Section 203 and Section 206 of the Indian Contract Act, 1872 respectively
  2. The contract of the agency is terminated after the completion of business under Section 201 of the Indian Contract Act, 1872.
  3. Section 201 of the Indian Contract Act, 1872 also gives that the contract of agency is terminated on the death or insanity of either the principal or the agent.
  4. The agency also comes to an end to the principal being declared insolvent.
  5. Lastly, the contract of the agency terminates when the agent has been appointed for a fixed period and that period comes to an end.

It should also be noted that the principal cannot revoke the agency if the authority given to the agent has been fully or partly exercised. In addition to this, the contract of the agency cannot be terminated before the expiry period without a reasonable cause. 

Jurisdiction

India follows a hierarchical court wherein the Supreme Court is at the top of the hierarchical ladder followed by the High Courts, the District Courts, and the Sessions Courts. In an agency dispute, the parties can either initiate litigation in an appropriate court having jurisdiction or can choose an international forum for arbitration. 

Agency laws in Kuwait

The Kuwait legal system has derived most of its laws from Sharia law, English law, Egyptian law, and the Ottoman system. The commercial agency in Kuwait is governed by Law No. 36 of 1964 regulating commercial agencies and Commercial Code number 68 of 1980. Since Kuwait follows open business policies, it encourages bilateral relations which allows a foreign person or entity to penetrate the Kuwait market and conduct business by forming a limited liability company, partnership, or any other form of business entity. Although there are other options for a foreign entrepreneur to enter the Kuwait market, the most followed technique is to appoint a local agent to conduct business and make transactions on behalf of the principal.

Article 1 of the Kuwaiti Law 13 of 2016 to organize Commercial Agencies includes a definition of commercial agency: As any agreement through which anyone – lawfully permitted – to entrust to a merchant or company in the state, to sell or promote or distribute goods or products or provide services as an agent or distributor or franchisee or licensee or the primary importer, in lieu of profit or commission.

Agency registration

It is essential that the agency agreement is properly registered with the Ministry of Commerce and Industry’s commercial agency registration (MCI). An eligible Kuwaiti national or a completely owned Kuwaiti firm incorporated in Kuwait must act as the agent.  It is imperative that the agency agreement is in writing and must include the agent’s and his foreign partner’s names, nationalities, and addresses. The protection of the agent is the primary reason for the registration of an agency agreement. It’s an advantageous arrangement for all parties if the agent is a trustworthy, knowledgeable agent after receiving the proper training.

Classification

The agents under Kuwaiti law is classified into four categories:

  1. Contract agency- It is defined as a contract in which a person undertakes and is engaged in a particular area of activity for the benefit of the principal in consideration of remuneration. The agent will be responsible for the conclusion and the execution of the transactions in the name and on behalf of the principal.
  2. Commission agency- In consideration for remuneration, in a commission agency there is a contract in which the commission agent undertakes in his own name a legal action for the benefit of the principal. They are treated differently in law, and if the agent fixes a higher price than that is fixed by the principal, then he is allowed to keep the difference in the price as his commission.
  3. Distribution agency- Under the distribution agency, the agent undertakes to promote and distribute the products for the foreign trader in consideration of remuneration.
  4. Commercial representative- A commercial representative is defined as a person who is authorized by the principal to carry out some of his business, he or she has limited scope and is allowed to carry out his or her business at his place of business or elsewhere by means of an agreement.

Consideration

The commercial law of Kuwait states that the commercial agency shall be made in consideration for remuneration unless otherwise agreed upon, and if the remuneration is not mentioned in the agreement then it would be determined by the usage or circumstances. The agent is not entitled to remuneration unless he ensures that he has completed the transaction entrusted to him or demonstrates that completing it has become problematic and difficult due to the principal’s actions. For the efforts of the agent and the tasks completed by him, he is entitled to compensation.

