Author: Ridhima Singhal
1. INTRODUCTION: LAW OF AGENCY
The Law of Agency is concerned with the contractual relationship between two people i.e. the principal and the agent in which the latter acts on behalf of the former. This relationship is what we call ‘Agency’. The logic behind the law of agency is that a person cannot accomplish all his tasks by himself which is why he appoints another person as a mediator to act on his behalf and accomplish those tasks for him or simply to represent him with the third parties. In such a case, the principal is legally bound and liable for all the acts of the agent that he does in the capacity and authority of being an agent.
The principle behind the law of agency is based upon the Latin legal maxim “qui facit per alium, facit per se ipsum”. It means that “the one who acts through another is deemed in law to do it himself ” (“Agency under Contracts”). Essentially, here in this maxim lies the basic essence or crux of the law of agency i.e. the acts done by an agent in his authority as an agent are considered to be done by the principal himself making him absolutely liable for them.
Agency is recognized universally in all modern legal systems prevalent in the world. It kind of plays a huge role in maintaining the world order. It fulfills the most diverse functions in both public and private law; in particular, it assists in organizing the division of labour in the national and international economy (Müller-Freienfels). It seems to provide most of the jobs and employment in the world and makes the tasks easier to accomplish. It also gives way to specialization. For instance, lawyers are better specialized and equipped to represent a common person in the court instead of the person himself which makes it quite obvious and prudent to let a lawyer be an agent to represent on the behalf of the concerned person in the court all thanks to their specialization.
In India, the law of Agency is governed by the Chapter X of the Indian Contract Act, 1872 which lays down the law for all kinds of contractual relationships including the one between the principal and the agent. Indian Contract Act, 1872 defines ‘agent’ and ‘principal’ as:
“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 an act is done , or who is so represented, is called the principal.” An illustration of a relationship of agency can be A, a car seller appoints B as a salesman. Here, B acts as the agent of A and any sale made by B would be deemed to be made by A himself making him liable for any breach in such a contract of purchase and sale.
The contract of agency can be created either orally or expressly in written or impliedly through conduct. Such a contract can also arise due to necessity or party or situation. For instance, if the third party believes B to be A’s agent due to his conduct, B is deemed in law to be A’s agent.
In the relationship of agency, the agent has certain duties and rights. Duties such as to conduct principal’s business according to his directions or prevailing customs in the absence of any directions, exercise adequate skill and diligence, communicate with the principal and get his consent, share the profit on transactions he does on behalf of the principal. His rights are to retain some part of profit on such transactions, indemnification against consequences of lawful and bonafide acts done by him on the principal’s behalf and compensation for any injury caused to him due to the principal’s negligence. Such a relationship essentially helps to run the world business.
This article aims to analyze the essential features of the contract of Agency in detail.
2. ORIGIN OF THE LAW ON AGENCY
The concepts develop because of the social needs that arise from time-to-time, especially the legal concepts. The doctrine of legal representation developed differently in different times and places, sometimes even within a single legal system (Müller-Freienfels). Initially, it seemed impossible that a different person could represent someone and create obligatory rights and duties between him and the third party. Even the official law of the Roman Empire never fully recognized the principle of representation. The explanation for this rejection lies mainly in the early Roman conception of a contractual obligation as a personal relationship binding the parties in some quasi-mystical way (Müller-Freienfels). As Roman law later developed, the need for specialized personal representation in commerce increased. This led to development of a legal system for representation which the Roman laws earlier opposed.
Roman Catholic Church canon law had its own special development, influenced by Hebraic theological concepts. Certain writers as early as in the 1200s, succeeded in constructing a type of agency relationship based on the position of procurator, a relationship intended to solve the representation problem in all except legal matters (Müller-Freienfels). A procurator is an agent who till today, represents others in the courts of law in the countries who have retained the Roman Civil law.
Around this time, the doctrine of agency developed in England as an expansion of the doctrine of master and servant. An agent can be directed to do a certain task but cannot be controlled or instructed on his actions. He is delegated with a certain part of the Principal’s authority. The situation is completely different between a master and a servant. A servant has no authority with respect to anything and can be completely controlled and directed regarding his tasks and actions and the way he needs to live.
