ROLE OF THE ACTS OF AN AGENT IN CONTRACT OF AGENCY

Submitted By:
Shubham Kashyap Kalita
UID: SM0117048
Second year, 4th Semester
Subject: Law of Contract-II

Faculty-in-charge:
Mrs. Daisy Changmai

NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY, ASSAM

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TABLE OF CONTENTS
Chapterization Page No.
1. Introduction.......................................................................................................... 2
1.1. Literature Review............................................................................................ 3
1.2. Research Questions......................................................................................... 3
1.3. Aims and Objectives....................................................................................... 3
1.4. Research Methodology................................................................................... 4
2. Agent and Principal in a Contract of Agency................................................... 5-8
2.1. Agency in Hire-Purchase Agreements............................................................ 6
2.2. Co-agents and Co-Principals........................................................................... 6-8
3. Duties and rights of an agent in the Contract of Agency.................................. 9-13
4. Authority of an agent in a Contract of Agency.................................................. 14-17
5. Indemnity and right to compensation in a Contract of Agency....................... 18-20
6. Conclusion............................................................................................................. 21
Bibliography............................................................................................................... 22
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CHAPTER 1

INTRODUCTION

According to Section 182 of the Indian Contract Act 1872, “An agent is a person employed
to do any act for another or to represent another in dealings with third persons.”1Thus, it is
clear that an agent is basically that person who acts on behalf of another by functioning for
the said person and handling his dealings.” The person on whose behalf the said agent
functions is called as the ‘principal’, and principal has been defined in the same section as
“The person for whom such act is done, or who is so represented, is called the principal. 2

However, it must be noted that not anyone can become an agent, or be appointed as an agent.
The bare minimum criterion for being considered as a candidate to become an agent has been
set in Section 183 3of the same Act, and it states that any person can be an agent provides that
he is above the age of majority. Thus, it can be contended that a minor cannot be an agent.
This is even corroborated in the fact that irrespective of the sort of contract, the Indian
Contract Act 1872 bars minors from entering into a contract, and thus, any contract formed
with a minor is void ab initio. Apart from this, it must also be stated at this point that Section
1844 of the same Act also prevent any person who is not of sound mind from entering into a
contract of agency, and thus, a person with unsound mind cannot become an agent.

Thus, to elaborate, a person who is employed by one to do his dealings in his place is called
the agent, and the person taking in the agent to do his dealings is known as the principal. The
contract formed between them is referred to as the contract of agency. The agent is endowed
with different sets of liabilities and responsibilities on account of the contract so formed with
the principal. In this paper, an attempt shall be made to try and look at the role that an agent
plays in a contract of agency. It shall try to look at the duties and responsibilities of an agent
in a contract of agency, and shall also try to determine the role played by the agent in relation
to the authority endowed in him by the principal on account of the contract of agency.

1
Section 182, Indian Contract Act, 1872.
2
Ibid.
3
Section 183, Indian Contract Act, 1872.
4
Section 184, Indian Contract Act, 1872.
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1.1. LITERATURE REVIEW:

 Avtar Singh, Law of Contract and Specific Relief Acts.
This book provides a detailed account of the Indian Contract Act 1872, and highlights
the different provisions that it contains. It lists a plethora of landmark cases that are
useful in the interpretation of the multitude of sections in the Indian Contract Act
1872, and also shows the numerous legal doctrines that are associated with the
principles of the Indian Contract Act 1872.
It also contains an interpretation and explanation of the Specific Relief Act 1963, and
deals with the various provisions that have been enshrined in the same, while at the
same time trying to give a detailed explanation of the clauses present in the said act.
 Pollock & Mulla, Indian Contract and Specific Relief Act.
This book has provided vital information about the Contract of Agency. The
provisions related to Contract of Agency have been discussed in detail along with
plethora of cases attached to each section. It has given a vast knowledge on the role of
agent in a Contract of Agency and its authority. It consists of all the provisions for
indemnity and compensation under the Indian Contract Act 1872.

1.2. RESEARCH QUESTIONS

 What is the role of an agent in a contract of agency?
 What is the authority of an agent in a contract of agency?
 What are the provisions for indemnity and compensation under the Indian Contract
Act 1872 for a contract of agency?

1.3. AIMS AND OBJECTIVES:

The aim of this project is to discuss the Contract of Agency, its role and its authority
under the Indian Contract Act, 1872.
The main objectives of this project are:
 To try and understand the role played by an agent in a contract of agency.
 To try and understand the authority of an agent in a contract of agency.
 To try and understand the various provisions that have been highlighted in the Indian
Contract Act 1872 regarding indemnity and compensation in a contract of Agency.
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1.4. RESEARCH METHODOLOGY:

1. Approach to research:

The methodology used in this project is doctrinal research. Doctrinal research is basically
library - based research where the resources available in the library are used.

