Das Sir's Project.docx

Hidayatullah National Law University Trimester II (November – February, 2019)

LAW RELATING TO AGENCY : AN ANALYSIS WITH RESPECT TO INDIAN LEGAL FRAMEWORK (Project towards partial fulfillment of the assessment in the subject of Contract II))

Submitted To:

Submitted By:

Dr. Dipak Das

Jyoti Sharma

Associate Professor

Roll No. 16

Hidayatullah National Law University

LLM Batch 2018-19 I

DECLARATION

I, Jyoti Sharma, hereby declare that the project work entitled “Law relating to Agency : An analysis with respect to Indian Legal Framework” submitted by me in HNLU, Raipur, is record of an original work done by me under the able guidance of Dr. Dipak Das, HNLU, Raipur.

Jyoti Sharma LL.M., Batch XII Trimester II Roll No - 16

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ACKNOWLEDGEMENT

On the completion of this project, I would like to place my sincere gratitude towards all those who have been instrumental in its making. I hereby express my heartfelt gratitude to Dr. Dipak Das for his guidance and supervision. This project topic has instilled in me a unique thirst for knowledge in the subject. It could not have achieved completion without the aegis of Dr. Dipak Das. I also owe sincere gratitude to the staff at the HNLU library for always helping me in the process of finding material and other sources for research. Last but not the least I thank my family and friends for supporting me throughout in my endeavors.

JYOTI SHARMA February 9TH, 2019

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TABLE OF CONTENT Declaration ……………………………………………………………………………………….I Acknowledgement ……………………………….……………………………………………...II Table of cases …………………………………………………………………………………...IV Research Methodology …………………...…………………………………………………....VI Introduction ..……………………………………………………………………………………………...1 1.1 Meaning……..…………………………………………………………………………………...1 1.2 Types of Agency Contracts ……………………………………………………………………..2 Relations between Principal and Agent………………………………………………………………….5 2.1 Duties of the Agent ………..…………………………………………………………………….5 2.2 Rights of the Principal ...…………...…………………………………………………………....8 2.3Duties of the Principal/Rights of the Agent ……………………………………………………10 Relation of Principal and Agent with the third party …........................................................................13 3.1. Rights and liabilities of the Principal …………………………..……………………………13 3.2 Personal Liability of Agent ………..…………………………………………………………..27 Termination of Agency ………………..………………………………………………………………30 4.1 Termination by the act of the parties………………...…………………………………………30 4.2 Termination by the obligation of law ………………………………………………………….31 Conclusion………………..…………………………………………………………………………….33 Bibliography …………………………………………………………………………………………VIII

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TABLE OFCASES

Amrit Lal v. Bhagwandas Association v. Nevill Bart v. British West Indian Airways

AIR 1939 B 435 (1887) 19 Q.B.D. 110 (1967) 1 Lloyd's Rep. 239

Benaras Bank Ltd, v. Prem & Co.

AIR 1937 All. 255

Bengal Coal Co. v. Union of India

AIR (1971) Cal. 219

Bharat Sarvodaya Mills Co. Ltd. v. Shree Ram Mills Danzier v. Thompson Dina Bandhu v. Abdul Latif Fazal Illahi v. East India Railway Firm Roop Ram Bhagwan Das v. Nanak Ram Chhaju Ram Harikishen Singh v. National Bank of India Ltd. Harsaran Das v. Executive Officer

AIR (1959) B. 309 (1944) K.B. 654 AIR (1923) Cal. 157 AIR 1922 All. 324 AIR (1927) L. 493, 494 AIR (1940) L. 412 (1962) All. L.J. 676

Indo Allied Industries Ltd. v. Punjab National Bank Ltd.

AIR 1970 All. 108

Indore-Malwa United Mills Ltd. v. C.I.T. Bombay

AIR 1966 SC 1466

Kulsekarapatnam Hand Match Workers Cottage Industrial Society Ltd v. Radhelal Laloo Kishanlal Mehrotra v. Union of India

AIR (1971) M.P. 191 AIR (1961) Punj.5

Kunj Kishore v. W.K. Porter

AIR (1914) All. 238

Lakshmishankar v Murtiram

(1904) 6 Bom. LR 1106 IV

Lilley v. Doubleday Madura Municipality v. Alagirisami Mahadeo Ganga Prasad v. Gauri Shankar

(1881) 7 QBD 551 (1939) Mad. 928 AIR (1950) Orissa 42

Maganbhai v. Chetan Lai

AIR (1968) Rai. 81

Mauji Ram v. Tara Singh

(l88l) 3 All.852

Mohammad Khaja v. Akber Ali

AIR (1955) Hyd. 150

Mohammad Taqiuddin v. Gulam Muhammad

AIR (1960) SC 134

M/s Shree Ram Refrigeration Industries v. State Bank of India

AIR (1983) Pat. 203

North Western Provinces Club v. Sadullah

(1898) 20 All. 497

Pannalal Jankidas v. Mohanlal

AIR 1951 SC 144

Rama Corporation v. Proved Tin and General Investments

(1952) 2 Q.B. 147,149,150

Ram Pertap v. Mar shall

ILR (1989) 26 Cal. 701 PC

Siten Bose v. Anand Bazar Patrika (Pvt.) Ltd.

(1980) 1 Cal. L.J. 426

State Bank of India v. Smt. Shyama Devi

AIR (1978) S.C. 1263; (1978) 3 S.C.C. 399

Syed Abdul Khader v. Rami Reddi

AIR (1979) S.C. 553

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RESEARCH METHODOLOGY

TOPIC: Law relating to Agency: An analysis with respect to Indian Legal Framework

SUBJECT: Contract II

OBJECTIVES: 1. To study meaning of Agency. 2. To understand the types of Agency. 3. To study the relationship between principal and agent. 4. To study the relationship of principal and agent with the third party. 5. To understand the modes of termination of Agency.

RESEARCH METHODOLOGY: This section talks about the methodology which will be used for this piece of research work. Methodologies vary from research work to work due to the difference in subjects, areas and study view. Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. For the purpose of this project I have used Doctrinal Research Methodology. Doctrinal research is that related to some abstract idea(s) or theory. It is generally used by philosophers and thinkers to develop new concepts or to reinterpret existing ones.

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RESEARCH QUESTIONS: 1. What is the meaning of Agency? 2. What are the different types of agency? 3. What is the relationship between principal and agent? 4. What is the relationship of principal and agent with the third party? 5. What are the modes of termination of Agency?

SOURCE: The primary source used in the making of this project is India Contract Act, 1872. The secondary sources used in the making of this project are Books, Articles, Journals, Periodicals and Weeklies.

VII

CHAPTER 1 – INTRODUCTION

In India, the agent and principle share a relationship that is contractual in nature, and therefore it is governed by the terms and conditions of the contract between them. Chapter X of the Indian Contract Act, 1872 provides the basic structure of rules and regulations that basically govern the performance and formation of any type of contract including the agency contract. In agency contracts, there exists a legal relationship between two people whereby one person acts on behalf of the other.

