CONTRACT OF AGENCY: ANALYSING THE PROCESS OF THE FORMATION AND TERMINATION OF AGENCY by Aishwarya

Posted on: May 9, 2021 Posted by: admin Comments: 0

Author: Aishwarya, Student at KIIT Law School, Bhubaneswar, Odisha.

ABSTRACT

In the era of trade and commerce, it is not possible to perform all the tasks on our own. At some point of time and at some juncture of the business, there is a requirement of a person who can represent  you in front of a third party with whom you are dealing.That person is know as the “ Agent”.An agent performs various business activities such as dealing in business matters, estate matters, sales matters and many other things. They are a boon for the principal because agents make the tasks convenient for them. In a contract of Agency, there exists a legal relationship between two people in which one person is authorized to act on behalf of the other. The person who authorizes is known as a “principal” and the person who acts on behalf of the principal is known as an “ Agent”.We will also discuss various case which have an important role in the creation and development of the Contract of Agency.

This paper is an attempt to analyse how the contract of Agency is formed and comes to an end.The paper further describes differences between the roles of servant and an agent. Apart from this, we will analyse the expressed and implied form of contract of Agency. Whether there can be a contract of Agency between a husband and a wife and at last we will analyse the procedure of termination of Agency through various methods like revocation, renunciation, death, expiration of the prescribed time and so on.

Keywords: Contract of Agency, Third party, Agent, Formation, Termination, Revocation, Renunciation, Incapacity, Death, Principal.                              

INTRODUCTION

The Indian Contract Act, 1872 governs the relationship between an agent and a principal because they are legal in nature and requires certain terms and conditions to be followed. The “ Law of Agency” is a law which describes some conditions prerequisite for the creation  and termination of Agency, the duties of Principal, duties of Agent, Liabilities of Principal and Agent and so on.Chapter X of the Indian Contract Act, 1872 provides the basic norms and regulations that needs to be followed while forming a contract of Agency.

According to section 182 ICA, 1872  “An agent is a person employed by any other person to do any act, or to represent him in front of another person( third party) in business dealings or so. The person who is represented by that agent is known as “ principal”. (sethi, 2018).

HISTORY

No business owner has the capacity or time to do everything himself. The concept of Agency was important enough in common Law to be chosen as second in the year 1933. The concept that was highlighted was that the businessman should delegate duties to his subordinate i.e, the agents and this method is not only feasible for large organizations, but also for normal business organization. (Rasmusen, 2004, pp. 1-3)

Agency is thus one of the fundamentals of the corporate law . There were clashes between the opinions of the economists and the lawyers.In previous years, during the 1990’s , the economists were of the belief that delegation of task will not induce enough effort by the agent and the lawyers were more concerned about the mishandling of the agent’s effort in spite of being active. According to the paradigm, an agent is hired by the principal to exert some efforts and the agent is compelled to be slack in his effort and to keep the agent on track of his work, the principal binds him by creating a “ Contract of Agency”.

The Law of Agency is based on a latin term “ quit facit per alium, facit per se which intrinsically implies that he who acts through another, is deemed to have tried to do the act by himself.The competent agent is de jure capable of acting for the principal, vis –a- vis the third party.

UNDER INDIAN CONTRACT ACT, 1872

There are different kinds of Agents with different names such as factor, Broker, Del credere agent. In the case of P.Krishna Bhatta v Mundila Ganapathi Bhatta[1],the concept of agency was explained. It was further stated that every person who acts for the principal, doesn’t become his agent. Sometimes the acts are also performed by the domestic servants. There is a distinction between a servant and an agent, and the distinction was highlighted in Lakshminarayan Ram Gopal & sons v Govt of Hyderabad[2].   