2. Sources of data collection:

Data has been collected from secondary sources like: books, web sources etc. No primary
sources like survey data or field data were collected by the researcher.
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CHAPTER 2
ROLE OF AGENT AND PRINCIPAL IN A CONTRACT OF AGENCY

An agent is any person who is employed by someone to do his dealings, while the said person
is called the principal. The contract so formed is known as the contract of agency. The
definitions of principal as well as agent have been defined under Section 182 5of the Indian
Contract Act 1872. However, In the case of Sukumari Gupta v Dhirendra Nath6 the view has
been expressed that the definition in s. 182 is wider than that of English law, under which no
one can become the agent of another except by the will of that other. The Indian definition
did not require that the employment should be by the person for whom the agent is employed
or to whom the agent is employed to represent. Hence, it can be stated that that the ambit of
who can become an agent under Indian Contract Law is wider in both scope and ambit than
that of English Law.
The emphasis is on the power of the agent to represent his principal in dealings with third
persons. Thus what distinguishes an agent from a person appointed to do an act, is the agent’s
representative capacity coupled with power to affect the legal relations of the principal with
third persons. The concept of “agency” was thus explained by Ramaswami J. of the Madras
High Court in P. Krishna Bhatta v. Mundila Ganapathi Bhatta7:
“In legal phraseology, every person who acts for another is not an agent. A domestic servant
renders to his master a personal service; a person may till another’s field or tend his flocks
or work in his shop or factory or mine or may be employed upon his roads or ways; one may
act for another in aiding in the performance of his legal or contractual obligations of third
persons. It is only when he acts as a representative of the other in business negotiations, that
is to say, in the creation, modification and termination of contractual obligations, between
that other and third persons, that he is an agent. Representative character and derivative
authority may briefly be said to be the distinguishing feature of an agent.”
Test of determining existence of agency relationship:
The test of determining the existence of agency relationship has been explained by Dhawan J.
of the Allahabad High Court in the following words:
“Agency depends on true nature of relationship. The American Jurisprudence refers to a case
in which it was held that the use of the words “agency agreement” and ‘agent’ by the parties

5
Section 182: An “agent” is a person employed to do an 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”.
6
Sukumari Gupta v Dhirendra Nath , A.I.R mi.Cal.643.
7
P. Krishna Bhatta v. Mundila Ganapathi Bhatta , AIR 1955 Mad 648.
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in a contract does not necessarily establish a relationship of agency in the legal sense. The
Law in India is the same. It has been held in several decisions that the fact that the parties
have called their relationship an agency is not conclusive, if the incidence of this
relationship, as disclosed by evidence does not justify a finding of agency, and that the court
must examine the true nature of the relationship and the functions and responsibilities of the
alleged agents.”8

2.1. Agency in Hire-Purchase transactions:

To know whether a person occupies the position of an agent or not, the law has to go by his
functions. The law has to see the substance of the transaction and not the parties terminology.
The relevance of the expressions used in an agreement has often been considered in
connection with hire-purchase transactions. A transaction of this kind generally involves
three parties, the dealer, who provides the goods,; the financier, who provides money to the
dealer and the hirer, who takes the goods and pays hire-purchase instalments to the financier.
Lest the dealer be regarded as an agent of the financier a hire-purchase agreement often
expressly declares that the dealer is not an agent. The Hire Purchase Act, 1972 (repealed)
regards the dealer as an agent of the financier for some purposes; one of them is that if any
representations are made by the dealer to promote the sale of the product, he would be
deemed to be an agent of the financier. But whether he is a general agent of the finance
company remains an open question.

2.2. Co-agents and Co-principals:

Where the authority given to co-agents is joint, it would be necessary for them to act jointly
and only then their principal would be bound. Where the authority is joint and several any of
them would be competent to act for the principal. An agent who represents more than one
principal in one and the same transactions, should account for to all of them jointly, for an
account given to one may not absolve him from his liability.

