This article has been written by Kamesh Tyagi.
Agency is all about authority which is the authority through which the agent acts on behalf of the principal. The principal is liable for all the acts done by the agent within his authority. It is based on the Latin maxim Qui facit per alium facit per se, which means one who acts through another does the act himself. The agent is regarded as an exception to the doctrine of privity of contract as the agent can acquire rights and incur liabilities on behalf of the principal. The agent is authorized to form a contract in the name of the principal, and the principal can sue or be sued on the basis of that contract. The agency can be formed through four ways: an actual authority through contract, ratification by the principal, estoppel by conduct, and by authority implied by law.
The principal delegates his power and authority to the agent to act on his behalf to third parties. Does the agent can further delegate his duty and appoint a person as a sub-agent? Ordinarily, the agent has no power to delegate the work delegated to him by the principal. It is based on the legal maxim Delegata potestas non potest delegari, which means a delegate cannot further delegate. However, § 190 of the Indian Contract Act provides two exceptional circumstances in which the agent can further delegate his duties. He can do when:
- The nature of agency permits or demands it; or
- The ordinary customary practices of the business allow it.
There can be two kinds of delegation where the delegation is from an agent; it is termed as sub-agent. When the delegation for the particular duty is done directly through the principal, it is known as a substituted agency. This piece will discuss the differences between them and the rights and liabilities created by both vis-à-vis principal and the original agent.
Sub agent is defined by § 191 of the Indian Contract Act as:
“A sub-agent is a person employed by, and acting under the control of, the original agent in the business of the agency.”
The original agent employed the sub-agent, who works under his control and authority. The relation between the original agent and the sub-agent is that of principal and agent. All the rules which govern the agency will automatically govern the relationship between the sub-agent and the agent. The same rights and liabilities can be created by the sub-agent on the original agent as created by the agent on the principal.
In the case of Balsamo v. Medici (1984), the Chancery Court (See here) held that the sub-agent couldn’t be directly sued by the principal even for negligence as there is no privity between them. As per § 192 of the Indian Contract Act, 1872, the sub-agent can only be sued by the principal directly in the cases of fraud and wilful wrong. In Raghunath Prasad v. Seva Ram Tikam Das (1980), the Allahabad High Court (See here), held that the principal could sue the sub-agent through the original agent for any losses as there is privity and both original agent and sub-agent can sue each other.
The sub-agent who is properly appointed can make the principal liable for any contracts entered by the sub-agent in the name of the principal. The contract will be treated as entered by the principal himself. The original agent is responsible to the principal for any acts of the sub-agent which include negligence, fraud, wilful wrong, or any other breach of duty. In the case of Nensukhdas Shivnaraen v Birdichand, the Bombay High Court (See here) held that the principal, if wishes he, can directly sue the sub-agent or the original agent for the fraud or wilful wrong of the sub-agent.
When the agent who does not have the authority to appoint the sub-agent appoints the sub-agent, then the agent will be a principal towards the sub-agent. The original agent will solely be responsible to both the principal and third parties for the acts of such person. This person will no way be considered representing the principal and thus can’t enter the contract on the principal’s behalf. The principal can’t be held liable for the acts of such a sub-agent.
Section 194 of the Indian Contract Act, 1872 defines a substituted agent as the person nominated by the original agent with the knowledge and consent of the principal to work in the business of the agency for some particular part of the business. Two requirements are to be fulfilled by an agent before nominating the substituted agent. The first is that the original agent has an implied or express authority to appoint such a person by the principal. The second is that the original agent has named such a person to act for the principal in such part of the agency’s business.
When the agent appoints such a person, the agent merely acts as the messenger of the principal’s direct authority conferred on him; this was held in Nensukhdas Shivnaraen v. Birdichand (See here).
The naming of such a person by the original agent does not amount to the delegation of duties by the original agent of the principal. Instead, it establishes the direct relation between the principal and the person so named. Here, the privity is established between the principal and the person so named by the original agent. Thus, the named person will be treated as the agent of the principal and not the agent of the original agent (see Central Bank of India Ltd v. Firm Rurchand Kurramal and see De Bussche v. Alt). This privity creates a direct relation between the substitute and the principal, and for the discharge of duties, the substitute is directly responsible to the principal.
The authority to appoint such substitutes is implied when the nature of the business or through the usage of the trade practices, it can be reasonably presumed. When the substitute is accepted by the principal and the privity is established between them, then the original agent is not concerned with the business transaction between the substitute and the principal (see Purushotham Haridas v. Amruth Ghee Co Ltd and see Central Bank of India Ltd v. Firm Rurchand Kurramal). He is not concerned with the substitute agent’s efficiency, character, or negligence (see Gambhirmull Mahabirprasad v Indian Bank Ltd). The original agent can’t be held to be responsible for the conduct of the substituted agent once the relation is established between the principal and the substituted agent (see Chowdhury TC v Girindra Mohan Neogi, 1930 Calcutta HC).
Section 195 of the Indian Contract Act, 1872 talks about the agent’s duty in naming such a person. This Section imposes a duty on the agent to select a person as a substitute agent by exercising such prudence an ordinary reasonable man has exercised in a similar case. If he exercises such prudence, the original agent is not responsible to the principal for the negligence or any other act of the substituted agent.
