ch.

20 : Agency 325

20 C H A P T E R

Agency
‘Agent’ and ‘principal’ defined (Section 182).—An ‘agent’ is a person em-
ployed 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 repre-
sented, is called the ‘principal’.

What is Agency?
An agency is a contract of employment for the purpose of bringing an-
other-in legal relation with a third party or in other words, the contract
between the principal and agent is primarily a contract of employment to
bring him into legal relation with a third party or to contract such business
as may be going on between him and the third party.
Competence of the parties to enter into a contract of agency
As per 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 means that the person employing the agent must himself have
the legal capacity or be competent to do the act for which he employ the
agent. A minor or a person with unsound mind cannot appoint an agent.
Consideration not required: As per section 185 consideration is not neces-
sary to create an agency. It comes under the category of those contracts
which law has declared to be valid without consideration.

Who is an Agent?
Who may be an agent (Section 184).—As between the principal and 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 principle according to the provisions in that behalf herein contained.
An agent is a person either actually or by law(implied) held to be authorised
and employed by any person to bring him into contractual or other legal
325
taxmann®
326 Part I : Indian Contract Act, 1872

relations with a third party. He is a representative vested with authority,

real or ostensible, to create voluntary primary obligations for his principal
by making promises or representations to third persons that induced them
to change their legal relations. Representative character and derivative
authority may briefly be said to be the distinguishing features of an agent.
An agent represents his principal in transactions with third parties or per-
forms an act for the principal.
Case Law
In P. Krishna Bhatta v. Mundila Ganapathi Bhatta (Died)399, it was opined that
in legal phraseology, every person who acts for another is not an agent. A domes-
tic servant renders to his master a personal service; a person may till another’s
field or work in his shop or factory or mine but in none of these capacities he is
an “agent” as he is not acting for another in dealings with third persons. It is only
when he acts as representative of the other in business negotiations, that is to say,
in the creation, modification, or termination of contractual obligations between
that other and the third persons, that he is an “agent.” Representation of another in
business negotiations with third persons so as to bind such other by his own acts as
if they were done by the former, is of the essence of the relation of agency and the
distinguishing feature between art “agent” and other persons who act for another.

Whether Minor can be Appointed as an Agent?

As per section 184, an agent need not necessarily be competent to contact
and hence minor or an insane can be appointed as an agent he can bring
about legal relations between the principal and the third party but such an
incompetent agent cannot personally be held liable to the principal.

Whether a Minor(Agent) can be Responsible towards Principal

No, although minor can be appointed as an agent but no burden can be
imposed on minor. Those contract of agency that impose burden or make
him responsible towards principal can not be entered with minor. Later
part of Section 184 prescribe that no person who is not of the age of ma-
jority and of sound mind can become an agent, so as to be responsible to
his principal according to the provisions contained in this Act.

Is it impermissible in law to give a joint Power by three persons in favour

of one agent?
Joint power by more than one person in favour of one person is not
impermissible in law.

399. AIR 1955 Mad 648.

taxmann®
 ch. 20 : Agency 327

Case Law
In Syed Abdul Khader v. Rami Reddy400, it was held that as stated in Halsbury’s
Laws of England, Vol. I, 4th Edn. para 726, Co-principals may jointly appoint an
agent to act for them and in such case become jointly liable to him and may jointly
sue him.

Types of Agent Authority

Agent’s authority may be expressed or implied (Section 186).—The authority
of an agent may be expressed or implied.
I. Express Authority: As per section 187 an authority is said to be express
when it is given by words spoken or written. The authority enables the
agent to bind the principal by acts done within the scope of his/her au-
thority. A written contract of agency is a power of attorney wherein one
person empowers the other to represent him/her, or act on his/her behalf
for certain purposes.

Illustration
A owns a shop in Serampor, living himself in Calcutta, and visiting the shop occa-
sionally. The shop is managed by B, and he is in the habit of ordering goods from
C in the name of A for the purposes of the shop, and of paying for them out of A’s
funds with A’s knowledge. B has an implied authority from A to order goods from
C in the name of A for the purposes of the shop.