Recognition of the principle of agency in the field of civil law was finally achieved in continental Europe during the ascendancy of natural law in the 17th century. In his work, Defensio Fidei Catholicae, Grotius added, in a theological context, that the principle of agency is based not on essential natural law but on nonessential natural law; that is, agency is not demanded by the nature of things but must only correspond to and be adapted to the nature of things (Müller-Freienfels).
In contrast, 18th-century commercial law, which was split off from the main body of common law and was allowed to develop under less-stringent controls, led the way for the modification and alteration of various feudal common-law concepts. Through this commercial influence, the concept of undisclosed agency (an important mode of representation in commercial transactions in which the agent appears to be the principal and there is no disclosure of the real principal to the third parties) developed alongside open agency representation in English law. Although, the necessity for the agent to act openly in the name of the principal was retained in the Continental European law. English law attempted to relate agency rules more closely to the everyday needs of the principal–agent relationship, in contrast to the more narrow and systematic treatment of agency in continental European law.
In India, the modern law on agency came as a colonial influence in the form of Chapter X of the Indian Contract Act, 1872 and the provisions related to this law of agency have continued to develop and evolve through regular amendment and case laws as per the pace of development of the society.
3. ESSENTIAL FEATURES OF AGENCY
The salient features which govern the contractual relationship of agency in India as per the Indian Contract Act, 1872 are based upon the requirement of principal being competent to contract although there is no such requirement in case of an agent and also, no consideration is necessary to create the contract of agency. It can be as simple as an adult asking a child to buy some groceries from the store on their behalf. In this case, the child is the agent of the adult even though he is neither competent to contract nor does he receive any consideration for his/her services.
3.1. Competency of the Principal
According to the Indian Contract Act 1872, any person may become a principal and hire an agent provided:
- He is of the age of majority ( 18 years as per the Indian laws)
- He is of sound mind ( sound mind means the person is capable of understanding the terms and conditions of the contract or relationship he is entering into and thus, can take reasonable decisions)
The principal is liable for all the acts of the agent which he performs in the capacity of being an agent and would face the same legal consequences as if he did the act himself.
3.2. Competency of the Agent
As per the 1872 act, any person acting between the Principal and the third parties can become an agent even if he/she is a minor or of unsound mind.
This means that a person need not be competent to contract to be an agent because whatever he/she does is on the behalf of the principal who is competent to contract and hence, liable for the actions.
Generally, an agent would be liable to the principal but if the agent is a minor or of unsound mind, he gets absolved from any sort of liabilities or legal consequences.
3.3. Consideration not required
According to the provisions of the Section 185 of the Indian Contract Act, 1872, no consideration is required in the contract of agency. The clause of consideration is solely the discretion of the principal and the agent. Although, Section 217 of the Indian Contract Act 1872 mentions agent’s right to remuneration for his services and also, his right to retain his share out of sums received on account of principal in the business with respect to all the costs and expenses incurred by him in conducting such business.
To determine the existence of the binding relationship of agency between two people, following two conditions can be looked upon.
i) the willingness of the agent to act on behalf of the principal
ii) the authority of the agent to create, regulate, modify or terminate the contract between the principal and the third parties
4. RELATED CASE LAWS AND LEGISLATIONS
4.1. Chairman, Life insurance Corporation v. Rajiv Kumar Bhaskar
(Creation of Agency)
- Facts of the case: According to the Salary Saving Scheme of the Life Insurance Corporation, the employer was supposed to deduct some amount from the salary of the employees and deposit it with LIC. Upon the death of one of the employees, his heirs found out about the default in the payment from the employer’s side causing the policy to lapse. LIC defense was based on a clause in the acceptance letter of the employer, “ The employer would act not in the capacity of agent of LIC but in the capacity of the agent of employees.”
- Issue: Can the employer be considered to be the agent of LIC even after the mention of the concerned clause in the acceptance letter?
