Meaning of Agency
Agency, as is well-settled, is a legal concept, which is employed by the Court when it becomes necessary to explain and resolve the problems created by certain fact situation. In other words, when the existence of an agency relationship would help to decide an individual problem, and the facts permit a Court to conclude that such a relationship existed at a material time, then whether or not any express or implied consent to the creation of an agency may have been given by one party to another, the Court is entitled to conclude that such relationship was in existence at the time, and for the purpose in question.
Section 182 defines the terms “Agent” and “Principal” as follows:
An “agent” is a person employed to do any act for another or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the “principal”.
In an agency one person (principal) employs another person (agent) to represent him or to act on his behalf, in dealings with a third person. The act of the agent binds the principal in the same manner in which he would be bound if he does that act himself.
The agent may be expressly or impliedly authorized to do an act on behalf of the principal. If I authorize my agent to sell my house to a third person and he does so, I become bound for the sale of the house to the third person in the same way as if I myself contracted to sell the house to the third person. The agent is only a connecting link between his principal and the third person. Contracts entered into through an agent and obligation arising from the acts done by an agent, may be enforced in the same manner, and will have the same legal consequence, as if the contract had been entered into and the acts done by the principal in person.( Section 226)
Explaining the definition of agent as stated in Section 182, Dhavan, J. observed in Loon Karan v. John and Co., A.I.R. 1967 All. 308, 311:
“According to this definition, an agent never acts on his own behalf but always on behalf of another. He either represents his principal in any transactions or dealings with a third person, or performs an act for the principal. In either case, the act of the agent will be deemed in law to be not his own but of the principal. The crucial test of the status of an agent is that his acts bind the principal.”
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Establishing Agency
Use of the word “agent” for a person is not conclusive proof of the fact that there is agency in law between the parties. “The Court must examine the true nature of the agreement and the subsequent dealings between the parties and then decide whether it established a relationship of agency under the law. It is common experience that the word ‘agent’ is frequently used to describe a relationship which is not an agency in law.” Thus, in Loon Karan v. John and Co. A.I.R. 1967 All. 308, it has been held that conferring a licence on a person by the Government of Assam to have the exclusive right to purchase yarn and sell it to the consumers, did not make such a person as Government’s agent even though he had been described as such in the agreement. In this case, it was found that in fact the person so authorized was acting solely in his own name, and there was no indication to suggest that he was an agent, even by implication.
Similarly, it has been held in Sakthi Sugars Ltd. v. Union of India A.I.R. 1981 Delhi 212, that the State Trading Corporation, which is a legal entity, when permitted to export sugar, does not become the agent of Union of India, while exercising that commercial function. Its position is just like that of an individual, who, when authorized to export some goods, has the position only of a licensee rather than an agent of the Union of India.
It is well settled that agency is a legal concept which is employed by the Court when it becomes necessary to explain and resolve the problems created by certain fact situation.
When the existence of an agency relationship would help to decide an individual problem, and the facts permit a Court to conclude that such a relationship existed at a material time, then, the Court said that “whether or not any express or implied consent to the creation of an agency may have been given by one party to another”, the Court would be entitled to conclude that such relationship was in existence at the time and for the purpose in question.
In Chairman, Life Insurance Corpn. v. Rajiv Kumar Bhaskar A.I.R. 2005 S.C. 3087, the Salary Savings Scheme floated by the L.I.C. provided for a tripartite arrangement under which, the employer accepted the sole responsibility to collect premium from its employees and remit the same by means of one cheque to the corporation. No individual premium notice was required to be sent to any employee and furthermore, no receipt was to be given there for. The employer was to inform the Corporation about changes in staff including factum of cessation of employment. The employees were not made aware of communication between the L.I.C. and the employer. In the light of above stated fact, it was held that the employer, though not agent of the L.I.C. qua its Regulations, it could be inferred that the employer had implied authority to act as agent of the L.I.C. in view of Section 186 of the Indian Contract Act, 1872.
The Court explained that “an agent”, in terms of Section 182 of the Contract Act, 1872, would be a person employed to do any act for another, or to represent other in dealings with third parties and the person for whom such act was done or who was so represented, was called “the principal”, so explained the Court held the employer was acting on behalf of the Corporation, and a contract of agency might be inferred. So ruled, the Court held, for failure on the of the employer to payment of premium, the L.I.C. liable.
The Court said that it was well settled that for the purpose of determining the legal nature of the relationship between the alleged principal and agent, the use of or omission of the word “agent” was not conclusive. If the employee had reason to believe that his employer was acting on behalf of the Corporation, a contract of agency might be inferred.
