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Agency Relationships in Indian Contract Law: Types of Agency and Agents

Updated: Feb 4

Agency relationships are a critical aspect of contracts under Indian Contract Law. In an agency relationship, a principal grants authority to an agent to act on their behalf, creating a legal relationship between the two parties.


Agency under Contract act in India

Understanding the types of agency and agents is essential in determining the authority of the agent and who is liable for any actions or obligations arising from the contract.


Let's take a closer look at the different types of agency and agents under Indian Contract Law, along with relevant case laws.



Content:

I. Agent and Principal a. Rights and Duties of Agent b. Rights and Duties of Principle

II. Types of Agency III. Types of Agents


I. Agent and Principal


An agent is a person who acts on behalf of another person, known as the principal, in dealings with third parties. The principal grants the agent the authority to act on their behalf, and the agent is obligated to act in the best interests of the principal. Section 182 of the Contract Act, 1872 defines an agent as "a person employed to do any act for another or to represent another in dealings with third persons."


A. Principal

The principal is the person who authorizes the agent to act on their behalf. The principal is responsible for any obligations and liabilities arising from the actions of the agent within the scope of their authority. Under the Indian Contract Act, 1872, the rights and duties of a principal in an agency relationship are specifically laid down. Let's take a look at them one by one:


Rights of the Principal:

  1. Section 186: Right to control the actions of the agent: The principal has the right to give instructions to the agent regarding their actions and to monitor their performance. The principal can also specify the limits of the agent's authority and the scope of their duties.

  2. Section 213: Right to receive information from the agent: The principal has the right to receive information from the agent about the performance of their duties and any material facts that may affect the contract.

  3. Section 217: Right to receive the benefits of the contract : The principal has the right to receive the benefits of the contract, such as the payment of any consideration or the performance of any obligations by the other party.

Duties of the Principal:

  1. Section 219: Duty to compensate the agent : The principal has a duty to compensate the agent for their services, as specified in the agreement. The compensation can be in the form of a commission, salary, or any other agreed-upon mode of payment.

  2. Section 222: Duty to indemnify the agent : The principal has a duty to indemnify the agent for any losses or damages that they may suffer while performing their duties, provided that the losses or damages are not due to the agent's negligence or misconduct.

  3. Section 185: Duty to perform their obligations under the contract : The principal has a duty to perform their obligations under the contract, such as the payment of consideration or the performance of any obligations specified in the agreement.

  4. Section 222: Duty to act in good faith : The principal has a duty to act in good faith towards the agent and to avoid any misrepresentations or concealments of material facts.


B. Agent


The agent is the person authorized by the principal to act on their behalf. The agent may be held liable for any actions taken outside the scope of their authority. Under the Indian Contract Act, 1872, an agent also has specific rights and duties in an agency relationship:


Rights of the Agent:

  1. Section 184: Right to receive compensation: The agent has the right to receive compensation from the principal for their services as per the agreement.

  2. Section 218: Right to retain the benefits of a contract: If the agent has incurred expenses while performing their duties, they have the right to retain the benefits of the contract to the extent of those expenses.

  3. Section 229: Right to receive remuneration for completed transactions: The agent has the right to receive remuneration for completed transactions, even if the contract is terminated before the completion of the remaining transactions.

Duties of the Agent:

  1. Section 211: Duty to follow principal's instructions: The agent has a duty to follow the instructions of the principal regarding their actions and to act within the limits of their authority.

  2. Section 213: Duty to disclose material facts: The agent has a duty to disclose any material facts to the principal that may affect the contract or the principal's decision-making process.

  3. Section 214: Duty to maintain accounts: The agent has a duty to maintain accounts of all transactions and to provide the principal with a detailed statement of accounts upon request.

  4. Section 215: Duty to remit sums received on behalf of the principal: The agent has a duty to remit any sums received on behalf of the principal promptly and to keep the principal informed about the receipt and payment of such sums.

  5. Section 218: Duty not to deal on their own account: The agent has a duty not to deal on their own account in the same business as that of the principal without the principal's consent.


C. True Test for Agency in Contract Law


The true test of agency is whether the principal has the right to control the actions of the agent. In other words, if the principal has the authority to give instructions to the agent regarding the performance of their duties, then an agency relationship exists.