Section 1839 talks about the essentiality of agency principal who should be competent to
contract. A minor cannot become an agent, nor can he formulate a contract of agency. This is

8
Loon Karan Sohan Lal v. John & Co, AIR 1967 ALL 308.
9
Section 183: Who may employ agent: 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.
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due to the fact that any contract formed with a minor is void ab initio, and hence, Section 1110
of the Indian Contract Act 1872 expressly prohibits the formation of a contract with minors.
In Shephard v. Cartwright11, it was observed that an infant cannot appoint an agent to act for
him neither by means of a power of attorney, nor by any other means. If he purports to
appoint an agent, not only is the appointment itself void, but everything done by the agent on
behalf of the infant is also void and incapable of ratification. An infant has not sufficient
discretion to chose an agent to act for him. He is all likely to choose a wrong man; and so the
law declares him to be incapable of choosing an agent at all. But in situations where a minor
is capable of binding himself by contract he may appoint an agent to contract on his behalf.
Whatever a person can do personally he can do through his agent. Further, there is nothing in
the Act which prohibits the guardian of a minor from appointing an agent for him. In T.C.
Mathai v. District & Sessions Judge12, the principle was laid down that every person has the
right to appoint an agent for any purpose does not apply where the act to be performed is
personal in character or when it is annexed to a public office or to an office involving any
fiduciary obligation.
Further, Section 184 13talks about who can be an agent. The agent need not be competent to
contract. Ordinarily, an agent incurs no personal liability while contracting for his principal
and, therefore, it is not necessarily that he should be competent to contract. Thus, a person
may contract through a minor agent, but the minor will not be responsible to his principal.
But does the agent to be appointed; is there any requirement of consideration? Section 18514
puts forward that consideration is not necessary. It clearly provides that no consideration is
necessary to create an agency. Generally, an agent is remunerated by way of commission for
services rendered, but no consideration is immediately necessary at the time of appointment.

An agent may have, and often has, in fact, a large discretion, but he is bound in law to follow
the principal's instructions provided they do not involve anything unlawful. To this extent an
agent may be considered as a superior kind of servant; and a servant who is entrusted with
any dealing with third persons on his master's behalf is to that extent an agent But a servant

10
Section 11, Indian Contract Act, 1872: Who are competent to contract.—Every person is competent to
contract who is of the age of majority according to the law to which he is subject,1 and who is of sound mind
and is not disqualified from contracting by any law to which he is subject. —Every person is competent to
contract who is of the age of majority according to the law to which he is subject,1 and who is of sound mind
and is not disqualified from contracting by any law to which he is subject."
11
Shephard v. Cartwright , 755: (1953) 3 WLR 460 (CA).
12
T.C. Mathai v. District & Sessions Judge , (1999) 3 SCC 614.
13
Section 184, Indian Contract Act, 1872.
14
Section 185, Indian Contract Act, 1872.
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may be wholly without authority to do anything as an agent, and agency, in the case of
partners, even an extensive agency, may exist without any contract of hiring and service.
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CHAPTER 3
DUTIES AND RIGHTS OF AN AGENT IN A CONTRACT OF AGENCY

Mutual rights and duties of principal and agent may be wholly provided for in their contract.
But the following duties of general nature are imposed by law upon every agent, unless they
are modified or excluded by special contract.
1. Duty to execute mandate:
The first and foremost duty of every agent is to carry out the mandate of his principal. He
should perform the work which he has been appointed to do. Any failure in this respect
would make the agent absolutely liable for the principal’s loss. Thus it has been held in a
number of cases that: “The rule of equity is, that if an order is sent by a principal to a factor to
make an insurance, and he charges his principal, as if it was made, if he never infact made
that insurance, he is considered as the insurer himself. In Pannalal Jankidas v. Mohanlal15,
where a commission agent purchased goods for his principal and stored them in a godown
pending their despatch. The agent was under instruction to insure them. He actually charged
the premium for insurance, but failed to insure the goods,. The goods were lost in an
explosion in the Bombay Harbour. The agent was held liable to compensate the principal for
his loss minus the amount received under the Bombay explosion (compensation) Ordinance,
1944, under which the government paid compensation up to fifty percent in respect of the
uninsured merchandise lost in the explosion.
2. Duty to follow instructions or customs:
Section 211 16
provides for Agent’s duty in conducting principal’s business. The agent is
bound to conduct the business of his principal and to keep himself within the confines of his
authority. In the absence of directions, the agent has to follow the custom which prevails in
business of the same kind and at the place where the agent conducts such business. When the
agent acts otherwise, if any loss be sustained, he must make it good to his principal, and if
any profit accrues, he must account for it.
3. Duty of reasonable care and skill:
Section 21217 provides for skill and diligence required from agent. The standard of care and
skill which an agent has to bestow depends upon the nature of the profession. If the principal
suffers any loss owing to the agent’s want of care or skill, the agent must compensate the