In Punjab National Bank v. Firm Ishwarbhai Bhai Lalbhai Patel & Co (see here), the original agent can only be sued for the failure of the nominated person when it can be shown that the original agent was negligent in selecting the nominated person. Suppose it is found that the original agent was negligent in selecting such a person. In that case, the original agent will be liable to pay damages to the principal as it can be seen as a breach of the agent’s primary duty. In Ramchandra Lalbhai v Chinubhai Lalbhai, the Bombay HC (see here) held that the original agent has the implied authority to revoke the authority of the substituted agent in the interest of his principal, or otherwise he will be tied by his negligence in the selection.
Difference Between Sub and Substituted Agent
The difference between the sub-agent and the substituted agent can be broadly classified into control & direction, responsibility, privity of contract, appointment, liability, remuneration to agents, and responsibility towards the third party:
- Control & direction- All the direction and control given to the sub-agent is by the original agent as he is the agent of the original agent. In contrast, all the control exercise on the substituted agent is directly through the principal. The principal can’t directly exercise control over the sub-agent, but he can exercise it through the original agent.
- Responsibility- A sub-agent is responsible for all the acts to the original agent, whereas the substituted agent is directly responsible to the principal for all his acts. Only for fraud and wilful wrong, the substituted agent is directly responsible to the principal. The sub agent is indirectly responsible to the principal through the original agent for all the other acts.
- Privity of Contract- There is no privity of contract between the sub-agent and the principal. The privity of sub-agent is with the original agent. On the other, there is privity between the principal and the substituted agent. The substituted agent can be directly sued and can also sue the principal. The principal cannot directly sue or be sued by the sub-agent except in the cases of fraud and wilful wrong.
- Appointment- A sub-agent can only be appointed by the original agent when the nature of the business dealt by the agency demands it or where there is a customary practice in the trade business to appoint the sub-agent. A substituted agent is appointed when the original agent has the express or the implied authority from the principal to appoint such a person. A substituted agent is usually appointed for the completion of a particular part of the business when it requires some special skills or which can’t be done by the agent himself.
- Liability- The sub-agent is liable to the original agent for any acts done by him. The sub-agent is liable for any conduct, breach of duty, fraud, or wilful wrong directly to the original agent. The sub-agent is liable to both the principal and the original agent for the fraud or wilful wrong. On the other hand, the substituted agent is liable only to the principal for any act or breach committed by him. The principal can hold the original agent liable for any acts done by the substituted agent only if the original agent has negligently chosen such person.
- Remuneration to agents- The original agent pays the commission or remuneration to the sub-agent through his pocket or share. The principal makes the payment to the substituted agent.
- Responsibility towards the third party- The contract entered by the properly appointed sub-agent on behalf of the principal will have the same effect as the contract entered by his agent or by the principal himself. The principal will be bound to the third parties for such a contract. But when the sub-agent is not properly appointed, the sub agent’s contract will have no liability on the principal vis-à-vis third party. For such a contract, the original agent will be liable to both the principal and the third party. Any act done by the substituted agent within his authority will bound the principal vis-à-vis a third party.
Differentiating between sub and substituted agent is a very tricky thing. It can change from substitute agent to sub-agent or vice versa just by adding or deleting a few facts. To answer the question of whether any authority is substituted or sub-agency, it should be a question of fact. The answer to this question can be given only through the analyses of the facts of the specific case.
To clear the doubt about the sub and substituted agency, some questions have to be asked. Who is controlling the authority? Who is responsible for whom? Who has privity with whom? What is the purpose of the appointment of a sub or substituted agent? Who is liable to whom? Who is giving payment to whom? What is the responsibility created by the sub or substituted to the principal vis-à-vis third party? After getting the answer to all these questions, the person can easily find out who is the sub-agent and who is the substituted agent.
- B. Mahinder Das v P. Mohan Lal, AIR 1939 All 187.
- Balsamo v Medici, (1984) 2 All ER 304.
- Central Bank of India Ltd v Firm Rurchand Kurramal, (1958) Pun 1115.
- Chowdhury TC v Girindra Mohan Neogi, (1929) 56 Cal 686: AIR 1930 Cal 10.
- De Bussche v Alt, (1878) 8 ChD 286.
- Gambhirmull Mahabirprasad v Indian Bank Ltd, AIR 1963 Cal 163.
- Meyerstein v Eastern Agency Co, (1885) 1 TLR 595.
- Nensukhdas Shivnaraen v Birdichand, AIR 1917 Bom 19.
- Punjab National Bank v Firm Ishwarbhai Bhai Lalbhai Patel & Co, (1971) 2 Bom 1413.
- Purushotham Haridas v Amruth Ghee Co Ltd, AIR 1961 AP 143.
- Raghunath Prasad v Seva Ram Tikam Das, AIR 1980 All 15.
- Ramchandra Lalbhai v Chinubhai Lalbhai, AIR 1944 Bom 76.
- Thomas Cheshire & Co v Vaughan Bros & Co, (1920) 3 KB 240.
- Pollock & Mulla The Indian Contract Act,1872, (15th ed., Lexis Nexis, 2020).
- Anson’s Law of Contracts, (29th ed., Oxford, 2010).
- The Indian Contract Act, 1872
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