This control may be either direct or indirect, and it may arise from a written or oral agreement between the principal and the agent. It is important to note that the existence of an agency relationship does not necessarily depend on the formal designation of the parties as principal and agent, but on the actual relationship between them, including the control exercised by the principal over the actions of the alleged agent.


One case that illustrates the importance of the principal's right to control the actions of the agent is the case of Laxmi Engineering Works v. P.S.G. Industrial Institute. In this case, the Supreme Court of India held that the true test of agency is the right to control the actions of the agent.

The appellant had appointed an agent to distribute its goods, including goods bearing the disputed trademark, in the respondent's territory.


The respondent contended that the trademark belonged to them, and the appellant had no right to use it. The appellant, on the other hand, argued that the trademark was registered in their name, and the agent had the authority to use it.

The court held that the true test of agency is the right to control the actions of the agent. In this case, the appellant had the right to control the use of the trademark by the agent.


The court observed that the agreement between the appellant and the agent clearly stated that the agent was appointed only for the purpose of distribution and that he had no authority to use the trademark in any other manner. Therefore, the agent was not authorized to use the trademark in the manner in which he did.

The case highlights the importance of the principal's right to control the actions of the agent in determining the existence and scope of an agency relationship. The right to control is a crucial aspect of agency law, as it enables the principal to ensure that the agent acts in accordance with their instructions and in their best interests.

II. Types of Agency

There are three types of agency relationships under Indian Contract Law: expressed agency, implied agency, and apparent agency.


A. Expressed Agency


An expressed agency is created when the principal expressly appoints the agent to act on their behalf. The authority of the agent is explicitly stated in the contract. Section 183 of the Contract Act, 1872 deals with expressed agency.


For example, in the case of Chandra Prakash v. Chandrika Prasad, the Supreme Court held that the sale of property by a power of attorney must be expressly authorized in writing, and any oral agreement between the principal and the agent would not be binding.


B. Implied Agency


An implied agency is created when the authority of the agent is not explicitly stated but is implied by the circumstances of the relationship between the principal and the agent. Section 186 of the Contract Act, 1872 deals with implied agency.


For example, in the case of Laxmidas Morarji v. Dharamsi Haji, the Bombay High Court held that when a person entrusts another person with their goods for sale, there is an implied authority to do all that is necessary to sell the goods.


C. Apparent Agency


An apparent agency is created when a principal allows an agent to appear to have authority to act on their behalf, even though no express or implied agency relationship exists. The principal is liable for the actions of the agent in such cases. Section 237 of the Contract Act, 1872 deals with apparent agency.


For example, in the case of Bank of India v. R.L. Vyas, the Supreme Court held that if a principal allows an agent to appear to have authority to act on their behalf, the principal would be bound by the actions of the agent within the scope of their apparent authority.


III. Types of Agents


There are three types of agents under Indian Contract Law: universal agent, general agent, and special agent.


A. Universal Agent


A universal agent is an agent authorized to act on behalf of the principal in all matters. The authority of a universal agent is broad and unlimited. Section 191 of the Contract Act, 1872 deals with universal agency. For example, in the case of Rai Bahadur Manoranjan v. Ram Prosad,the Calcutta High Court held that an agent appointed as a universal agent has the authority to deal with all the property of the principal, subject to any limitations specified in the contract.


B. General Agent


A general agent is authorized to act on behalf of the principal in a specific area or type of business. The authority of a general agent is limited to the specific area or type of business for which they are authorized. Section 192 of the Contract Act, 1872 deals with general agency.


For example, in the case of Ram Prasad v. Satish Chandra, the Calcutta High Court held that a power of attorney given to an agent for managing a specific business does not give the agent the authority to create a mortgage on the property belonging to the principal.


C. Special Agent


A special agent is authorized to act on behalf of the principal for a specific transaction or purpose. The authority of a special agent is limited to the specific transaction or purpose for which they are authorized. Section 194 of the Contract Act, 1872 deals with special agency.


For example, in the case of Union of India v. S.R. Karim, the Supreme Court held that a special agent appointed by the government to sell goods at an auction has no authority to waive the condition of the sale unless expressly authorized to do so.



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