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This article is written by Nitish Thukral, from Symbiosis Law School Noida. This article deals with the Essentials of the Contract of Agency.

Introduction

“Agency is a relationship which exists where one person (the principal) authorizes another (the agent) to act on his behalf, and the agent agrees to do so.” 

While the contract of agency has been very diligently explained under chapter 10 (section 182-238) of the Indian Contract act, 1872 and by the Hon’ble courts of justice, time and again; A contract of agency, in its essence, is nothing but a fiduciary relationship between two parties where one party (the principal) contracts-with and authorizes (implicitly or explicitly) another person (the agent) to act on his behalf and provides him with the capacity to create legal relationships between the principal and third parties. 

Principal and Agent

The terms Principal and agent have been defined under Sec. 182 of the Indian Contract Act, 1872. The act defines an agent as an individual who has been employed by another to act/deal on behalf of him and the person who employs the agent, i.e., the person whom the agent represents is called the principal. 

An agent in its essence is an individual who, acting at his discretion and judgment, has the ability to make the principal directly liable to third parties, i.e., enable the principal to sue or be sued by any third party directly.

The agent may or may not always be directly employed by the principal himself, i.e., the relationship between the principal and the agent may not always arise out of a contractual relationship, there might be different situations that give rise to the contract of agency, situations like a necessity, through an obligation attributed upon a person by law or otherwise.

But inconsiderate of how the principal-agent relation is formed, it can not be formed without the essential element of consent. Here the consent given need not be explicit, it may not even in all cases be given explicitly for forming the contractual principal-agent relationship. The court of law presumes the consent for the formation of a contractual relationship if they have consented to a situation that would have in any way established the contractual principal-agent relationship; even if the ‘principal’ and the ‘agent’ stay adamant on not accepting the association.

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Essentials: Contract of Agency

The Special Contract of Agency has been defined under Chapter 10 (section 182-238) of the Indian Contract Act, 1872; where beyond the general essentials (section 10) provided for a contract, the Act also lays down certain specific principles and essentials for the Special Contract of Agency.

The major essentials to the contract of agency include:

Competency of the Principal  

The requirement for the competency of the principal has been repeated (as Sec.10 of the “act” also requires for “parties competent to contract”) and laid down in the Indian Contract Act under sec. 183, where the requirements for a competent principal have been listed down to;

  • Majority, i.e. the principal must have attained the age of majority, under the relevant laws.
  • Sound mind, i.e. the principal must be of sound mind, at least at the moment of appointing the agent.

The basic rule of thumb here is that the principal should be capable of performing the tasks (in law), which he wants his agent to do for him. 

Thus any appointment of an agent by a minor[2] or a person of unsound mind is explicitly declared to be void.

Competency of the Agent

The requirements regarding the competency of the agent have been listed down in Sec. 184 of ICA, 1872, where it has been explicitly mentioned that anyone between the principal and the third party may become an agent, regardless of its age or soundness of his mind. It prescribes that any person, including a minor and an unsound person, may become an agent. However, they (the agent) may not be liable to the principal unless they have attained the age of majority and are of sound mind.

From the general description provided under the section, it can be interpreted that, any person, including ones who themselves might not be competent enough to contract (minors and persons of unsound mind included), have the capacity to represent and bind their principals into direct and valid contractual relationships. 

Consideration not required 

As per the view of the Indian Contract Act, even consideration is not an essential element for the creation of an Agency; hence no consideration is required to be presented while the formation of an agency.

However, these provisions do not deprive the agent of his legal and justified remunerations unless proven to be specified otherwise in the contract. 

These principles of the contract act are based upon the ideologies of Common Law, which specify that no consideration is required to give an individual the authority of an agent, neither does it bar any one of the parties from suing each other, either it be for the negligence on part of the agent or for the recovery of due compensation from the principal. 

Formalities required by Law

While the Contract Act sets out certain general guidelines for the contract of agency, it is not to be considered exhaustive. Thus to prevent disagreements later on, certain additional formalities have been prescribed by numerous statues and the Hon’ble courts, dependent on the diverse kinds of agencies; such as:

  • The Registration act, 1908; provided that an agent for the purpose of registration and execution of a document must be effected in writing[3].
  • A proxy to be appointed for attending the meeting of a company should be registered in writing and that too only in the prescribed form[4].
  • A Power of attorney issued on behalf of the company should only be under the company’s common seal[5]

These guidelines, while simple hold the potential to declare the principal contracts void, thus demand to be followed very cautiously. 

Principal and Agent: Existence of Agency[6]

The Yale Law Journal 

The following article analyses the aftermath of the judgement of Eagle Iron Co. v. Baugh, 41 South. Rep. 663. (Ala.); where it was held that the declarations of an agent (alleged) himself can not be used to establish authority. 

