This article is written by Harsh Dev Singh.
The Indian Contract Act discusses various special contracts which exist in the contemporary legal system. Special contracts are discussed in Sections 124 to 238 of the Indian Contract Act and one such special contract is the contract of agency. Through this article, we will try to closely analyze different facets of the contract of agency, further, we will look into two research question which will help us understand the essentials of contract of agency in a better manner.
Contract of Agency
So, what exactly is a contract of agency? It is a type of special contract in which one party agrees or consents to act as an agent or a representative of the other party. Section 182 of the Indian Contract Act defines an agent as “a person employed to do any act for another, or to represent another in dealings with third persons.” and a principle as “The person for whom such act is done, or who is so represented by the agent”.
Going strictly by this definition, an agent could be anyone who does an act for someone else, this will imply that even a servant or an employee who carries out the act assigned to them by their master or employer will be an agent. This was clarified in P. Krishna Bhatta v Mundila Ganapathi Bhatta, whereby Justice Ramaswami opined that in a legal context not every person who does any act for another is an agent, but only when the person (agent) acts as a representative of the other (principle) in dealings and contracts he can be termed as an agent.
It is also a general misconception that an agent is only involved in the creation of contracts with the third party, but this notion is mistaken, for an agent can be involved in the formulation, alteration, or termination of contractual obligations, between principle and the third party.
Essentials for contract of agency
- Principal should be qualified/competent to contract:
Section 183 of the Indian Contract Act deals with the qualification of competent principal. For a person to be a competent principal he must have attained the age of majority and he must be of sound mind at the time of appointment of agent.
- Agent should be qualified/competent to contract:
Section 184 of the Indian Contract Act deals with the qualification of a competent agent. The section states that every person is competent to be qualified as an agent, even if the said person is a minor or is of unsound mind. The only thing that is to be kept in mind is that if a minor or a person of unsound mind is chosen as an agent, he may not be accountable to their principle.
- There must be an intention to contract:
Intention is an essential part of any contract but its relevance and compliance varies with different types of contract. In contract of agency, there should be an intention on the part of the agent to act as the representative of the principal.
- Consideration is not required for contract of agency to exist:
Section 185 of the Indian Contract Act talks about the value of consideration in a contract of agency. Section states that no consideration is required for the creation of a contract of agency, but this does not mean that an agent will not be granted the suited commissions.
Status of minor in a contract of agency
Minor as a principle
Section 183 bars any minor to act as a principle in a contract of agency. Section 183 bars any minor to act as a principal in a contract of agency, but why is it so? The reason behind barring a minor to act as a Principle is that any contract entered by them is void ab initio. This was exhaustively discussed in the landmark judgment of Mohri Bibi v Damodar Ghosh.
The consequences and reasoning behind barring a minor to enter into a contract of agency was discussed in the landmark judgment of Shephard v Cartwright, where Justice Denning opined that a minor is incapable of selecting an agent for himself/herself to act on his/her behalf because if the law allows such a situation to occur, the selection of the said agent will be void. It will follow that every act that the agent so selected will be void ab initio and incompetent of being ratified by the Principle.
Now coming to the rationale as to why the court bars a minor to act as a principal in an agency contract, the law assumes that a minor does not possess the necessary wisdom/caution to choose a fitting agent for himself/herself. He will, in the eyes of law, seemingly choose the wrong person as his/her agent, so following this rational law says that a minor is inept at picking an agent. This does not mean that a minor could never appoint an agent no matter whatsoever the case may be.
In cases where a minor is capable of entering into a contract all by himself, he can also appoint someone else (an agent) to do the same. This principal was further discussed in depth by Bowstead on Agency, where it was concluded that a minor or a person of unsound mind is bound by the acts of his/her agents done by his authority, given that the conditions are such that he would have himself obliged if he had himself made the contract.
Moreover, as discussed in Madanlal Dhariwal v Bherulal, no section in the Indian Contract Act bars the appointment of an agent by the legal guardian of that minor, so even though the law bars him to directly elect an agent for himself, it goes on to correct any wrong or inconvenience that is suffered on the part of the minor.