1.1 MEANING The person acting on behalf of the other is called an agent, and the person from whom the agent derives authority to act is called the principal. The law of agency is based on the Latin maxim “qui facit per alium, facit per se,” which means, “He who acts through another is deemed in law to do it himself“. Agent and principal are defined under Section 182 of the Indian Contract Act, 1872. According to the section “an agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal”.

The competent agent is legally capable of acting for the principal vis-à-vis the third party. Now who can become an agent? Section 184 answers this question. According to this section any person can become an agent i.e. there is no need to have a contractual capacity to become an agent. Therefore, a minor can also act as an agent. But the minor will not be responsible to his principal. Different types of commercial agents have been identified under Indian law like brokers, auctioneers, del credere agents, persons entrusted with money for obtaining sales and insurance agents.

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1.2 TYPES OF AN AGENCY CONTRACT 1.2.1 Express Agency A contract of agency can be made orally or in writing. Example of a written contract of agency is the Power of Attorney that gives a right to an agency to act on behalf of his principal in accordance with the terms and conditions therein. A power of attorney can be general or giving many powers to the agent or some special powers, giving authority to the agent for transacting a single act. 1.2.2 Implied Agency Implied agency arises when there is any conduct, the situation of parties or is necessary for the case. a. Agency by Estoppel (Section 237) Estoppel arises when you are precluded from denying the truth of anything which you have represented as a fact, although it is not a fact. Thus, where P allows third parties to believe that A is acting as his authorized agent, he will be estopped from denying the agency if such third-parties relying on it make a contract with an even when A had no authority at all. b. Wife as Agent Where a husband and wife are living together, we presume that the wife has her husband’s authority to pledge his credit for the purchase of necessaries of life suitable to their standard of living. But the husband will not be liable if he shows that: (i) he had expressly warned the tradesman not to supply goods on credit to his wife; or (ii) he had expressly forbidden the wife to use his credit; or (iii) he already sufficiently supplies his wife with the articles in question; or (iv) he supplies his wife with a sufficient allowance. 2

Similarly, where any person is held out by another as his agent, the third-party can hold that person liable for the acts of the ostensible agent, or the agent by holding out. Partners are each other’s agents for making contracts in the ordinary course of the partnership business. c. Agency of Necessity (Sections 188 and 189): In certain circumstances, a person who has been entrusted with another’s property may have to incur unauthorized expenses to protect or preserve it. This is called an agency of necessity. For example, a sent a horse by railway. On its arrival at the destination, there was no one to receive it. The railway company, is bound to take reasonable steps to keep the horse alive, was an agent of the necessity of A. A wife deserted by her husband and thus forced to live separate from him can pledge her husband’s credit to buy all necessaries of life according to the position of the husband even against his wishes. d. Agency by Ratification (Sections 169-200): Where a person not having any authority act as agent, or act beyond its authority, then the principal is not bound by the contract with the agent in respect of such authority. But the principal can ratify the agent’s transaction and accept liability. In this way, an agency by ratification arises. This is ex post facto agency— agency arising after the event. By this ratification, the contract is binding on principal as if the agent had been authorized before. Ratification will have an effect on the original contract and so the agency will have effect from original contract and not on ratification. The conditions for ratification to be effective – (i) The agent must expressly contract as agent for a principal who is in existence and competent to contract.

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(ii) The principal must be competent to contract not only at the time the agent acts but also when he ratifies the agent’s act. (iii) The principal at the time of ratification has full knowledge of the material facts and must ratify the whole contract, within a reasonable time. (iv) Ratification cannot be made so as to subject a third-party to damages, or terminate any right or interest of a third person. (v) Only lawful acts can be ratified. Effect of ratification – (i) It establishes the relationship of Principal and Agent insofar as the act ratified is concerned between the people doing the act. (ii) It establishes the relationship of contract between the principal and the third party. e. Agency by operation of law Sometimes an agency arises by operation of law. For example, when a company is first formed, its promoters are its agents by operation of law. Again, according to Section 18 of the Indian Partnership Act, 1932, a partner is an agent of the firm for the purposes of business of the firm. Further, according to section 19 of the Indian Partnership Act, 1932, the act of a partner which is done to carry on the usual way business of the kind carried on by the firm, binds the firm. Similarly, section 28 of the Indian Partnership Act, 1932 deals with the principle of holding out between the parties.

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CHAPTER 2 – RELATIONS BETWEEN PRINCIPAL AND AGENT

2.1 DUTIES OF AGENT 2.1.1 Duty to follow principal’s directions or customs1: The first duty of every agent is to act within the scope of the authority conferred upon him and perform the agency work according to the directions given by the principal. When the agent acts otherwise, if any loss be sustained, he must make it good to the principal, and if any profit accrues, he must account for it. Illustrations: (a) Where the principal instructed the agent to warehouse the goods at a particular place and the agent warehoused them at a different warehouse which was equally safe, and the goods were destroyed by fire without negligence, it was held that the agent was liable for the loss because any departure from the instructions makes the agent absolutely liable (Lilley vs Doubleday).2 (b) An agent being instructed to insure goods neglects to do so. He is liable to compensate the principal in the event of these being lost (Pannalal Jankidas vs Mohanlal).3 If the principal has not given any express or implied directions, then it is the duty of the agent to follow the custom prevailing in the same kind of business at the place where the agent conducts business. If the agent makes any departure, he does so at his own risk. He must make good any loss so sustained by the principal. Illustrations4 (Appended To Sec. 211):

1

Section 211, Indian Contract Act, 1872. Lilley vs Doubleday, (1881) 7 QBD 551. 3 Pannalal Jankidas vs Mohanlal, AIR 1951 SC 144. 4 Ibid at 1. 2

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(a) A, an agent, engaged in carrying on for B a business, in which it is the custom to invest from time to time at interest, the moneys which may be in hand, omits to make such investments. A must make good to B the interest usually obtained by such investments. (b) B, a broker, in whose business it is not the custom to sell on credit, sells goods of A on credit to C, whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the loss to A, irrespective of his good intentions. 2.1.2 Duty to carry out the work with reasonable skill and diligence5: The agent must conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. Further, the agent must act with reasonable diligence and to the best of his skill. If the agent does not work with reasonable care, skill (unless the principal has notice of his want of skill) and diligence, he must make compensation to his principal in respect of ‘direct consequences’ of his own neglect, want of skill or misconduct. But he is not so liable for indirect or remote losses. Illustrations6 (Appended To Sec. 212): (a) A, a merchant in Kolkata, has an agent B, in London, to whom a sum of money is paid on A’s account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest from the day on which it ought to have been paid, according to the usual rate, and for any further direct loss such as loss by variation of rate of exchange, but nothing further. (b) A, an agent for the sale of goods, having authority to sell goods on credit, sells to B on credit, without making the proper and usual enquiries as to the solvency of B. B, at the time of such sale, is insolvent. A must make compensation to his principal in respect of any loss thereby sustained.