It has been interpreted that when it comes to parol evidence for proving the existence of agency and establishing authority, the words of an agent hold just as weight as the words of a stranger testifying (under oath) to any facts relating to the agency, which he believes to be true.

The issue discussed in the above article is also applicable to Indian law and the principal reason behind that might be the fact that the Indian Contract Act only lays down certain general guidelines for the special Contract of agency; and even the explanations/principals provided are so wide and general that they include and treat everyone in the same criteria as an agent, regardless of the reason and the intention behind the hire. Which ends up creating chaos as it includes in the definition of an agent, everyone from the employee hired at a multinational for the management of the company’s assets to the cobbler hired beside the road to blacken one’s shoes.

But in the Indian Context, a simple test[7] can be conducted to establish if a binding contract of agency is in place, i.e. certain criteria have been set by the Patna High Court, which if needed could be looked upon to check for the existence of an agency; 

  • If the “agent” is willing to act on behalf of the principal, i.e. if he purposes to enter into transactions on behalf of its principal.
  • If he has the authority to create, modify or terminate contractual relations between the principal and third parties.

And if these criteria are successfully met, it can be reasoned that there exists a contractual relationship between the two parties, where one of the parties has agreed to represent the other, while the other has given him the authority to do so and subsequently bind him into Contractual relations with third parties.

Principal and Agent: Compensation of Unfaithful Agent[8]

Michigan Law Review

The following article walks on the premise of an unlisted case from the Hon’ble courts of the United States of America. Here in the article the author first provides for the premise of the case, where a manager of a firm has sued his employer demanding compensation for his work; while the employer rejects to pay, given that the manager had, during his term under the employer, started working with some competitors. Now, before moving on further and taking in-depth about the compensation for a disloyal agent, the author first lists out the ratio from the judgement of the case, where the court themselves had agreed, that an agent must always carry himself with the best interests of the principal in mind and that any lack on his part to perform with the same, must be considered a breach of duty on his part.

Further, the author uses the example of the manager from the above case to list down different remedies available with the principal in cases where the other party has proven to be dishonest; some of them being,

  1. Recovery: if while still working under the principal, the agent has engaged in a breach of his duties and during that if he has received some benefits, the principal is entitled to those benefits along with the recovery of damages caused to him due to the breach.
  2. Another measure designed to secure the rights of the principal is for the principal to retain the compensation of the agent. And given there aren’t many guidelines regarding this, it is left to the discretion of the court if to allow the principal to retain the compensation to the dishonest agent, even if to a certain extent.

Also while comparing different state laws regarding the compensation to be provided to a dishonest agent, he observes that the actual loss suffered, if any, by the principal is immaterial in the determination by the court, if the principal can retain back the compensation to be paid to the dishonest agent.

Conclusion 

As has been very clearly established by now, any person who shall represent any other person, in his authority, with the capacity to bind that person into a binding legal relationship, is entitled to be called an agent, with the person who he represents regarded as the principal.

Defined and controlled by the Indian Contract Act, 1872, the contract of agency is, if not wholly but majorly regulated by the guidelines provided under chapter 10 of the Act. With a few additions here and there, according to the requirements of the situation.

While having its knickknacks, the Contract act covers the contract of agency, sufficiently enough to declare the rights and duties of the parties of the contract; but still leaves the task of distinguishing between different kinds of agencies to the agencies of law and the general public.

References

  1. Anson’s Law of Contract, 30th edn, p.715. 
  2. Shephard v Cartwright, [1953] 728, 755.
  3. Registration Act, 1908; s. 32.
  4. The Companies Act, 1956; s.176(5). S.105 Companies Act, 2013
  5. The Companies Act, 1956; s.48.  Companies Act, 2013 S.22
  6. Principal and Agent. Existence of Agency. Eagle Iron Co. v. Baugh, 41 South. Rep. 663. (Ala.). (1907). The Yale Law Journal, 16(4), 290-291. doi:10.2307/785116
  7. State of Bihar v Dukhulal Das, AIR 1962 Pat 140.
  8. Deal, E. (1947). Principal and Agent: Compensation of Unfaithful Agent. Michigan Law Review, 46(1), 112-114. doi:10.2307/1283722

Resources

  1. Indian Contract Act, 1872.
  2. Registration Act, 1908.
  3. The Companies Act, 1956.
  4. Companies Act, 2013.
  5. Principal and Agent. Existence of Agency. Eagle Iron Co. v. Baugh, 41 South. Rep. 663. (Ala.). (1907). The Yale Law Journal, 16(4), 290-291. 
  6. Deal, E. (1947). Principal and Agent: Compensation of Unfaithful Agent. Michigan Law Review, 46(1), 112-114. 

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