15
Pannalal Jankidas v. Mohanlal , AIR 1951 SC 144: 1950 SCR 979: (1951) 21 Comp Cas 1.
16
Section 211, Indian Contract Act, 1872.
17
Section 212, Indian Contract Act, 1872.
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principal for such loss. Section 212 limits the agent’s liability to “direct consequences”. It
provides that the agent must make compensation to his principal in respect of the direct
consequences of his own neglect, want of skill or misconduct, but not in respect of any loss
or damage which is indirectly or remotely caused by such neglect, want of skill or
misconduct.
4. Duty to communicate with the Principal:
Section 21418 provides that it is the duty of an agent, in cases of difficulty, to use all
reasonable diligence of communicating with his principal, and in seeking to obtain his
instructions. Where the agent informed his principal that purchases have been effected on his
behalf and subsequently confirmed it by reporting that the goods would be despatched as
soon as transport strike was over whereas he had done nothing in the matter, it was held by
the Supreme Court that such a neglect and misconduct of the agent misinforming the
principal was squarely within the wide terms of Section 212. “He must bear the brunt to pay
damages” the court said.19
5. Duty to avoid conflict of interest:
20
Section 215 provides the right of principal when agent deals, on his own account, in
business of agency without principal’s consent. And Section 21621 provides for principal’s
right to benefit gained by agent dealing on his own account in business of agency. An agent
occupies fiduciary position and, therefore, it is his duty not to do anything which would bring
his personal interest and his duty to the principal in conflict with each other. This conflict
invariably arises when the agent is personally interested in the principal’s transaction, for
example, where he himself buys the property he is appointed to sell or delivers his own goods
when he is instructed to buy on behalf of the principal. In firm of Rameshardas Benarashidas
v. Tansookhrai Bashesharilal Firm22, the principal incorporated in section 215, which
provides that if an agent deals on his own account in the business of agency, without first
obtaining the consent of his principal and acquainting him with full facts, the principal may
repudiate the transaction if he can show that –
(a) a material fact has been dishonestly concealed from him, or
(b) the dealing of the agent has been disadvantageous to him.

18
Section 214, Indian Contract Act, 1872.
19
Jayabharathi Corpn v. Sv. P.N.Sn. Rajasekara Nadar, 1993 Supp (1) SCC 401: AIR 1992 SC 596.
20
Section 215, Indian Contract Act, 1872.
21
Section 216, Indian Contract Act, 1872.
22
Rameshardas Benarashidas v. Tansookhrai Bashesharilal Firm , AIR 1927 Sind 195.
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6. Duty not to make secret profit:

Another aspect of this principle is the duty of the agent not to make any secret profit in the
business of agency. His relationship with the principal is of fiduciary nature and this requires
absolute good faith in the conduct of agency. What is meant by secret profit? It means any
advantage obtained by the agent over and above his agreed remuneration and which he would
not have been able to make but for his position as agent.
7. Duty to remit sums:
Section 21823 provides for agent’s duty to pay sums received for principal. The agent is
bound to pay to his principal all sums received on his account. The agent is, however, entitled
to deduct his lawful charges, but only subject to this right, the principal’s money must be
remitted to him even if it has been received in pursuance to a void or illegal contract. The
agent has to perform this duty even his earnings for the principal flow out of void or illegal
transactions.
8. Duty to maintain accounts:
Section 218 provides that an agent is bound to render proper accounts to his principal on
demand. Accounts are necessary for the proper performance of the agent’s other duties, for
example, the duty to remit sums to the principal. There is no provision in the Act enabling an
agent to institute a suit for accounts against the principal.
9. Duty not to delegate:
Delegatus non protest delegare is a well known maxim of the law of agency. The principal
chooses a particular agent because he has trust and confidence in his integrity and
competence. Ordinarily, therefore, the agent cannot further delegate the work which has been
delegated to him by the principal. Section 19024 provides that an agent cannot lawfully
employ another to perform acts which he has expressly or impliedly undertaken to perform
personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature of the
agency, a sub-agent must, be employed.

RIGHTS OF AGENT
The following are some of the important rights of the agent:
1. Right to remuneration:

23
Section 218, Indian Contract Act, 1872.
24
Section 190, Indian Contract Act, 1872.
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Section 21925 provides for agent’s right to remuneration. Every agent is clearly entitled to his
agreed remuneration, or if there is no agreement, to a reasonable remuneration. Where the
amount of remuneration is left on principal’s discretion, even then reasonableness would be
the criterion.
Effect of misconduct:
26
Section 220 provides that the agent is not entitled to remuneration for business
misconducted. Section 220 accordingly provides that an agent who is guilty of misconduct in
the business of agency, is not entitled to any remuneration in respect of that part of the
business which he has misconducted. The effect of misconduct is two-fold. First, the agent
forfeits his right to commission. This is irrespective of any loss suffered by the principal. The
principle underlying the rule is that a principal is entitled to have an honest agent and it is
only the honest agent who is entitled to any commission. The commission is forfeited only in
respect of that part of the agency business which has been misconducted.
2. Right of retainer:
Section 21727 provides for right of retainer out of sums received on principal’s account. The
agent has the right to retain his principal’s money until his claims, if any, in respect of his
remuneration or advances made or expenses incurred in conducting the business of agency
are paid. The right can be exercised on any sums received on account of the principal in the
business of the agency. He can retain only such money as in his own possession. He is not
entitled to an equitable lien, that is, the right to have his claims satisfied in preference to other
creditors out of the principal’s money not in his possession.
3. Right to lien:
Section 22128 provides for agent’s lien on principal’s property. The effect of lien as between
principal and the agent has been thus stated by A.H. Khan J. in Gopaldas v. Thakurdas29: The
agent’s lien does not give unrestricted authority to the agent to deal with the property in any
manner the agent may like. The right is limited in nature. It enables the agent to retain the
property till his dues are paid. But this confers no authority on the agent to sell or otherwise
dispose of the property without the consent of the owner.

25
Section 219, Indian Contract Act, 1872.
26
Section 220, Indian Contract Act, 1872.
27
Section 217, Indian Contract Act, 1872.
28
Section 221, Indian Contract Act, 1872.
29
Gopaldas v. Thakurdas , AIR 1957 MB 20, 22.
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4. Right to indemnity:
Section 222 30
provides for agent’s right to indemnity. The right to indemnity extends to all
losses and expenses incurred by the agent in the conduct of the business. The agent must have
been damnified in the lawful conduct of the business of agency. A wagering agreement is not
unlawful. It is only void. Accordingly, the Supreme Court in Kishanlal v. Bhanwar Lal31,
allowed an agent to recover indemnity for losses incurred by him in wagering transactions
entered into on instructions of his principal. Section 22332 provides that agent is to be
indemnified against consequences of acts done in good faith. In Adamson v. Jarvis33, An
auctioner sold certain cattle on instructions from the defendant and was held liable to the true
owner for conversion. He recovered indemnity from the principal because the act in question
was apparently lawful. Section 22434 states that where the act in question is apparently
tortuous, the agent, who has been held liable on it, may recover contribution from the
principal (not indemnity) under the Law Reform (Married Women’s and Tortfeasors) Act,
1955.
5. Right to compensation:
Section 22535 provides for compensation to agent in case of injury caused by principal’s
neglect. Thus every principal owes to is agent the duty of care not to expose him to
unreasonable risks.

30
Section 222, Indian Contract Act, 1872.
31
Kishanlal v. Bhanwar Lal, 1954 AIR 500.
32
Section 223, Indian Contract Act, 1872.
33
Adamson v. Jarvis, (1827) 4 BING 66.
34
Section 224, Indian Contract Act, 1872.
35
Section 225, Indian Contract, 1872.
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CHAPTER 4
AUTHORITY OF AN AGENT IN A CONTRACT OF AGENCY

The Indian Contract Act 1872 doesn’t make any distinctions on the basis of classes of agents.
However, a distinction is made on the basis of the authority bestowed on the agent. The agent
can be given either specific authority or general authority. The former expression includes
brokers, factors, partners, and all persons employed in a business of filling a position of a
generally recognised character, the extent of authority being apparent from the nature of
employment or position; the latter denotes an agent appointed for a particular occasion or
purpose, limited by the employment. A special agent has only authority to do some particular
act for some special occasion or purpose which is not within the ordinary course of his
business or profession.6 This distinction is made to determine the authority of that agent.

In the case of Jacob v Morris (1902)36 it had been contended that “A general agent has the
full apparent authority due to his employment or position and the principal will be bound by
his acts within that authority though he may have imposed special restrictive limits which are
not known to the other contracting party. A special agent has no apparent authority beyond
the limits of his appointment and the principal is not bound by his acts in excess of those
limits whether the other contracting party knows of them or not.”