5 6

Section 212, Indian Contract Act, 1872. Ibid.

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2.1.3 Duty to Render Accounts7: It is the duty of an agent to keep proper accounts of his principal’s money or property and render them to him on demand, or periodically if so provided in the agreement. 2.1.4 Duty to communicate8: It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions, before taking any steps in facing the difficulty or emergency. 2.1.5 Duty not to deal on his own account9: An agent must not deal on his own account in the business of agency; i.e., he must not himself buy from or sell to his principal goods he is asked to sell or buy on behalf of his principal; without obtaining the consent of his principal after disclosing all material facts to him. If the agent violates this rule, the principal may repudiate the transaction where it can be shown that any material fact has been knowingly concealed by the agent, or that the dealings of the agent have been disadvantageous to the principal. The principal is also entitled to claim from the agent any benefit which may have resulted to him from the transaction. Illustration: A, directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on discovering that B has bought the estate for himself may repudiate the sale, if he can show that B has dishonestly concealed any material fact or that the sale has been disadvantageous to him.

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Section 213, Indian Contract Act, 1872. Section 214, Indian Contract Act, 1872. 9 Sections 215, 216, Indian Contract Act, 1872. 8

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2.1.6 Duty not to make any profit out of his agency except his remuneration 10: An agent stands in a fiduciary relation to his principal and therefore he must not make any profit (secret profit) out of his agency. He must pay to his principal all moneys (including illegal gratification, if any) received by him on principal’s account. He can, however, deduct all moneys due to himself in respect of his remuneration or/and expenses properly incurred. If his acts are not bonafide, he will lose his remuneration and will have to account for the secret profit to his principal. 2.1.7 Duty on termination of agency by principal’s death or insanity11: When an agency is terminated by the principal dying or becoming of unsound mind, the agent must take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him. 2.1.8 Duty not to delegate authority12: An agent cannot delegate his authority to another person unless authorized or warranted by the usage of trade or nature of the agency. A work entrusted to the agent must be done by him.

2.2

RIGHTS OF THE PRINCIPAL

2.2.1 To repudiate contract13: If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from him by the agent or that the dealings of the agent have been disadvantageous to him.

10

Sections 217, 218, Indian Contract Act, 1872. Section 209, Indian Contract Act, 1872. 12 Section 190, Indian Contract Act, 1872. 13 Section 215, Indian Contract Act, 1872. 11

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As a rule, an agent cannot deal on his account/. Only after obtaining the consent of the principal and full disclosure of all material facts, agent may act on his own account. However, where agent’s personal interest is to conflict with principal’s interest, he cannot act on his own account. Where the agent acts on his own account, principal has following rights: (i)

he may repudiate the transaction

(ii)

he may affirm the transaction and claim the benefits

(iii)

he may claim damages for loss caused to him.

To claim benefit (Sec 216) if an agent without the knowledge of the principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. The principal must show that a material fact has been dishonestly concealed or the dealing of an agent has been disadvantageous to him. All profits and advantages made by the agent in the business conducted by him for his principal must be paid over to the principal. Agent cannot make any secret profits or receive bribes. Principal is entitled to receive all such sums and also interest on them. The position of an agent being fiduciary in character, he cannot conflict his personal interest with his duty to the principal. 2.2.2 To ratify or disown agent’s acts: Where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or disown such acts.14 2.2.3 To revoke agent’s authority: The principal may revoke the authority given to his agent by giving a reasonable notice of revocation at any time before the authority has been exercised so as to bind the principal.15

14 15

Section 196, Indian Contract Act, 1872. Section 203, Indian Contract Act, 1872.

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2.2.4 To claim loss or profit: The principal is entitled to compensation for any loss sustained by him or to any profits accrued16 — (i)

where the agent acts contrary to the directions given by the principal; or

(ii)

where loss is caused due to agent’s neglect, want of skill, or misconduct.

2.2.5 To demand accounts17: Principal is entitled to demand proper accounts from the agent. 2.2.6 To refuse remuneration when agent is guilty of misconduct: The principal has a right to refuse remuneration to the agent who is guilty of misconduct in the business of the agency.18

2.3 DUTIES OF PRINCIPAL/RIGHTS OF AGENT 2.3.1 To indemnify the agent: 

The employer is bound to indemnify his great against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him. It must be noted that principal is liable only for such damages as are direct and immediate and naturally follow the execution of the agency. When the agent acts in an unauthorized manner or in breach of his duty, he is not entitled to be indemnified. However, the principal may ratify agent’s default.19 The agent must be indemnified in the lawful conduct of the business of the agency. Therefore, if the act turns out to be unlawful, agent is entitled to indemnity.

16

Section 211, 212, Indian Contract Act, 1872. Section 213, Indian Contract Act, 1872. 18 Section 220, Indian Contract Act, 1872. 19 Section 222, Indian Contract Act, 1872. 17

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

Against consequences of the acts done in good faith: Where one person employs another to do an act and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act though it causes an injury to the third person.20 The principal is therefore liable to indemnify the agent not only against the lawful acts (Sec 222) but also against the unlawful acts of an agent done in good faith (sec 223). An agent therefore cannot claim indemnity for acts which is known to be unlawful. When is the agent not entitled to be indemnified: where one person employs another to do an act which is criminal, the employer is not liable either upon an express or an implied promise, to indemnify him against the consequences of that act. 21 This establishes the principle that an agent can refuse to carry out the instructions of the principal to do a criminal act.

Illustrations: (i) A employs B to beat C, and agrees to indemnify him against all consequences of the act. B thereupon beats C and has to pay damages to C for so doing. A is not liable to indemnify B for those damages. (ii) B, the proprietor of a newspaper, publishes at A’s request, libel upon C in the paper, and A agrees to indemnify B against the consequences of the publication and all costs and damages of any action in respect thereof. B is sued by C and has to pay damages, and also incurs expenses. A is not liable to B upon the indemnity. 

Compensate the agent for injury caused: the principal must take compensation to his agent in respect of injury caused to the agent by the principal’s neglect or want of skill.22 Illustration: A employs B as brick layer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully put up, and B is consequently hurt. A must pay compensation to B.