Compensation on termination

The Kuwaiti law has compulsory provisions with respect to the termination of the agency agreement. This is given under Article. 3 7 of the Kuwaiti Law 13 of 2016 to organize Commercial Agencies which explicitly provide for fixed-term agency agreements. If the contract is terminated for invalid reasons then the principal is obliged to pay a certain amount as compensation, unless the contract is terminated for a valid reason. Under Article 284, the regulations list three situations in which the agent is entitled to compensation on a transaction:

  1. If the agent has been given an exclusive right under the agency agreement.
  2. If the agency agreement is cancelled without any justifiable or valid reason, and
  3. If the involvement of the agency has led to the development of the principal’s business, further, if the agent had constructed a factory/warehouse or had spent a considerable amount into the business anticipating profit margin, then the agency cannot be cancelled for a minimum period of five years.

Kuwait, though providing for a termination procedure in the agency agreement in accordance with Article. 3 6 of its agency law, requires a breach of the agreement from the trade agent in order to give a right of termination to the principal

Exclusivity

The exclusivity clause is the manufacturer’s or supplier’s requirement not to provide other distributors or agents the right to sell their products in a specific area, as well as the distributor’s or agent’s commitment not to sell products from other manufacturers or suppliers in the same area.

If the principal appoints a territory to the agent, he will be deemed to have an exclusive right within his territory. Under the agency laws in Kuwait, Article 4, which states that the import or distribution of a good shall not be exclusive to the trade agent or distributor and if it were, even with a trademark, all legal conditions must be met.

Tax

Kuwaiti citizens are not obliged to pay income tax in general, and only foreign corporate bodies engaging in commercial activities within Kuwait’s jurisdiction are liable to taxation. The tax rate is set at 15% of net income. It is also essential that all Kuwaiti shareholding firms donate 5% of their net profits to the Kuwait Foundation for Advancement of Science (KFAS), a non-profit organization dedicated to scientific research and development.

Intellectual property rights

Although Kuwait has sufficient laws in place governing the protection and enforcement of IP rights, enforcement of such laws is still a complicated process and tiresome. It is imperative to apply for all necessary trademarks and other relevant IP rights in advance prior to entering the Kuwaiti market.

Penalty

If foreign traders get involved in commercial agency activities in the country, they will be violating the law and further, if the theory is found guilty, then they will be subject to three months of imprisonment and fine. Parties who falsely portray themselves as agents or engage in commercial agency operations in violation of the law will also be liable for a one-month prison sentence and a fine.

Jurisdiction

When the parties enter into agency agreements, the dispute resolution mechanism is also discussed and a suitable jurisdiction would be agreed by the parties in their agreements. To determine the actual position of the agent and the principal, Kuwaiti courts examine the agreement and the nature of the company. It should also be understood that under agency agreements, choosing a foreign court or arbitration may not always be effective, as the Kuwaiti court has the power to take up such disputes if the Kuwaiti partner’s interests are harmed. If the person signing the agency agreement for the local agent does not have express authority to agree to arbitration, a Kuwait court can refuse to enforce it.

Comparison between the agency laws in India and Kuwait

  • In Kuwait, the agency is solely reserved for its own nationals, under specific regulations, whereas in India a foreign trader may be granted an agency without establishing an entity in India.
  • In Kuwait the agency agreements are always registered which require a number of conditions to be fulfilled and is always a written agreement, this provides protection to the agents of their country, whereas in India, the agency is created in multiple ways like through express appointment, implied appointment, through estoppel, and even through ratification. Agency laws in India are less defined and must be interpreted through the circumstances, conduct, and relationship of the parties. 
  • The agency agreement in Kuwait requires a consideration of the formation of the agreement, the same does not apply in the agency contracts in India, there is no requirement for consideration for the formation of the agency relationship.
  • In Kuwaiti, their citizens do not have to pay the income tax and only foreign corporate entities engaged in commercial activities within the territory of Kuwait will be mandated to pay taxes. Whereas in India, any income generated from the agency relationship will be subjected to taxation under the Income Tax Act, 1961.

Conclusion

In contrast to other countries, India lacks a specific law or a comprehensive regulation that deals only with the agency laws in the country. The stringent and comprehensive regulations of the Kuwaiti laws protect the rights of the agents in their country. Hence, the Indian lawmakers and courts must strive towards making the agency laws more comprehensive to ensure that the agents in the country are not treated unfairly.

References


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