i. Basically a domestic servant performs the personal activities for the master, or say provides personal services. But, the agents are employed in order to deal with the third persons as a representative of the Principal. He deals in business negotiations, modification , continuation of the Contract.                                                                                                                                                 

ii. There is a difference in terms of scope and authority as well. A master is liable for the act of the servant if it is within the “ course of servant’s employment” but in case of agency, a principal is liable for his agent when it is “ within the scope of authority exercised to him”.                                                        

iii.The agent is paid in the form of remuneration or commission that is decided on the basis of tasks but in case of a servant, a salary or wage is fixed.                                                                                                            

iv. There is a direct control by the master on his servant. A servant has to act and perform the obligations according to the instructions given by the master. In a contract of agency,the agent is not under the direct control or supervision of the Principal, but he has to adhere to the lawful instruction given by the principal while performing the task.                                                                                                                       

Section 183 of the ICA, 1872 talks about the capacity that is required to employ an agent. It states that any person who has attained the age of 18 years according to the law  and is of sound mind, is allowed to appoint an agent for the task. It was also argued that a contract of agency is void if it is entered into by a minor. It was observed in Shephard v Cartwright[3] . In this case , it was held that an agent cannot be appointed by a minor ,neither in the form of attorney   nor in any other form.And if he does this, then the entire contract will become void and incapable of ratification. The reasoning for this judgement was given by the learned judge who said “ In order to select or employ an agent, you need a sensible discretion to choose the same. But, a minor is incapable of choosing a right person as his agent because he lacks the required capacity.But, nothing in the act specifies that the guardian of a minor is not allowed to employ an agent.

Now, let us look whether there is a requirement competency on part of the agent to be employed and perform the task. This is explained n section 184.

Section 184 of the Indian contract Act, 1872 states ,that any person may become an agent between a principal and a third person, but a person who is a minor and of unsound mind cannot become an agent, so as to be responsible to his principal . And if a person employ a minor agent, then that agent will not be responsible to his principal.

Section 185 of the ICA, 1872 states that in order to create an agency, it is not necessary to provide any consideration and no consideration is immediately needed at the time of appointment.

Difference between agent and Bailee                                                                                                                                                                

Although, bailee and an Agent seem to be similar to each other but in reality they are not.If we’ll talk about the representation part, then

i. Bailee has no authority to represent the Bailor but in Agency, an agent is employed only to represent the principal in front of a third party.                                                                                    

ii. The role of Bailee ends as soon as he is out of the possession of the goods bailed to him but in case of Agency, the contract can continue for a longer period of time.                                            

iii. In the contract of Agency, the agents are generally remunerated with a commission but a contract of bailment can be gratuitous as well. (singh).

RESEARCH QUESTIONS
  1. What is Contract of Agency?
  2. Who is an “Agent” and who is a “ Principal”.
  3. Who is a Del credere Agent?
  4. What is the difference between a “ servant” and an “ agent”?
  5. What is the difference between a “ Bailee” and an “ Agent”?
  6. How the formation of Agency takes Place?
  7. Does there exist a contract of agency between a husband and a wife?
  8. What is termination of contract of Agency?
  9. How the termination of Agency takes place?
  10. What are the different modes by which Contract of Agency comes to an end and what are the different conditions for it?’’
LITERATURE REVIEW

The researcher has gathered knowledge and data about the topic from various sources.The sources are mentioned below:-

LEGISLATIONS, BOOKS, JOURNALS AND WEBSITES

Primary sources:-

  1. Principles of Law of Agency by Howard N. Benett
  2. Pollock & Mulla, The Indian Contract Act,1872, 15th Edition
  3. Contract & Specific Relief by Avatar Singh, 12th Edition

Secondary Sources:-

  1. Annual Review of Sociology vol 31(2005)
  2. American Law & Economics Review vol.6,No.2(2004)
  3. Oxford University Press

Online Sources:-

  1. jstor
  2. Manupatra
  3. SCC Online
  4. Academike
  5. Researchgate
  6. LegalserviceIndia
  7. Investopedia
FORMATION OF CONTRACT OF AGENCY