20

Section 223, Indian Contract Act, 1872. Section 224, Indian Contract Act, 1872. 22 Section 225, Indian Contract Act, 1872. 21

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However, if the injury is due to agent’s own contributory negligence the principal may not be liable to compensate the agent. 2.3.2 To pay remuneration and dues: It is the principal’s duty to pay his agent such remuneration as may be payable to him as agent, and also all monies due to the agent is respect of advances made or expenses properly incurred by the agent in conducting principal’s business.23 2.3.3 Misrepresentations or fraud by agent: Misrepresentations made, or frauds committed, by an agent acting in the courses of business for his principal, has the same effect on agreement made by such agent as if such misrepresentations or fraud had been made or committed by the principal. Therefore, in case of mis- representations made or frauds committed by an agent in the course of the business, the principal is liable. However, misrepresentations made of frauds committed, by an agent in matters which do not fall within his authority, do not affect his principal.24 In order that a principal shall be made liable for the misrepresentations and frauds committed by the agent, such misrepresentations or frauds must be committed by the agent — (i) in the course of the business of his principal; and (ii) the act must be within the scope of agent’s authority. The acts of agent shall be deemed to be acts of the principal. Principal may then liable for damages. The underlying principle is that master is answerable for every wrong the servant or agent does. The act must be committed by the servant or agent in service or in principal’s business. In case where an agent receives money from a third party by fraud and the principal is not aware that the money was wrongfully obtained, the third party cannot call upon the principal to repay the same.

23 24

Section 227, Indian Contract Act, 1872. Section 238, Indian Contract Act, 1872.

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CHAPTER 3 –RELATION OF PRINCIPAL AND AGENT WITH THIRD PERSON

3.1

RIGHTS AND LIABILITIES OF THE PRINCIPAL The third aspect of agency i.e. relationship between the principal and the third party is obviously, an exception to the doctrine of privity of contract. It is, therefore, necessary to examine this aspect in some detail. Section 226 of the Indian Contract Act provides that contracts entered into through an agent and obligations arising from acts done by an agent may be enforced in the same manner and will have the same legal consequences as if the contracts had been entered into and acts done by the principal in person. This section makes it clear that as a general rule a contract made by an agent, within scope of his authority, with third party confers rights and imposes liabilities upon the principal. The relationship between principal and third party can be studied under the following two sub-heads: 1. Rights of Principal. 2. Duties of Principal.

3.1.1. Rights of Principal The rights of the principal against third party are as follows: (i). Rights when the agent acts within actual authority: The principal has a statutory right to acquire benefit of a contract entered into by his agent with third party. According to section 226 of the Contract Act the principal can enforce the contract against third party. But, normally, the principal can require

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performance of only such contracts which have been made by the agent acting during course of his agency i.e. within the authority actually conferred on him by the principal. 25 Such an authority of the agent may be given either expressly or impliedly. 26 It is well settled that an agent having an authority to do an act has also the authority to do every lawful thing which is necessary in order to do such authorized act.27 When, therefore, an agent enters into a contract with third party and the contract falls within actual authority of the agent, it is the principal who is entitled to enforce the contract against third party. Thus, in Indore-Malwa United Mills Ltd, v. C.I.T. Bombay,28 the Supreme Court held that if by an agreement the debtor is authorized to pay the debt by a cheque and to send the cheque by post to the creditor, the post office is the agent of the creditor to receive the cheque and the creditor is deemed to receive payment as soon as the cheque is posted to him.29 However, section 226 of the Contract Act permits enforcement of contracts as they stand (i.e. with their initial terms) and not their substitution by fresh contracts with different terms. In Indo Allied Industries Ltd, v. Punjab National Bank Ltd.,30 the court held that in the absence of an express contract to the contrary, there is an implied contract, with a customer who opens an account with a Bank, which carries with it the duty of the bank to pay the customer only at the branch where the account is kept subject to instructions to transfer the amount elsewhere. If the obligation to transfer is frustrated by local legislation or governmental action of the country where the account is kept, the remaining implied obligation to pay at the branch or office where the account is kept cannot be substituted automatically by an unconditional obligation of the principal to pay elsewhere by resorting to section 226 of the Contract Act. 31 Furthermore, the principal can also enforce the contract made by sub-agent who is duly appointed by the agent.32

25

Section 182, The Indian Contract Act, 1872. Section 186, 187, The Indian Contract Act, 1872. 27 Section 188, The Indian Contract Act, 1872. 28 Indore-Malwa United Mills Ltd, v. C.I.T. Bombay, AIR 1966 SC 1466. 29 Ibid. 30 Indo Allied Industries Ltd, v. Punjab National Bank Ltd., AIR 1970 All. 108. 31 Ibid. 32 Sections 192, 226, Indian Contract Act, 1872 26

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(ii). Rights when agent exceeds authority or acts without authority: Where an agent, exceeding his authority, has done something lawful for his principal, the principal may acquire right by such act provided he ratifies the act. But, if he does not ratify such act, he cannot claim any benefit arising out of the act.33 For example, where an agent who is appointed to sell certain goods also makes a contract with third party to purchase certain goods, the contract to purchase goods is beyond his actual authority. If the principal ratifies it, he can enforce the contract against third party. Similarly, where a person, without being an agent of another, does a lawful act for such another person without his authority, if the person, for whom the act has been done, ratifies the act, an agency by ratification comes into existence.34 Consequently, the ratifier becomes entitled to acquire benefits of the act. Another significant point to be mentioned is that when an emergency occurs which may affect principal's interest, the agent can exceed his authority. He can do any such act which is reasonably necessary to protect the principal from loss.35 For instance, in the case of Harikishen Singh v. National Bank of India Ltd. 36, it was held that if the goods are given to agent by the principal with the direction to send them at certain place, he can sell the goods if ar. emergency occurs (i.e. when goods start perishing or they can perish before reaching the destination). If the agent in such emergency sells the goods on credit, the principal is entitled to sue the purchaser. But, the agent must prove that (a) there was in fact an emergency, (b) the principal could not be informed, and (c) He acted bonafide to save the principal from loss. It is worth mentioning that the person ratifying the contract must be competent37 to enter into contract both at the date when it was made and when it was ratified.

33

Section 196, Indian Contract Act, 1872. Ibid. 35 Section 189, Indian Contract Act, 1872. 36 Harikishen Singh v. National Bank of India Ltd., AIR (1940) L. 412. 37 Mohammad Taqiuddin v. Gulam Muhammad, A.I.R. (1960) SC 134. 34

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(iii) Rights of undisclosed principal: A principal may be undisclosed in two cases: Firstly, where the agent conceals the very fact of existence of agency and contracts in his own name and not on behalf of the principal. Secondly, where the agent, though discloses agency, conceals his principal's name. In the first case, the agent acquires rights and incurs personal liability. In the second case also the agent can enforce and is bound by the contract.38 But, as a general rule, the principal does not acquire any right in both the cases. However, the real position of rights of undisclosed principal against third party can be made clear in the light of certain provisions of the Contract Act as follows: (a). Where the principal is completely undisclosed When the principal is totally undisclosed i.e. where the agent does not even disclose his character that he is an agent, generally, the agent can enforce the contract. But, except in special cases,39 the principal can also enforce the contract even though the agent has not disclosed him. That is, even in the cases where the agent has concealed the fact of agency and made the contract in his own name, the principal can sue the third party on the contract. The undisclosed principal has statutory support to claim for enforcement of contract. The first part of section 231 of the Indian Contract Act provides that if an agent makes a contract with a person who neither knows nor has reason to suspect that he is an agent, his principal may require the performance of the contract, but the other contracting party has as against the principal, the same rights as he would have had as against" the agent if the agent had been' the principal. Thus, this section deals with the rights of the principal and rights of the third party where the agent makes the contract without disclosing his principal. The section makes it clear that where a contract is made by an agent without disclosing his principal, the principal can claim for performance of the contract regardless of the fact that he was totally undisclosed to the third party. In