It has also been seen in the case of Palestar Electronics Private Limited v. Additional
Commissioner (1978)37 that the acts of the agent within the scope of his authority bind the
principal. Section 226 of the Indian Act 1872 states that contracts entered into through an agent,
and obligations arising from acts done by the 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. It is necessary for this effect to follow that the agent must
have done the act within the scope of his authority. The authority of an agent and more
particularly its scope are subjects to some controversy.38 This argument has also been cited in
another case of Sardar Gurucharan Singh v. Mahendra Singh (2004).39
With regards to contracts and acts which are not actually authorised, the principal may be bound
by them, on the principle of estoppels, if they are within the scope of the agent’s ostensible

36
Jacob v Morris (1902).
37
Palestar Electronics Private Limited v. Additional Commissioner , (1978) 1 SCC 636.
38
Municipal Corporation, Delhi v. Jagdish Lal, (1969) 3 SCC 389.
39
Sardar Gurucharan Singh v. Mahendra Singh, (2004) 1 MPLJ 252 (MP).
 15

authority, but in no case is he bound by any unauthorised act or transaction with respect to
persons having notice that the actual authority is being exceeded.40

There are various types of authority that may be derived by an agent which are regarded as
follows:
1. The first is actual authority. The authority conferred on an agent by the principal is termed
as the actual authority. It can be classified into two categories, namely express and implied. 41 An
authority is said to be express when it is given by words spoken or written.42 In the case of Syed
Abdul Khader v. Rami Reddy,43 it was held that a power of attorney can be taken as an example
of express authority.
The scope of express authority can be worked out by using the construction of the contract.44 A
case on this point can be that of Attwood v. Munnings45 where a principal, while going abroad,
authorised his agent and partner to carry on his business, and his wife to accept bills on his behalf
for his personal business, he was not held bound when his wife accepted bills on his behalf for the
business, which the agent was conducting and which was different from his personal business. In
the case of Reid v. Rigby46 where the agent obtained a loan outside his authority by signing a
cheque on behalf of his principal to pay the principal’s workmen, the principal was held bound.
In cases where the third party has knowledge of the limitation of the agent’s authority or could
have discovered it by reasonable examination, he would be bound by it as held in the case of
Ferguson v. Um Chand Boid.47

An authority is said to be implied when it is to be inferred from the circumstances of the case; and
things spoken or written or the ordinary course of dealing, may be accounted circumstances of the
case. The distinction between express and implied authority depends merely on whether the
authority is delimited by words or by conduct. In the case of Ramanathan v. Kumarappa38
48
an estate agent was appointed to find a purchaser for a certain property. He accepted a
deposit from a prospective customer and misappropriated it. The principal was held liable
because an estate agent has an implied authority to take a deposit.

40
Mulla, The Indian Contract Act, 13th Ed. (2011), P-344.
41
Sec186 of Indian Contract Act 1872.
42
Section 187 of Indian Contract Act 1872.
43
Syed Abdul Khader v. Rami Reddy, 1979 2 SCC 601.
44
Avtar Singh.’Law of Contract and Specific Relief’, 10th Ed. (2015), P-775.
45
Atwood v. Munnings (1927), 7 B. & C. 278, 283.
46
Reid v. Rigby (1894)
47
Ferguson v. Um Chand Boid.(1905)
48
Ramanathan Cheriappa v. Kumarappa K.M.V.V Kumariappa Chettiar (1939)
 16

2. The second type of authority is apparent authority. In the case of Hely-Hutchinson v.

Brayhead Ltd49 (1967), it was stated by the learned jurist Lord Denning “Ostensible or
apparent authority is the authority of an agent as it appears to others. It often coincides with
actual authority. Thus, when the board (of directors) appoint one of their members to be a
managing director they invest him not only with implied authority, but also with ostensible
authority to do all such things as fall within the usual scope of that office.”50

In the case of Valapad Co-operative Stores Limited v. Srinivasa Iyer51 it was held: “The term
‘ostensible authority’ denotes no authority at all. It is a phrase conveniently used to describe
the position which arises when one person has clothed another, or allowed him to assume an
appearance of authority to act on his behalf, without actually giving him any authority either
express or implied, by which appearance of authority a third party is misled into believing
that a real authority exists.”

The doctrine of apparent authority is really an application of the principle of estoppel, for
estoppel means only that a person is not permitted to resist an inference which can reasonably be
drawn from the principal’s words or conduct. The person making the representation is estopped
from denying the ostensible authority which was thus created. Three things should be noted here.
The representation must be made by or with the authority of the principal. Ostensible authority
cannot be created by simply a representation of the agent. The third party must rely on a
representation of the agent’s authority to act as agent. The agent’s want of authority must be
unknown to the third party.
When an agent has, without authority, done acts or incurred obligations to third persons on
behalf of his principal, the principal is bound by such acts or obligations if he has by his
words or conduct induced such persons to believe that such acts and obligations were within
the scope of the agent’s authority.52