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The Court reiterated and approved the decision in Delhi Electric Supply Undertaking (DESU) v. Basanti Devi A.I.R. 2000 S.C. 43, wherein the Apex Court stated the law thus:
…Formation of the contract of insurance is between L.I.C. and the employee of DESU Scheme has been introduced by the L.I.C. purely on business consideration and not for any particular benefit of insurance conferred on the employee working in an organization. Though in the proforma letter written by DESU to L.I.C. it is mentioned that DESU would be an agent of its employer and not that of L.I.C. but this understanding between L.I.C. and DESU was not communicated or made known to the employee. As far as the employee is concerned he is told that premium will be deducted from his salary every month and remitted by DESU to L.I.C. under an agreement between L.I.C. and DESU. For the employee of DESU, therefore, DESU had implied authority as an agent of L.I.C. to collect premium on its behalf and then pay to L.I.C… in the nature of the Scheme, the employee was made to believe that it is the duty of the employer though gratuitously cast on him by L.I.C. to collect premium by deducting from the salary of each employee covered under the scheme every month and remit the same to L.I.C. by means of one consolidated cheque…. As to what is the arrangement between L.I.C. and DESU, the employee is not concerned. In these circumstances DESU cannot perhaps be held liable under the Act…..
The Apex Court referred to the decision in Brawwhite v Worcester Works Finance Ltd. (1969) 1 A.C. 552, wherein the House of Lords took a similar view in the following terms:
The relationship of principal and agent can only be established by the consent of the principal and the agent. They will be held to have consented if they have agreed to what amounts in law to such a relationship and even if they have professed to disclaim it… But the consent must have been given by each of them, either expressly or by implication from their words and conduct.
In Shree Digvijay Cement Co. Ltd. v. State Trading Corporation of India Ltd. A.I.R. 2006 Del. 276, there was a contract for purchase of cement from the plaintiff by the State Trading Corporation for supply of cement to foreign purchaser. Craft papers (Packaging Material) was imported by plaintiff for and on behalf of STC. There was conversion of papers into bags by plaintiff for use of STC. Suit was filed for recovery of amount spent on unutilized craft paper bags by plaintiff against STC. The Delhi High Court held that suit was bound to be decreed in view of relationship of principal and agent in respect of transaction regarding packaging material between the parties.
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In Delhi Electric Supply Undertaking (DESU) v. Basanti Devi A.I.R. 2000 S.C. 43, under an agreement between the DESU and the L.I.C. under which the employer, i.e., DESU was to deduct insurance premium every month from the salary of its employee under Salary Savings Scheme of the L.I.C. and the same was to be transmitted to the L.I.C. It means that the employer had ostensible authority from the LIC to collect premium from its employees on behalf of L.I.C.
It was held that the employer, in such a case was an agent of the L.I.C. for collecting premium from its employees, under Section 182, though the employer will not be an insurance agent under the Insurance Act.
Further, the employer failed to remit the premium deducted from the salary of the employee to the L.I.C., on the death of the employee. In an action by the legal representatives of the employee under the Consumer Protection Act, it was held by the State and the National Commission that the employer was liable to pay to the representatives of the employee amount equivalent to the policy of the employee. LIC, was, however discharged from the liability.
On appeal, the Supreme Court held that the LIC was wrongly absolved from the liability by the State and National Commission. The Supreme Court directed that the LIC should pay Rs. 50,000 as insurance claim to Smt. Basanti Devi, the widow of the employee with interest, thus substituting LIC for DESU for payment of the insurance claim.
For default in remitting the premium, DESU was directed by the Supreme Court to pay Rs. 25,000 as cost of the proceedings, to Smt. Basanti Devi.
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Different kinds of Agents in Agency
Depending on the kind of authority given to the agent to act on behalf of the principal, the agents are of various kinds.
(1) Auctioneers
An auctioneer is an agent whose business is to sell goods or other property by auction, i.e., by open sale. The authority vested in him is to sell the goods only, and not to give warranties on behalf of the seller, unless expressly authorized in that behalf. He is a mercantile agent within the meaning of Section 2(9) of the Sale of Goods Act. If the owner of the goods puts him in possession of the goods, although the authority to sell has not been conferred in him, a buyer in good faith from such an auctioneer will get a good title in respect of the goods.( See proviso to Section 27, Sale of Goods Act, 1930. Also see Section 178, Indian Contract Act, regarding pledge by a mercantile agent)
Thus, if he has been authorized to sell the goods only subject to a reserved price but he sells the same to an innocent and bona fide buyer below the reserved price, the buyer will get a good title in respect of such goods.
(2) Factors
A factor is a mercantile agent who is entrusted with the possession of the goods for the purpose of sale. He has also the power to sell goods on credit and also to receive the price from the buyer. If the owner has put a factor in possession of the goods or the document of title but without authorizing him to sell the goods, the sale of goods by him will convey a good title to a bona fide buyer ( Section 27, Sale of Goods Act, 1930).
According to Section 171 of the Contract Act, a factor has right of general lien over the goods belonging to his principal, which are in his possession, for the general balance of account.
(3) Brokers
A broker is an agent who has an authority to negotiate the sale or purchase of goods on behalf of his principal, with a third person. Unlike a factor, he himself has no possession of the goods. He merely makes the two parties to enter into a contract. He gets his commission whenever any transaction materializes through his efforts.
(4) Del Credere Agents
Generally, the function of an agent is over after a contract is established between his principal and a third person. He is not answerable to his principal for the failure of the third person to perform the contract. A del credere agent constitutes an exception to this rule. He is a mercantile agent, who, on the payment of some extra commission, known as del credere commission, guarantees the performance of the contract by the third person. If in such a case the third person, for instance, fails to pay for the goods supplied to him, the principal can bring an action against the del credere agent for the same. The liability of the del credere agent, like that of a surety, is secondary and the same arises if the third person fails to pay to the principal what is due under the contract.