When Agent Authority to do an Act will be Extended

According to Section 188 an agent having an authority to do an act has au-
thority to do every lawful thing which is necessary in order to do such act.
An agent having an authority to carry on a business, has authority to do
every lawful thing necessary for the purpose, or usually done in the course,
of conducting such business.

Illustrations
(a) A is employed by B, residing in London, to recover at Bombay a debt due to
B. A may adopt any legal process necessary for the purpose of recovering
the debt, and may give a valid discharge for the same.
(b) A constitutes B his agent to carry on his business of a ship-builder. B may
purchase timber and other materials, and hire workmen, for the purpose of
carrying on the business.

II. Implied Authority: An implied authority arises from the conduct, situation
or relationship of the parties. It is inferred from the circumstances of the
400. AIR 1979 SC 553, (1979) 2 SCC 601, 1979 2 SCR 424.
taxmann®
328 Part I : Indian Contract Act, 1872

case. The agency arises when the principal conducts himself/herself towards
the person alleged to be the agent to the third parties in such a manner as if
the principal had conceded to the appointment of that person as agent. As
per section 187 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.
This form of agency can be formed in any of the following manner;
a. Agency in Emergency: According to section 189 of the Indian Contract
Act an agent has authority in an emergency, to do all such acts for the
purpose of protecting his principal from loss as would be done by a person
of ordinary prudence in his own case, under similar circumstances. The
agent while protecting the principal from loss may exceed his authority
thus giving rise to agency of necessity provided (1) he was not in a position
to communicate with the principal (2) had taken all reasonable care and
necessary steps to protect the interests of the principal and (3) had acted
in good faith.

Illustrations
(a) An agent for sale may have goods repaired if it be necessary.
(b) A consigns provisions to B at Calcutta, with directions to send them imme-
diately to C, at Cuttack. B may sell the provisions at Calcutta, if they will not
bear the journey to Cuttack without spoiling.

b. Agency by Necessity: Sometimes in certain urgent circumstances the

law confers an authority on a person to act as an agent for the benefit of
another, there being no opportunity of communicating with that other.
Such agency is called agency of necessity. The following are some cases
of agency by necessity:
Person entrusted with another’s property: when a person is entrusted with
some property of another, which he/she has to protect or preserve. In
such case although the person who is entrusted with the property has no
express authority to do the act necessary to preserve it, yet because of the
necessity such an authority is implied.
Husband and wife: A wife is considered to be the agent of her husband.
This implied authority of the wife is not absolute. The implied authority
can be presumed if the following conditions are met;
i. The husband and wife must be living together in a domestic estab-
lishment of which the wife is the incharge.401
ii. The wife can run her husband into debt only for necessaries.
401. Debenham v. Mellon (1880) AC 24.

taxmann®
 ch. 20 : Agency 329

The husband can escape liability if he can prove the following:

(1) He has expressly forbidden his wife to pledge his credit.
(2) The goods purchased by his wife are not necessary goods.
(3) He has expressly told the salesman not to give credit to his wife.
Husband cannot be presumed as an agent of wife. His authority can arise
only from his appointment as an agent
c. Agency by Estoppel: At times the principal by his/her conduct creates
an impression in the mind of a third person that the agent has an authority
to act on his/her behalf. In such a case the principal is liable towards the
third person for the acts done by the agent, on the ground of the application
of the law of estoppel. The basis of the action is what appears to the third
person to be an authority, i.e. apparent or ostensible authority conferred
on the agent. Section 237 further describes the liability of principal if the
principal induces third person to believe that agent’s unauthorized acts
were authorized. When an agent has, without authority, done acts or in-
curred 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 third persons to believe that such acts and obligations were
within the scope of the agent’s authority402.