The contract of agency is formed as soon as the principal employ a person to act on his behalf in front of a third party and in return the agent agrees to perform the obligation or consents to do so.There are four ways in which the contract of Agency is formed:

  1. THROUGH EXPRESSED APPOINTMENT

The appointment of an agent can be done through expressed appointment, which means it can be made in writing or it may be oral.Now in Indian Law, the concept of employment of an agent is much wider than what it is there according to the English Law. According to section 182 of the Indian Contract Act, 1872 an agent can be employed by any person authorized by law. According to the English law, The will of the other person is necessary for the employment of the agent.Basically, majority of the will should be of the principal and he should be willing to employ the other person as his agent. However, it’s not that the principal can compel the person to become his agent, but in order to create a legal relationship, the consent of both the persons will be taken into consideration.The consent must be given by each of them, either expressed or implied.

A power of attorney refers to the appointment that takes place by a deed. In the case of Sayed Abdul Khader v Ram Reddy[4], there were three principals of a single agent and it was argued that whether it forms a valid contract of agency or not.It was questioned that how by a single power of attorney, can three persons become the principals of a single agent. But, it was decided that this can happen which is contrary to the contract Act.

On the other hand, the laws of England gave a wider perspective and said that two principals can jointly employ a single agent and the agent will be jointly responsible to both of them and the two principals have have the right to sue the agent jointly.

  2. THROUGH IMPLIED AGENCIES

Beside the expressed contract of Agency, the contract of agency can be formed impliedly as well. Implied Contract means when the contract is created through a person’s conduct or actions.Whenever a person allows another person or places him in a position where it can be interpreted that he is authorized or allowed to perform a certain task on behalf of the person, it is said to be implied Appointment. For example, if A allows a person to drive his car for some days and taking care of the expenses and maintenance of the car, then that other person can be held as an implied agent of the principal. This is because by his conduct, he is giving an implied authority to the other person to become his agent.

Estoppel is a well known form of the implied form of agency.The principal of estoppel states that a principal is estopped as against the third person to whom the agent is representing the principal, if the principal himself place an agent to believe that in such course of situation he is authorized to perform a particular act. The principal makes him presuming the fact that he has an apparent and real authority to exercise his role in the business. In pickering v Busk[5] the broker, who was assigned with the task of buying and selling hemp, sold the hemp which the purchaser gave him to keep in his custody.The principal argued that he didn’t authorize the broker to sell the hemp. But, the court held that the principal is bound by the sale and receipt of money as he gave an apparent authority to the agent to perform the task of selling and buying of hemp. The apparent authority can be taken as a real authority in case of implied contract of Agency and hence it is binding on the principal.

   3.THROUGH AGENCY OF NECESSITY                                                                                                                                       

Sometimes there is an emergency kind of situation in which one person act for another in the absence of expressed contract. It becomes necessary at that point of time to perform the act in order to save the other person from any future danger or loss. In that case, the agent is justified to act beyond his scope of authority. In case of medical emergency, when there is an urgent need of medical attendance, the person can act as an agent.

There are various conditions for Agency of necessity . In Gwiliam v Twist[6], it was highlighted that the agency of necessity doesn’t take place when the agent can communicate with the principal.This is because, if the agent is able to communicate with the principal, he can ask him for further directions as to what to do and what not.The servant was driving the defendant’s omnibus, the policeman thought that the driver in drunk and ordered him to discontinue the driving. The driver and the conductor directed another person to drive instead of being a quarter of a mile away from the defendant’s yard. The court rejected the plaintiff’s claim with reason that there were possibilities of communication between the defendant and the owner and that’s why no Agency of necessity took place.

DOES THE CONTRACT OF AGENCY EXISTS BETWEEN A HUSBAND AND A WIFE?                                                                                         

There are some exceptions which states that an expressed or implied agency can take place between a husband and wife, but in a regular course of situation, there exists no contract of Agency between a husband and a wife. (mirzawardahbeg, 2019).Now, if we talk about the implied authority that is exercised by the wife to bind her husband with the credit purchase,it is necessary that both of them are living together.Mere remaining or living together doesn’t make the wife an agent.The wife should be incharge of a domestic establishment.A husband is not an agent of his wife by any inherent or implied authority.