- Judgement: In this case, the word ‘agent’ is not conclusive to identify the existence of the legality of the agency relationship. As all the procedures and decisions were the responsibility of the employer, it indicates that the employees did not have any say in this salary saving policy and so, could not be the principal. Thus, the employers would be considered to be the agent of the LIC irrespective of any express or implied consent for creation of such an agency. This is because of the nature of the relationship existent at that material time.
4.2. Watteau v Fenwick
(Liability of an undisclosed Principal)
- Facts of the case: Watteau, the plaintiff supplied cigars to a beer house ‘Victoria’ which was operated by a man named Humble but not on his own account. He had assigned his interests to Ms./ Fenwick and Company i.e. the Fenwick Co. (the defendants in the case) became the principal. The plaintiff was completely unaware of the involvement of Fenwicks in the business of ‘Victoria’. But, when he was not paid his 25 pounds, he eventually sued the defendants.
- Issue: Could Fenwick and Company be considered Principal in this case and held liable for Humble’s non-payment?
- Judgement: In this case, Humble seems to have an implied authority given by Fenwick and Co. to act on their behalf in the operations of the beer house ‘Victoria’. Thus, Fenwick acts as a Principal and once it is established that the defendant is the Principal, the ordinary rules of the agency would apply irrespective of whether the plaintiff was aware of such a relationship or not. As the principal is liable for all the acts of the agent, Fenwick was held liable irrespective of their undisclosed authority.
4.3. Foreman v Great Western Rly Co
(Agent’s competency to contract is immaterial)
- Judgement: It was held that any person can become an agent irrespective of their contractual capacity to become an agent. Therefore, a minor can also act as an agent but where an agent is a minor, the principal will be bound for his acts to the third person, but the minor will not be responsible or accountable to the principal.
“The agent’s competency is not limited by his own disabilities. An agent who cannot read can bind by his signature the principal who can read”.
The Contract of Agency is merely a connecting link between the principal and the third party and is based upon consent (“Definition of Contract of Agency and Its Essentials”). The agent, through his specialized skills, aids the Principal in accomplishing tasks or representing him adequately in front of the third parties thus, acting as a connection or a conduit-pipe or a channel between the two which offers for a smooth conduct of the business. Agency is a fruitful and needful venture for the society.
The agent does not share the position of a servant but is more like an employee delegated with some authority due to his skills. Thus, this law of agency was initially developed as an expansion of the relationship of a master and a servant. As an agent acts on the behalf of the principal, it is the Principal who gets legally bound with the third party for the contract and not the agent. Although, the agent is liable to the Principal for his acts.
The Contract act covers the contract of agency, sufficiently enough to declare the rights and duties of the parties of the contract; but still leaves the task of distinguishing between different kinds of agencies to the agencies of law and the general public (Verma). Thus, every relationship of agency is different and its existence and nature is dependent upon its interpretation and implementation. The Indian Contract Act 1872 or any other laws on the concerned agency only state an outline and guidelines for the contract of agency and is not absolute. The implication of the law majorly depends upon the prudence of the judiciary and the courts of law.
- Indian Contract Act, 1872.
 Agency under Contracts, Academike (May 19, 2021), https://www.lawctopus.com/academike/agency-contracts/#:~:text=In%20agency%20contracts%2C%20there%20exists,act%20is%20called%20the%20principal.
 Wolfram Müller-Freienfels, Agency, Britannica, Encyclopedia Britannica (May 8, 2021), https://www.britannica.com/topic/agency-law.
 Section 182 of the Indian Contract Act, 1872.
 Supra note 2.
 Supra note 2.
 Section 183 of the Indian Contract Act, 1872.
 Section 184 of the Indian Contract Act, 1872.
 Section 185 of the Indian Contract Act, 1872.
 AIR 2005 SC 3087
  1 QB 346
 (1878) 38 LT 851
 Definition of Contract of Agency and Its Essentials,LawwithShaheen (May 19, https://lawwithshaheen.com/contract-of-agency-and-its-essentials/.
 Ayush Verma, Essentials to the Contract of Agency under Indian Contract Act, 1872,ipleaders (May 19, 2021), https://blog.ipleaders.in/essentials-to-the-contract-of-agency/.