38

Section 230 (2), The Indian Contract Act, 1872. Where the principal is minor or non-existent person, e.g., a company yet to come into existence or where the performance requires personal skill of the agent etc. 39

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Maganbhai v. Chetan Lai,40 the agent entered into a contract with third person without disclosing his principal. The court held that the principal could enforce the contract even when the third person neither knew nor had reason to believe that the person with whom he entered into contract was an agent.41 The second part of section 231 of the Contract Act states that if the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfil the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract. The principle underlying this part of section 231 of the Contract Act is, thus, to provide freedom to elect whether he will fulfil or not the contract in the case where the principal is known to him before the contract is concluded. Section 232 of the Contract Act, provides that 'when one man makes a contract with another neither knowing nor having reasonable ground to suspect that the other is an agent, the principal, if he requires the performance of the contract, can only obtain such performance subject to the rights and obligations subsisting between the agent and the other party to the contract.' This’ section, thus, protects third party as regards the rights and duties subsisting between the agent and the third party. That is, if an undisclosed principal requires performance of the contract by virtue of provisions of section 231 of the Contract Act, he cannot do so without discharging that contractual obligation which the agent owes to the third party. For example, A, who owes 500 rupees to B, sells 1000 rupees, worth of rice to B. A is acting as agent of C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is the case, C cannot compel B to take the rice without allowing him to set off A's debt.42

40

Maganbhai v. Chetan Lai, A.I.R. (1968) Rai. 81. Ibid. 42 Illustration to section 232, Indian Contract Act, 1872. 41

17

(b). Where the principal is partially disclosed A principal may be partially undisclosed when the agent discloses his character (that he is acting as agent) but does not disclose name of his principal.43 In such a case presumption is that the agent can sue and be sued.44 Undoubtedly, this presumption is weaker than in the case where the agent conceals agency itself and contracts in his own name i.e. where the principal is completely undisclosed. However, if the principal can be ascertained by the third party from the description given by the agent, there will be no presumption of agent's right to sue the third party. Nevertheless, the undisclosed principal can require the performance of the contract so made by the agent with third party.45 But, the principal can enforce the contract subject to rights and obligations subsisting between the agent and the third party.46 Thus, it is clear that the ‘doctrine of undisclosed principal’ i.e. the circumstance when an undisclosed principal is allowed to sue the third party is an exception to the doctrine of privity of contract. Under English law, an undisclosed principal can also sue but his rights under a contract can only arise when (1) the principal was in existence when the contract was made, (2) the principal is discovered and (3) the contract is not one which depends on personal skill of the agent.47 However, if the contract made by the agent is such that it can be construed as containing an express term that the agent is really the principal then there can be no right in any other (undisclosed) principal.48

43

Section 230(2), The Indian Contract Act, 1872. Ibid. 45 Section 231, The Indian Contract Act, l8?2. 46 Section 232, The Indian Contract Act, 1872. 47 Anson's Law of Contract, 26th Ed. (1984) at 551, 552. 48 Fridman's Law of Agency,3rd Ed. (1971) at 190. See also United Kingdom Mutual Steamship Assurance Association v. Nevill (1887) 19 Q.B.D. 110; Bart v. British West Indian Airways (1967) 1 Lloyd's Rep. 239. 44

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3.1.2 Liability of the Principal Since an agent is a person who brings his principal into legal relations with third party, his acts, normally, bind the principal. Section 226 of the Indian Contract Act provides that contracts entered into through an agent and obligations arising from an act done by an agent may be enforced in the same manner and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person. Section 226, thus, enunciates that the principal can enforce and is bound by the agent's contract. It is to be noted that section 226 of the Contract Act is general in application. It covers all the acts done or contracts made by an agent within the scope of his authority actual or apparent or ostensible. Further, where the agent acquires his authority by ratification of his act, the ratifier is bound by his act. That is, agency by ratification also imposes contractual obligations upon the ratifier (principal). The duties of the principal are manifold. It is, therefore, necessary to examine them under the following sub-heads: (i). Duty when agent’s authority is actual According to section 226 of the Contract Act, the principal is liable to third party with whom the agent makes contracts. But, it is necessary that firstly, the agent must have acted within course of his actual authority which is lawfully conferred upon him by the principal by contract49 and secondly, that he must have made the contract with third person on behalf of the principal. For this purpose, it is immaterial whether the actual authority of the agent is express or implied.50 In Syed Abdul Khader v. Rami Reddi,51 the Supreme Court held that a power of attorney which authorizes the agent to do certain act is an illustration of an express authority. It is noted that where an agent has an authority to do an act, he can also do such lawful act which is necessary to do the authorized act.52 For example, A is employed by B residing in London to recover at Bombay a debt due to B. A may adopt any legal process necessary for the purpose of recovering the debt and may give a valid discharge for the

49

Section l82, Indian Contract Act, 1872. Section 186, 187, Indian Contract Act, 1872. 51 Syed Abdul Khader v. Rami Reddi , A.I.R. (1979) S.C. 553. 52 Section I08, Indian Contract Act, 1872. 50

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same.53 Further, the principal is bound not only by an agent's act but also by the acts done by a sub-agent.54 But, it is necessary that the sub-agent is appointed by the agent and he acts under control of the agent55 and no under control of the principal. Although there is no privity of contract between principal and the sub-agent, the principal can be sued by the third party with whom the sub-agent has contracted on behalf of the principal. It is necessary that the sub-agent must have been appointed properly. If he is not appointed properly by the agent, the act of sub-agent is not binding on the principal.56 (ii). Duty when agent exceeds authority or contracts without authority The general rule is that an agent is bound to act within the scope of his authority. If he exceeds his authority or does something without authority he would be personally liable. But, there are certain cases when the principal can be held liable. These cases are stated below: (a). During emergency When an unforeseen emergency arises an agent can exceed his authority and do all such acts, to save his principal from loss which a person of ordinary prudence would have done in his own case in similar circumstances.57 For example, an agent for sale may get the goods repaired if it becomes necessary. The principal is liable for cost of repairing. Therefore, when an agent has deviated from instructions of his principal due to occurrence of an emergency which may jeopardize the principal's interest, the principal is liable for his acts to the third party. But, the liability can be imposed upon the principal only when (1) an emergency has actually occurred, (2) the principal could not be informed of the emergent situation, and (3) the agent acts reasonably to save the principal from loss. When in emergency the principal can be contacted the agent cannot do anything beyond his authority unless he has obtained principal's instructions. However, if the principal after being informed of the 53