Where, however, a person contracting with the agent has actual or constructive notice of any
restriction on the agent’s ostensible authority, he is bound by the authority.51 The ultimate
question is whether the circumstances under which a servant has made a fraudulent

49
Hely-Hutchinson v. Brayhead Ltd, [1968] 1 QB 549.
50
Hely-Hutchinson vs Brayhead Ltd (1967),
51
Valapad Co-operative Stores Limited v. Srinivasa Iyer (1964)
52
Section 237 Indian Contract Act 1872.
 17

misrepresentation which has caused loss to an innocent party conducting with him are such as to
make it just for the employer to bear the loss.53
The next question that arises is what happens when an agent exceeds his authority.
When an agent does more than he is authorised to do and when the two can be separated, so much
only of what he does as is within his authority is binding as between him and his principal.54 If the
act cannot be separated from what is within it, the principal is not bound to recognize the
transaction.55Any notice given to or information obtained by the agent, provided it be given or
obtained in the course of business transacted by him for the principal, shall have the same legal
consequences as if it had been given to or obtained by the principal.56 Misrepresentations 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
made or committed by the principal.57

53
Avtar Singh Law of Contract and Specific Relief 10th Ed. (2015) P-789
54
Section 227, Indian Contract Act 1872.
55
Section 228, Indian Contract Act 1872.
56
Section 229, Indian Contract Act 1872.
57
Section 238, Indian Contract Act 1872.
 18

CHAPTER 4
INDEMNITIES AND RIGHT TO COMPENSATION IN A CONTRACT OF AGENCY
In a contract of agency, indemnity can only be sought in the event of termination of the
contract. An agency is terminated by the Principal revoking his authority; or by the Agent
renouncing the business of the agency; or by the business of the agency being completed; or
by either the Principal or Agent dying or becoming of unsound mind; or by the Principal
being adjudicated an insolvent under the provisions of any act for the time being in force for
the relief of insolventdebtors9. Where the Agent has himself an interest in the property which
forms the subject matter of the agency, the agency cannot be terminated to the prejudice of
such interest.58
The right to indemnity and/or the right to compensation to the Agent in the event of
termination of the Agency Contract is subject primarily to the terms and conditions of the
Agency Contract entered into between Principal and Agent. Since the Agent represents the
Principal, the Agent has the right to be indemnified for all the lawful acts done by the Agent
in the course of the agency. The Act contains specific provisions under Section 222 and 223,
discussed in detail in subsequent paragraphs, for the payment of indemnity or compensation
in the event of revocation of the Agency Contract by the Principal prior to its term.
The Courts in India, from time to time have held that an Agent can claim indemnity against
the Principal, if the Agent is able to prove that he has actually incurred a loss or that loss is
eminent due to the wrongful termination of the Agency Contract. For an Agent to claim
indemnity it is essential that the act done by him must be lawful. It is not sufficient that his
acts are innocent or done in good faith. Further, it is important that the action in respect of
which the Agent is claiming indemnity must have been performed in accordance with the
authority conferred upon the Agent. There is no right to indemnity unless the Agent has acted
within his express, implied or usual authority. Subject to the terms of Agency Contract the
Agent may, in addition to indemnity, claim compensation by way of damages, which may
either be general or special. 59
General damages are those, which result from ‘direct and proximate’ consequences from
breach of contract. Normally, what can be awarded is compensation for loss or damage,
which can be directly or proximately attributed to the breach of contract. One way of
assessing damages is the difference between the contract price and the market price on date

58
Section 202, Indian Contract Act 1872.
59
Avtar Singh.’Law of Contract and Specific Relief’ 10th Ed. (2015) P-775 Avtar Singh.’Law of Contract and
Specific Relief’ 10th Ed. (2015) P-784
 19

of breach of contract, plus reasonable expenses incurred by him on account of the breach plus
cost of suit in court of law. Special damages or consequential damages arise due to existence
of special circumstances. Such damages can be awarded only in cases where the special
circumstances were foreseeable by the party committing the breach or were specifically
known to the party.60

The conditions of claiming indemnity are provided under Section 222 and 223 of the Indian
Contract Act 1872. Section 222 of the Act provides that an employer is bound to indemnify
an Agent against all the consequences of all lawful acts done by such Agent in the exercise of
the authority conferred upon him. By virtue of this section, under the Indian Law there is an
implied contract between the Principal and the Agent whereby the Principal has to indemnify
the Agent against the losses and consequences of all lawful acts done by such Agent in
exercise of the authority conferred upon him. For instance, where an Agent who is authorized
to make contracts for the supply of goods, is authorized or is not forbidden to make those
contracts in his own name, he becomes entitled to an indemnity against any personal liability
in respect of any contract for the purchase of goods the moment he enters into such contract.
His right of action in respect of this indemnity is not postponed to his satisfaction of the
liabilities against which he claims indemnity.61