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Features of a contract of Agency
1. The principal should be competent to contract. (Section 183).
2. The agent may not be competent to contract. (Section 184).
3. No consideration is necessary to create an agency. (Section 185).
1. The principal should be competent to contract (Section 183)
According to Section 183, “any person who is of the age of majority according to the law to which he is subject and who is of sound mind, may employ an agent.”
It has already been noted that for the validity of a contract, the parties have to be competent to contract. Since in an agency, the agent creates a contractual relationship between his principal and the third persons, it is necessary that the principal and the third person should be competent to contract. If a person is not competent to contract and, therefore, is incapable of making a contract, he cannot make a contract through an agent either. A person can do only such thing through an agent which he is himself personally capable of doing. Therefore, if the principal is a minor or of unsound mind, he is incapable of being bound through the acts of his agent.
Although a minor himself cannot appoint an agent, there is nothing in Section 183, which prohibits the guardian of a minor from appointing an agent for him.(Madanlal Dhariwal v. Bherulal, A.I.R. 1965 Mysore 272)
When a client gives a power of attorney to his counsel, while he is in good state of health and mental understanding, but subsequently the client becomes old, feeble, weak, unable to comprehend under a mental incapacity, the power of attorney becomes worthless after the change in the state of health and mental infirmity of the client.(Mahendra Pratap Singh v. Padam Kumar Devi, A.I.R. 1993 All. 143)
2. The agent may not be competent to contract (Section 184)
Section 184 makes the following provision regarding the capacity of an agent.
“As between the principal and a third person, any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained.”
The capacity of an agent could be looked from two angles. Firstly, the capacity of the agent to act on behalf of the principal, so as to bind his principal and the third person. Secondly, his capacity to bind himself by a contract between himself and his principal.
So far as the agent’s capacity to bind the principal and the third person is concerned, for that any person may become an agent. It means that even if an agent is a minor or otherwise incompetent to contract, he is capable of creating a valid contract between his principal and the third person. In this context, the agent is only a connecting link between the two parties. What is necessary is that those two parties should be competent to contract, rather than the agent. If I can make my letter to speak for me and create any contract with another person, why cannot the same thing be done through a person who is not competent to contract?
So far as the agent’s capacity to bind himself to the principal is concerned, for that it is necessary that the agent should also be competent to contract. Section 184, therefore, provides that no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. Thus, if an agent is a minor, through him a valid contractual relationship will be created between the principal and the third person, though such an agent will not himself be responsible for his acts to his principal.
3. No consideration is necessary to create an agency (Section 185)
Section 185 provides that no consideration is necessary to create an agency. From the very nature of the contract of agency, the principal agrees to be bound by the acts done by the agent on his behalf and that serves as a sufficient detriment to the principal. Moreover, the principal’s duty to indemnify the agent is also there. The law does not require any consideration as such for the validity of a contract of agency.
Law does not require any consideration, as such, for the validity of a contract of agency. Since consideration may be of some benefit to the plaintiff or some detriment to the defendant, the principal’s willingness to be bound by the acts done by the agent on his behalf serves as a sufficient detriment to the principal. Besides, law imposes a duty on the Principal to indemnify the agent. (Sections 222-23, the Indian Contract Act, 1872)
For instance, in Adamson v. Jarvis(1827) 4 Bing 68, the plaintiff, an auctioneer, sold certain cattle on the instruction of the defendant. It subsequently turned out that the livestock did not belong to the defendant, but to another person, who made the auctioneer liable and the auctioneer in his turn sued the defendant for indemnity for the loss he had thus suffered by acting on the defendant’s directions.
Generally, an agent is remunerated by way of commission for services rendered, but no consideration is immediately necessary at the time of his appointment. Though, formally not required, the provision of Section 185 cannot deprive an agent, e.g., a legal practitioner of his remuneration, where an agreement to work without remuneration has not been proved.( Mohd. Moinuddin v. Mir Ahmed, A.I.R. 1965 A.P. 409)
It is stated that this very fact of employment and the credit gained thereby on the one hand, and the promise to act on the other, are sufficient to constitute the employment of agency. Once an agent accepts the employment of agency, he immediately becomes liable for the agent’s duties.
For example, where a person undertook on behalf of co-sharers of land to make an application concerning a land under a law relating to land revenue, he became an agent for that purpose, even though there was no consideration for his appointment.( Bhoobun Chunder Sen v. Ram Soonder Surma Mozoomdar, (1877-78) I.L.R. 3 Cal. 300.)
However, a mere gratuitius employing or authority does not bind the agent to do anything. If having neither reward nor promise of reward, he does nothing at all, the principal does not appear to have any remedy against the agent.
Thus, no consideration at Common Law is required to give to a person the authority of an agent, or to make him liable to the principal for negligence, such matters may be defined by the terms of a contract and are in their nature, independent of contract.