Illustration(a) to section 188, The Indian Contract Act, 1872. Section 192, Indian Contract Act, 1872. 55 Section 191, Indian Contract Act, 1872. 56 Amrit Lal v Bhagwandas, AIR 1939 B 435 57 Section 189, Indian Contract Act, 1872 54

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unforeseen emergency fails to give instructions within fixed time or reasonable time, the agent can do all such things which can save the principal from loss, even though acts so done are beyond agent's authority. In Firm Roop Ram Bhagwan Das v. Nanak Ram Chhaju Ram,58 the plaintiffs, as commission agents bought certain gunny bags for defendants, the principal. Before date of delivery the plaintiffs telegraphed to defendants to remit the purchase price within 24 hours, otherwise, they would be compelled to sell at market rate at risk of defendants. The plaintiffs contracted to sell the bags at market rate. The court held that the plaintiffs had implied authority to settle contract at market rate. It is clear from section 189 of the Indian Contract Act that if there is no emergency, the acts done by an agent in excess of his authority cannot bind the principal. Further, section 188 of the Indian Contract Act states that the agent can do acts which are incidental to the authorized acts. The incidental acts are those acts which are reasonably necessary to do the authorized acts. Thus, it is evident that where there is neither emergency nor is the act done beyond authority incidental to authorized act a contravention of authority by the agent is not justified. But, if such act is ratified by the principal, the principal would be liable to third person.59 For example, an authority to receive payment in cash does not justify the receipt of payment otherwise than in cash; the latter does not bind the principal unless ratified.60 However, if the rights of third parties are affected the principal's ratification of the agent's act cannot validate the action which was initially without any authority.61 Section 227 of the Contract Act provides that when an agent does more than he is authorized to do and when the part of which he does is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority, is binding as between him and his principal.' For example, A being owner of a ship and cargo authorises B to procure an insurance for 4000 rupees on the ship. B procures a policy for 4000 rupees on the ship and another for like sum on the

58

Firm Roop Ram Bhagwan Das v. Nanak Ram Chhaju Ram, A.I.R. (1927) L. 493, 494. Sections 196 and 226, The Indian Contract Act,l872. 60 Bharat Sarvodaya Mills Co.Ltd. v. Shree Ram Mills, A.I.R. (1959) B. 309. 61 Siten Bose v. Anand Bazar Patrika (Pvt.) Ltd., (1980) 1 Cal. L.J. 426. 59

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cargo. A is bound to pay the premium for the policy on the ship but not the premium for the policy on the cargo.62 However, section 228 of the Indian Contract Act provides that when an agent does more than he is authorized to do and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognise the transaction. It is, thus, clear that when an authorized act of an agent cannot be separated from his unauthorized act, the principal is not bound to recognise the transaction. For instance, A authorises B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of 6000 rupees. A may repudiate the whole transaction.63 The question naturally arises what will happen if a third party who contracts with agent knows that the agent is exceeding his authority. The answer is very simple. The principal cannot be held liable unless he ratifies the act. (b) When agent acts without authority Where one person does an act for another but without his knowledge or authority, such person for whom that act is done may elect to ratify or disown the act. If he ratifies the act, an agency by ratification will come into existence and consequently, the ratifier (principal) is liable to the third person for such act.64 However, the ratification is effective only when the act is done i.e. the contract is made on behalf of ratifier and is lawful. No question of ratification can arise in case of a void contract. 65 However, a minor's contract can be ratified because he can be appointed as an agent.

62

Illustration to section 227, Indian Contract Act,l872. Illustration to section 228, The Indian Contract Act, 1872. 64 Sectionsl96,226, The Indian Contract Act, 1872. 65 Mauji Ram v. Tara Singh, (l88l) 3 All.852. See also Madura Municipality v. Alagirisami',(1939) Mad.928; Kishanlal Mehrotra v. Union of India,A.I.R.(1961) Punj.5; Harsaran Das v. Executive Officer,(1962) All.L.J. 676;Bengal Coal Co. v.Union of India,A.I.R. (1971)Cal.219. 63

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(c) Duty in agency by estoppel (i.e. when agent's authority is 'apparent' or 'ostensible') An 'apparent' or 'ostensible' authority of an agent is one which appears to others. Such authority arises where an agency is created by estoppel. An 'agency by estoppel 66 cannot be created unless following three conditions are present: (a) a representation, (b) a reliance on the representation, and (c) an alteration of position (by maker of representation) resulting from reliance.67 The agency by estoppel (or holding out) has got statutory recognition in India. Section 237 of the Indian Contract Act provides for such agency. This section states that when an agent has, without authority, done acts or incurred obligations to third party on behalf of his principal, the principal is bound by such acts or obligations if he has by words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent's authority. For example, A consigns to B certain goods for sale and gives him instruction not to sell under a fixed price. C being ignorant of B's instruction enters into a contract with B to buy goods at a price lower than the reserved price. A is bound by the contract68 on the basis of an agency by estoppel. The liability under section 237 of the Contract Act is, thus, independent of any actual or real authority of the agent. The principal is liable to third person under agency of estoppel. He cannot defend merely on the ground that he by word or conduct did not intend to confer actual authority on the agent to make contract on his behalf. The principal is bound if the act is done on his behalf and is within apparent authority of the agent. In Kunj Kishore v. W.K. Porter,69 the shareholders and directors of a limited company induced the people to believe that certain firm was their permanent agent and was authorized to raise money on their behalf. The manager of that firm executed and signed Hundis on behalf of the company. It was held that under the circumstances the company was liable to a holder of such Hundis in due course, though the agent firm was not legally authorized. The court held that the transaction was within ostensible authority of the agent because the appellant had paid

66

An expression adopted under English Law to denote a kind of agency. Rama Corporation v. Proved Tin and General Investments (1952) 2 Q.B. 147,149,150 68 Illustration(a) to section 237, The Indian Contract Act, 1872. 69 Kunj Kishore v. W.K. Porter, A.I.R. (1914) All. 238. 67

23

money for Hundis in the belief that the agent had a valid authority. 70 The principal is liable in the cases where agent has exceeded his authority provided the contracting party (i.e. the third party) has no notice that the agent has exceeded his authority. In Ram Pertap v. Mar shall,71 the Privy Council held that the right of a third party against the principal on the contract of his agent, though made in excess of the agent's actual authority, can be enforced if the contracting party has been led into an honest belief that the agent was having an authority to make the contract. However, section 237 of the Contract Act does not apply unless an agency exists between principal and agent. In Benaras Bank Ltd, v. Prem & Co.,72the wife handed over certain shares to her husband merely for safe custody. The husband, without having an authority, pledged the shares with Bank and in lieu overdrew money. In a suit brought by the Bank to recover money, the court held that there was no relationship of principal and agent between the husband and the wife and, therefore, this section does not apply and shares of wife were not liable for the amount due on the overdraft. It is to be noted that, ordinarily, the third person dealing with the agent is supposed to take reasonable care to enquire whether the agent has an actual authority or not. But, in the cases where estoppel creates an agency, he is free from such burden. He has to believe honestly on the basis of authority of the agent. Under such apparent authority the principal may be liable even though the act of the agent is fraudulent. (d) The principal is bound by information given to agent by third party The general rule is that a notice given by third person to an agent is deemed in law a notice to his principal.73 But, it is necessary that the notice given to or information received by him must be in the course of business which the agent transacts for his principal.74 For instance, in the case of Kulsekarapatnam Hand Match Workers Cottage