Section 223 of the Act provides that an Agent has to be indemnified against consequences of
unlawful acts, which are not criminal, done by him in good faith and without the knowledge
that such act is unlawful. This provision entitles an Agent to claim indemnity in respect of the
acts done in good faith though they cause injury to the rights of third persons.62 The right to
indemnity entitles an Agent to recover his commission remuneration and all his expenses that
he has incurred on the Principal’s behalf. It has been held by Supreme Court of India that the
right of an Agent to obtain indemnity from his Principal is a matter entirely collateral to the
main contract made by the Agent on behalf of the Principal, and is not affected by anything,
which renders the main contract unenforceable.

60
Ibid. 785.
61
Section 222, Indian Contract Act 1872.
62
Section 223, Indian Contract Act 1872.
 20

Under Section 225 of the Act, the Principal is liable to compensate the Agent in respect of
any injury caused to such Agent due to Principal’s neglect or want of skill. In order to entitle
the Agent to compensation he must prove that:-

 Some injury was caused to him; and

 Such injury was caused by the Principal’s neglect or want of skill.63

The Agent cannot recover compensation, if the Principal proves that the Agent could have
avoided the consequence of Principal’s negligence by reasonable means. Further, the Agent
cannot recover compensation, if the injury has resulted from the nature and circumstances of
his employment, or if the injury is a natural and necessary consequence of his employment.

According to the Limitation Act, 1963 when an Agent sues the Principal for money spent by
him on behalf of the Principal and recoverable under Section 222 and 223 of the Act, the suit
should be filed within a period of three years from the date of payment and not when the
agency terminates. Suit for claiming compensation and indemnity should be filed within a
period of three years from the date the right to sue has first arisen i.e. when the cause of
action first arises. When the right to sue first arises largely depends on the facts and
circumstances of each case.

63
Section 225 Indian Contract Act 1872.
 21

CHAPTER 5
CONCLUSION

Under the Indian Contract Act 1872, agents are basically people who have been entrusted to
work on behalf of the principal. The principal is therefore the person who engages and
employs the agent. The agent can be anyone who is competent enough to form a contract, i.e.
a person who is not under the majority age, and also someone who does not suffer from
insanity or an unsound mind.
The agent is then granted a particular level of authority on the basis of his work by the
principal, the authority being either express or implied. It can also be divided into specific
and general authority; the former denoting the agent has been bestowed with authority to act
on behalf of the principal in a particular manner in certain specific situations, wherein general
authority is such that it allows the agent to function in a wide variety of areas, not limited by
any specifications. However, misrepresentations or frauds committed by the agent in course
of pursuance of his duties as an agent have the same effect as that of the principal doing the
same. Moreover, in cases where the agent exceeds the authority bestowed on him by the
principal, and acts in a particular way, then unless the act in which the agent did have
authority bestowed on him and he act that he committed without the necessary authority can
be separated, the principal is not bound to accept whatever has been done by the agent.
The contract of agency also provides an option for indemnifying or compensating either party
of the contract and the basics of indemnity in a contract of agency has been highlighted under
Sections 222, 223 and 225 of the Indian Contact Act 1872. However, the limitation period
for the agent suing the principal for any money is 3 years since the cause of action first arises,
according to the provisions of the Limitations Act. An employer is bound to indemnify an
Agent against all the consequences of all lawful acts done by such Agent in the exercise of
the authority conferred upon him. The agent is also to be compensated for any loss caused to
him due to want of skill or neglect on part of the principal, according to the provisions of
section 225.

Thus, to conclude, the contract of agency is a very unique kind of contract, wherein a person
is given the authority to enter into the agency, and work on behalf of the principal, and is also
liable to be compensated and indemnified for any loss incurred by him in his duty.
 22

Bibliography
Books:
 Avtar Singh ‘Contract and Specific Relief Act’ 10th Ed (2015).
 Bare Act of Indian Contract Act 1872.
 Mulla, The Indian Contract Act, 13th Ed. (2011).
 Pollock & Mulla, Indian Contract Act 1872, Lexis Nexis, 14th Edition.

Websites:
 https://www.toppr.com/guides/business-laws-cs/indian-contract-act-1872/creation-of-
agency/
 https://sol.du.ac.in/mod/book/view.php?id=644&chapterid=379
 https://www.slideshare.net/nileshmishra12979/contract-of-agency-14550183
 https://www.lawctopus.com/academike/agency-contracts/