A husband is liable to his wife for all the necessaries in case when both of them are living apart on the will of husband. But, when the separation has taken place due to the faults,whims or will of the wife,the husband won’t be liable for necessaries of his wife.In Debenham v Mellon , There was a husband and a wife. The husband(defendant) was the manager of the hotel and his wife was acting as the manageress.The wife took a debt from a tradesman for some clothing and after the expiration of due date,the trademan demanded the amount from the husband.

The court held the husband not to be liable for the amount as they both were in a cohabitation and not in a domestic establishment. So, due to this reason no sort of “ necessity” was there.The case of Girdhari Lal v W. Crawford,highlighted  that a if a husband is providing a reasonable allowance to his wife, then he won’t be liable even if the fact of allowance is not known to the seller.

TERMINATION OF CONTRACT OF AGENCY

As for now, we have read about what is the contract of Agency and its formation takes place.But, how long the contract of Agency last or what are the situations or norms to be followed to end the contract of Agency? Let us ponder over it with details.

The modes of termination of Agency are mentioned under section 201 to section 210 of the Indian Contract Act, 1872.

Section 201 of the ICA, 1872 talks that a contract of Agency comes to an end if its authority has been revoked by the principal,or the agent has renounced the business, the agency of the business has been completed,either the principal or the agent has become person of unsound mind,or the principal has become insolvent.Through this definition we have got 7 modes of termination of contract of agency and they are as follows:

i.Revocation by the principal –The principal may revoke the agent’s authority but the condition of revocation is that it should be done before the authority has been exercised by the agent. (singh p. C.) This is stated under section 203 of the Indian contract Act, 1872. For example, If  A is the agent of B and he has been exercised with the authority of selling and collecting money from the customer,A may revoke this authority before B start to exercise the authority. The  revocation may be expressed or implied and this is mentioned under section 207 of the ICA, 1872.  Section 207 of the ICA, 1872 states that revocation and renunciation of Agency may be expressed or implied.For example, A hired an agent to sign an agreement with C, Later A signed the agreement himself. This is an Implied form of revocation because here the principal revoked the authority with his conduct and actions.it should be taken into consideration that mere execution of power of Attorney didn’t restrict the principal to act according to him or independently. He was not bound to consult his attorney before performing any task or getting into any agreement. But, due to this , it was presumed that the contract has been revoked by the principal.So, the formulated law says, if an agreement has taken place by virtue of the power of attorney, then it has a binding effect on the principal. If revoked,the agent can claim for losses or compensation from the principal.

Section 202 of the ICA, 1872 talks about the termination of agency where the agent has some kind of interest in the subject matter.It further states that there needs to be an expressed contract for the termination of Agency. In absence of that,the contract of Agency cannot be terminated,i.e comes to an end. For example, if A has authorized B to sell a particular house to C and directs him to keep half of the selling amount with himself. This is because A owed some amount of debt to B.In this situation, B has interest in subject matter and that’s why the contract cannot be terminated even by his insanity or death.This principle was very well explained in case of Smart v Sanders[7]. Where an authority is assigned to an agent to perform some activities and he also has some benefits in it, such an authority is said to be irrevocable.In this particular case, it was also observed that there need not to be a pre-existing interest in the subject matter, the interest can even occur randomly or subsequently with the creation of agency.