70

Fazal Illahi v East India Railway, AIR 1922 All. 324. Ram Pertap v. Mar shall, ILR (1989) 26 Cal. 701 PC. 72 Benaras Bank Ltd, v. Prem & Co., AIR 1937 All. 255. 73 Section 229, The Indian Contract Act, 1872. 74 Ibid. 71

24

Industrial Society Ltd, v, Radhelal Laloo75 the court held that an intimation of the fact of rejection of part of goods by the buyer to the agent of the seller is due intimation to the principal himself.76 (e) Duty for misrepresentation or fraud Section 238 of the Indian Contract Act says that misrepresentation made or frauds committed by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been committed by the principals; but misrepresentation made or frauds committed by agents in matters which do not fall within their authority do not affect principals. The section, thus, lays down two principles of law. The first principle is that the principal is liable for misrepresentation made or fraud committed by his agent. But, it is necessary that the misrepresentation must have been made or fraud must have been committed within agent's authority. For example, where certain goods were consigned by third party to the agent to carry them (in boat) for the principal and the agent misappropriated them in course of business, the principal was held liable.77 In other words, a principal is liable even though the misrepresentation or fraud- solely benefits the agent. From the first principle it follows that the principal is also liable for torts committed by his agent during course of employment. But, this section cannot be construed to exonerate the agent for his personal liability. The principal and the agent are joint tort-feasors. They are, therefore, liable jointly as well as severally. The agent cannot plead his exemption from liability because the exemption may encourage him to become more negligent. He cannot also be permitted to escape personal liability for his wrongs only on the ground that it was his principal and not he • (agent) who has benefitted by the wrong.78 Secondly, section 238 of the Contract Act lays down that when misrepresentation made or fraud committed by the agent does not fall within his authority, the principal is not liable. Thus, in State Bank of India v. Smt. Shyama

75

Kulsekarapatnam Hand Match Workers Cottage Industrial Society Ltd, v, Radhelal Laloo , A.I.R. (1971) M.P. 191. 76 Ibid. 77 Dina Bandhu v. Abdul Latif, A.I.R.(1923) Cal. 157. 78 Mohammad Khaja v. Akber Ali, A.I.R.(1955) Hyd. 150.

25

Devi,79 ‘the husband of respondent gave a cheque and certain money to a clerk of the bank of his acquaintance with direction to deposit them in his account. But, the husband did not take receipt of cheque and money from the clerk. The clerk misappropriated money and cheque proceeds. The bank was held not liable. The Supreme Court held that the employer (i.e. principal) was not liable for act of servant (agent) if the cause of loss or damage occurred without his actual fault and without the fault or neglect of his agents or servants in the course of his employment.80 Under English law the principal is not liable for fraud or misrepresentation of his agent unless (1) he intends or knowingly permits the agents to make a false statement or (2) his agent acting within the actual or apparent scope of his authority makes a statement with knowledge of its falsity or recklessly not caring whether it be true or false. (f) Duty of undisclosed principal The liabilities of an undisclosed principal can be examined under following sub-heads: (a). When the principal is totally undisclosed It is well settled that the principal is completely undisclosed when the agent contracts with third party in his own name without disclosing even the fact of agency. In such cases generally, the agent is personally liable. At the same time it is to be noted that except in certain cases81 the principal can also be sued by third party upon the contract.82 In those cases where both the principal and agent can be sued, the third party has right to elect whether he will sue the principal or the agent or the both. If he elects to sue the principal, the court may hold the principal liable. But, where the third party makes it clear to the principal that only the agent will be liable on the Section 230(1) & (2), The Indian Contract Act,1872. i.e. where the principal is a resident abroad and the contract is for sale or purchase of goods, or where the principal is a person who cannot be sued e.g. minor or a company yet to come into existence contract, he cannot, afterwards, hold the principal

79

State Bank of India v. Smt. Shyama Devi, A.I.R. (1978) S.C. 1263; (1978) 3 S.C.C. 399. (1978) 3 S.C.C. 399 para 24 at 407. See also M/s Shree Ram Refrigeration Industries v. State Bank of India, A.I.R.(1983) Pat. 203. 81 Section 231, The Indian Contract Act, 1872. 82 Section 234, The Indian Contract Act, 1872. 80

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liable. In such case the doctrine of estoppel is applied under section 234 of the Indian Contract Act. For instance, in Mahadeo Ganga Prasad v. Gauri Shankar,83 the plaintiff expressly warned the agent that he would be held responsible for the loss, and did not purport to make the principal liable. It was held that the principal could not be made liable subsequently. (b). When principal is partially undisclosed A principal can be treated as partially undisclosed when the agent discloses the fact of agency but not the name of his principal. The general presumption in cases of un-named principal is that the agent has personal obligations to third party. 84 But, the presumption seems to be not so strong as it is in cases where the principal is completely undisclosed. Nevertheless, the principal can be sued.85 For instance, where an agent disclosed his character as the secretary of a club, personal liability could not be imposed on him. 86 The English Law is that where an agent acts on behalf of an undisclosed principal, the principal when discovered can normally be sued.87 For instance, in Danzier v. Thompson,88 the agent was described in the contract of lease as the tenant. The court held that the principal was liable for the rent. The third party upon discovering the principal, may elect to sue either the agent or the principal, but he cannot sue both, while in India he can sue either the agent or the principal or both of them.