Minor as an agent
As we have seen above, nothing in the Indian Contract Act bars any person to act as an agent in the contract of agency. Section 184 clearly states any person can be declared competent to be an agent, but this comes with a cautionary clause that even though a lunatic or a minor may be allowed to act as an agent he will not be held accountable to his/her principal.
The rationale as to why a lunatic or a minor is allowed to be an agent is that an agent cannot be held personally accountable when he is entering into a contract for the principal, so even if the agent is a minor or a lunatic their qualifications as to be competent in a contract is insignificant. This was discussed at length in the case of Mohomedally Ebrahim Pirkhan v Schiller.
So, in essence as to why a minor is qualified to be an agent but not a principle is that a principle incurs personal liabilities for the acts done by the agent and if the principle is a minor, he could not be held liable, whereas when we talk about minor as an agent, he incurs no personal liability for his actions, so even if the other party seeks remuneration or wants to hold the principle liable, he can do so without any inconvenience.
Difference between an agent and a servant
Examining the essential features of a master-servant contract and a contract of agency, we come across various similar features that exist in both these contracts. Now the question is how do we objectively differentiate between them? This question was answered in the judgment of Justice Bhagwati in Lakshminarayan Ram Gopal & Sons Ltd v Govt of Hyderabad, where he opined that chief distinctions can be objectively categorized into following points:
- The power to enter into a contract for his/her master is specifically only enjoyed by an agent. He/she possesses the authority to represent the principal on their behalf to a third party in signing a contract, but when we talk about a servant, such authority is generally absent.
- The control of a principle as to direct an agent what to do is present but he cannot prescribe the mode in which the work is to be carried out by the agent. When we talk about the control exercised by a master on his/her servant, we see that he enjoys the power to guide what action needs to be done and how it is to be done by the servant. Generally, a servant is expected to follow all the lawful commands given to him/her by his/her master in the course and scope of employment. This is not the case with an agent, while he is expected to conform to the instructions given to him/her by his/her master, he/she experiences no direct command of the principle.
- The way in which the servant is compensated for the works that he/she rendered for his/her master is different from how an agent is compensated. As we have already seen that consideration is not a mandatory condition for a contract of agency to exist, hence it is no requirement that the agent must be given a salary/remuneration for his/her acts. Generally, an agent receives commission for the work done by him/her for the principle.
- In a master-servant relationship, the master is liable for the acts of the servant if the said act falls under the ambit of scope of employment and course of employment. Vicarious lability in a principle-agent relation is different in the sense that even though an act of the agent falls within the course of employment but it was personal in nature, the principle will not be bound/liable for such acts. In essence, the principle is only liable for the acts that are done “within the scope of authority” of the agent
- We have studied exhaustively that a servant cannot work for more than one master at once, because if we allow this to happen there will be too much confusion as to who will be held vicariously liable for the wrongs of the servant. This is not the case with agents, an agent has the flexibility to work as many principles as he desires.
It is to be kept in mind that the court is not restricted by the name that is given by the parties to the contract to the contract itself, rather by the material in the contract itself. Even if a contract is signed assuming it to be a contract of employment, the court can, on finding substantial grounds to the contrary, treat it as a contract of agency.
It is also to be emphasized that a single person can sometimes play two different roles i.e., of an agent or a servant/employee. For example, a person holding a managerial position in a company may be termed as an agent when he represents the company to a third party for entering into a contract, and he can also be termed as a servant when he is carrying of the works that are in his course of employment.
Agency, as described in the Indian Contract Act, 1872, is a fiduciary relationship wherein the principal employs an agent to deal with third parties on behalf of the principal. Anyone can be called an ‘agent’ if he is representing another individual under their jurisdiction and has the ability to enter a legal relationship for the individual he represents, who is called the ‘principal’.
As the agent is a legal representative of the principal, the principal is thus bound by his agent’s actions and may even benefit from them as if he had performed these actions himself. Moreover, all actions of the agent carried out in his scope of employment are legally considered to be the actions of the principal.
This article discussed the essentials that must be fulfilled for the formation of such an agency. Often, its complexity is overlooked because it is used so commonly nowadays that it has become part of our everyday routine. Like Contract Law, however, agency is also a very essential part of every person who is engaged in a business and requires a high level of practical knowledge.
- Avtar Singh, Contract & Specific Relief, 12th edition
- Bowstead on agency (11th Edn) 14.
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