To see whether the power of attorney is irrevocable or not,it is necessary to see whether the object of giving the power is to protect the interest of agent or not.If the power of Attorney is given to the agent to recover on behalf of the principal and that is also protecting some rights of the agent, then the power of Attorney is revocable.

ii. Renunciation by Agent–Renunciation means rejecting something or giving up a right. Section 206 of the Indian Contract Act, 1872 talks about renunciation by the agent. The manner of renunciation should be same as that of the revocation by agent. It should be done within a reasonable time. section 206 of the ICA,1872 states that there needs to be reasonable notice of renunciation or revocation in case of a fixed contract. And if the notice is not given prior, the damages, if any to the principal or the agent, must be made by one to another.One such prominent case in this regard was J.R. Sayani v Bright Bros (P) Ltd[8]. Here, the agent was earning rupees 4000 per month and the contract of agency was revoked by the principal without any prior notice. The court said that the agent should get rupees 12000 as a compensation because a three months prior notice could be given. The Madras High court,on the contrary held that the agent is not entitled to get any compensation because of the following the following condition :

The Agency was not created for a fixed period of time.

Hence, it was concluded that no compensation will be given if the agency is not for a fixed period and second,The notice of termination has been given before reasonable time.

Section 205 states that if there is an expressed or implied contract of agency for a period of time, and the principal revokes the contract without a sufficient cause, the principal is bound to provide compensation to the agent who has suffered due to the revocation.

iii. Completion of Business-The contract of Agency is terminated as soon as the business for whom the authority is given to the agent, is completed. If the task of agent is to collect the proceeds from the sale of house, the business is completed after he receives the amount.

iv. Death or Unsoundness of Mind– On the demise of either the agent or the principal,a contract of agency automatically comes to an end.   Since a person cannot operate on behalf of a non-existent person, the agency is immediately terminated when either the agent or the principal dies. As a result, when a client dies, the power of the client’s pleader die as well. In Grishan Industrial co Ltd v Interchem Corpn[9]. It was highlighted that an attorney is regarded as the agent of the principal and whatever he does, he does for the principal.   Any act committed by the attorney or his lawyers is legitimate and continues to be valid as long as the principal is alive, regardless of whether the attorney is alive or dead. When an agent dies, his agency ceases to exist, but it does not obliterate actions performed by the agent on behalf of the principal.

v. On Expiry of Time- If an agent has been appointed by the principal for a certain period of time, then the contract of Agency comes to an end as soon as the term of the agent expires.It is not necessary whether the purpose of agency has been accomplished or not.

vi. Insolvency of the pricipal- The agency is dissolved when the principal is deemed insolvent.This is due to the insolvent’s inability to enter into contract.

CONCLUSION

This paper has tried to show the multiple facets of the contract of agency. It explains the various methods by which it can be formed and comes to an end. The paper has also put threw some light on the basic differences that are mostly confusing at times, such as how bailee or servants are different from that of an agent or how the owner is different from the principle.If Contract is the genes, then Law of Agency is the species.

A contract of agency can be formed by a person who has attained the age of majority and is of sound mind. There is no qualification or competency required to become an agent.Even the consideration is not necessary in a contract of agency.The contract of agency exists between a husband and a wife only when they share a domestic relationship, rather than mere cohabitation.

For the termination of contract of Agency, in the absence of anything to prove its termination,an agency will be believed to have continued until such a period of time has passed.Also, if the contract of agency is made for a fixed period of time, the principal cannot revoke it without a proper cause. And if he does so, he will be liable to compensate the agent for all the damages and losses.Agency may be terminated in subsequent ways. By way of revocation, renunciation by agent, due to death or insanity of the principal or agent, due to completion of business, insolvency of the principal or expiration of time.  The paper has tried its best to clear all the ambiguities of some basic terms and topics with a clear picture of “contract of agency”.                  

BIBLIOGRAPHY
REFERENCES

[1] AIR 1955 Mad 648

[2] AIR 1954 SC 364: (1955) 1 SCR 393

[3] 1953 Ch 728, 755: (1953) 1 WLR 460 (CA)

[4] (1979) 2 SCC 601: AIR 1979 SC 553,557

[5] (1812) 15 East 38

[6] (1895) 2 QB 84 (CA)

[7] (1848) 5 CB 895

[8] AIR 1980 Mad 162

[9] 1970 Curr LJ 387

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