3.2 PERSONAL LIABILITY OF THE AGENT As a general rule when an agent acts on behalf of the principal in his dealings with a third person, a contractual relationship between the principal and the third party is formed and the agent is not personally liable. This is known as the principle of the agent’s immunity from

83

Mahadeo Ganga Prasad v. Gauri Shankar, A.I.R.(1950 ) Orissa 42. Section 230(2), The Indian Contract Act 1872. 85 Section 231, The Indian Contract Act, 1872. 86 North Western Provinces Club v. Sadullah(1898) 20 All. 497. 87 Fridman's Law of Agency, 3rd ed.(1971) at 190. 88 Danzier v. Thompson , (1944) K.B. 654. 84

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personal liability. “Neither the agent is entitled to enforce the contracts entered into on behalf of the principal, nor is he personally bound by them. This is subject to contract to contrary”.89 Exceptions to this principle are as under – 3.2.1 When the contract expressly provides – A person while entering into a contract with an agent may expressly stipulate that he would hold the agent personally liable in case of breach of contract. If the agent agrees to it, he will be personally liable. 3.2.2 When the agent acts on behalf of a foreign principal – When an agent has entered into a contract for the sale or purchase of goods on behalf of a principal resident abroad the presumption is that the agent undertakes to be personally liable for the performance of such a contract.90 The object is to avoid hardship to a third person which could be there in suing such a principal, or enforcing a decree against him. He can exclude his personal liability even in such a case by express provision to this effect in the contract. 3.2.3 When the agent acts for an unnamed principal Section 230(2) of the Indian Contract Act, 1872 makes it clear that in case of a contract where the principal is unnamed it is presumed that the agent undertakes to be personally liable. 3.2.4 When the agent acts for a principal not in existence The promoters of the company (yet to be incorporated) sometimes enter into contracts on behalf of the company, though in such a case the alleged principal has no existence till the time of incorporation.in sucha a case agent to held accountable in order that there is no failure to provide a remedy.91

89

Section 230, Indian Contract Act, 1872. Section 230(1), Indian Contract Act, 1872. 91 Lakshmishankar v Murtiram, (1904) 6 Bom. LR 1106. 90

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3.2.5 When the agent commits a breach of legal obligation When the agent fails to perform a legal obligation, such a contractual duty or a statutory duty, or commits a tort against a third person that renders him personally liable for the consequences thereof. 3.2.6 Liability of a pretended agent (Holding out) Where the agent pretends to have authority which he does not possess, he is personally liable. It is a special application of doctrine of estoppel and is known as liability by holding out.92 3.2.7 When the authority of agent is coupled with interest Where an agent has an interest in the subject matter of the contract entered into by him with the third party, his authority is coupled with interest. He has in such a case, the right to sue or be sued, but only to the extent of the interest in the subject matter. 3.2.8 Where trade usage or custom makes the agent personally liable Where there is a trade usage (as in mercantile transactions, example – bills of exchanges, promissory notes, etc.) or a custom making the agent personally liable, he will be so liable unless there is a contract to the contrary.

92

Section 235, Indian Contract Act, 1872.

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CHAPTER 4 – TERMINATION OF AGENCY

Section 201, of the Indian Contract Act describes several modes of termination of agency. An agency is terminated by 

The principal revoking his authority, or



The agent renouncing the business of the agency, or



The business of agency being completed, or



The death or insanity of the principal or the agent, or



The principal being adjudicated as insolvent under the provisions of any time for the time being force for the relief of the insolvent debtors.

However, section 201 is not exhaustive of the circumstances in which an agency can be terminated. The modes of termination of Agency falls under two heads – 1. Termination by the act of the parties 2. Termination by operation of law

4.1 TERMINATION BY THE ACT OF THE PARTIES 4.1.1 Agreement The relation of principal and agent is generally founded on mutual consent. It may be brought to an end by the same process which originated it, i.e. by agreement. It can be terminated at any time and at any stage. 4.1.2 Revocation by the principal The principal has full authority to revoke an agency, except in certain cases, at any time at his option either with or without any reason. The agent cannot, after revocation of agency, bind the principal for his further acts. Revocation may be express or implied. 30

4.1.3 Revocation by the agent As the principal can revoke the agent’s authority, so also the agent can renounce the agency. Renunciation may also be express or implied.93

4.2 TERMINATION BY THE OPERATION OF LAW 4.2.1 Performance of contract (business of the agency being completed) The most obvious way of putting an end to the agency is to do what the agency has undertaken to do. Where, therefore, the agency is for a particular object, it is terminated when the object is accomplished or when the accomplishment of object becomes impossible.94 4.2.2 Expiry of time Where the agent is appointed for a fixed period of time, it comes to an end after the expiry of that time even if the work of the agency is not completed. 4.2.3 Death of the principal or agent When the death of the principal or the agent takes place, the agency is terminated.95 When the agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take, on the behalf of the representatives of the principal, all the reasonable steps for the protection of interests entrusted to him. 96 4.2.4 Insanity of the principal or agent An agency comes to an end when the principal or the agent becomes of unsound minds.97

93

Section 207, Indian Contract Act, 1872. Section 201, Indian Contract Act, 1872. 95 Ibid. 96 Section 209, Indian Contract Act, 1872. 97 Ibid. 94

31

Where there occurred a change in the state of health of a client and he becomes mentally infirm, after giving a power of attorney to his counsel, it was held that such power of attorney becomes worthless.98 4.2.5 Insolvency of the principal The insolvency of the principal puts an end to the agency though nothing is mentioned in Section 201 of the Indian Contract Act, 1872 regarding insolvency of the agent.99

98 99

Mahendra Pratap Singh v Padam Kumar, AIR 1993 All. 143. Section 201, Indian Com=ntract Act, 1872.

32

CONCLUSION

Agency in law connotes an authority or capacity in one person to create legal relations between a person, occupying the position of principal, and third parties. Thus in an agency, one person employs another person to represent him or to act on his behalf, in dealing with the third person. It is almost impossible for any man in the modern complex world to transact all his business by himself. Whatever a person competent to contract may do by himself, he may do through an agent. There are, of course, exceptions to this rule. A person, for example, cannot marry through an agent. The function of an agent is to bring about contractual relationship between the principal and third parties. Thus, the agent is merely a connecting link between the principal and third parties. Representative character and derivative authority may briefly be said to be distinguishing feature of an agent. The test is – has he any power of representing the principal i.e. making the principal answerable to a third party? If he has this power, then there is the relation of agent and principal. The fiduciary element in agency, though the key to much of the law governing this relation, is not its essential element. It is not every agent is in fiduciary position vis-à-vis the principal.

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BIBLIOGRAPHY

BOOKS – 1. AC Mitra, LAW OF CONTRACT AND SPECIAL RELIEF, Universal Law Publishing Co, 5th Edition, (2005). 2. Akhileshwar Pathak, CONTRACT LAW, New Delhi: Oxford University Press, (2011) 3. Avtar Singh, CONTRACT AND SPECIFIC RELIEF, Eastern Book Company, Lucknow, 13th Edition, (2013). 4. M Krishnan Iyer, LAW OF CONTRACTS, Orient Longman, Hyderabad, 5th Edition, (2004). 5. Mulla(revised by Anirudh Wadhwa), MULLA’S INDIAN CONTRACT ACT, LexisNexis, 15th edition. 6. Narender Kumar, INDIAN CONTRACT ACT, 1872, Allahabad Law Agency, 1st Edition, (2015).

WEBLIOGRAPHY – 1. www.law.harvard.edu 2. www.jstor.org 3. www.papers.ssrn.com 4. www.manupatra.com 5. www.heinonline.com 6. www.scconline.com

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