Illustrations
(a) A consigns goods to B for sale, and gives him instructions not to sell under a
fixed price. C, being ignorant of B’s instructions, enters into a contract with
B to buy the goods at a price lower than the reserved price. A is bound by
the contract.
(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to
C in violation of private orders from A. The sale is good.

Ostensible or Apparent Authority

Ostensible authority coincides with the actual authority. It means that the
authority of an agent as it appears to others i.e. third party. The principal
will be liable for the act done by an agent if an act within the ambit of ap-
parent authority. When it is said that agent’s act was within the scope of
his apparent authority it means that act appears to be authorised403.

402. Section 237.

403. J.L. Montrose, Actual and Apparent Authority, (1938) Can BR 757.

taxmann®
330 Part I : Indian Contract Act, 1872

Case Law
In Ram Pertab v. Marshall404 it was held that principal will be liable against the
third person if the contract is made by the agent in excess of agent’s authority but
the third person showed it by evidence that the contracting party had been led
into an honest belief in the existence of an authority to the extent apparent to him.

Knowledge of Lack of Authority

If a person entering into the contract is having the knowledge about the
limited powers of the agent or is aware that the person with whom they are
entering in the contract is not have any authority to enter into the contract
then they are governed and bound by those restrictions etc.
An apparent authority once created will continue to exist till the time it is
terminated by a notice to the third person.

Difference between Ostensible Authority and Implied Authority

Implied authority is the real authority in the same manner as in the case
of express authority. There is only one difference between express and
implied authority and that is use of words in first case and presumed from
behaviour and conduct in latter case.
The ostensible authority is not a real authority. This expression is used
in the cases where one person has allowed other to represent himself as
an agent that misled the third party to believe that real authority exist in
favour of that other.405
Liability of Principal in case Agent Acts Without Authority

Case Law
In State of Orissa v. United India Insurance Co. Ltd.406, it was held that the principal
is not bound by such an undertaking, by operation of Section 237 of the Contract
Act as this section provides that “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
third persons to believe that such acts and obligations were within the scope of
the agent’s authority.” In this case it was found, as a fact, that he had no authority
to undertake such liability by subsequent incorporation into the policy of such
under writing and, therefore, by operation of Section 237of the Contract Act, the
Insurance Company was not bound by such act of the manager.
d. Agency by Ratification: If a person may acts as an agent of someone and
does an act on his/her behalf for which he/she does not have the authority,

04. ILR(1898) 26 Cal 701.

4
405. Valapad Coop Stores Ltd. v. Srinivasa Iyer AIR 1964 Ker. 176.
406. AIR 1997 SC 2671.
taxmann®
 ch. 20 : Agency 331

and if that someone binds himself/herself for the acts done by the agent,
then it is called an agency created by ratification.
The Principal Must have contractual capacity both at the time of the con-
tract and at the time of ratification.

Right of the Principal to Elect or Ratify

Section 196 provides that where acts are done by one person on behalf
of another, but without his knowledge or authority, he may elect to ratify
or to disown such acts. If he ratify them, the same effects will follow as if
they had been performed by his authority. Section 198 further explains
that while ratifying an act, the principal must be aware about the complete
facts as well as about the consequences too. No valid ratification can be
made by a person whose knowledge of the facts of the case is materially
defective. The person ratifying any unauthorized act i.e. principal has the
right to elect to ratify or disown but after selection this limited right will
come to an end. The person further cannot make selection that what part
to be ratified and what part to be disowned as section 199 impose a duty
on the person ratifying unauthorised act done on his behalf to ratifies the
whole of the transaction of which such act formed a part. The principal
cannot ratify a part of the transaction and reject the rest of it. The person
cannot accept the benefits and reject the burdens.
Type of Ratification
Section 197 provides that ratification may be expressed or may be implied
in the conduct of the person on whose behalf the acts are done.

Illustrations
(a) A, without authority, buys goods for B. Afterwards B sells them to C on his
own account; B’s conduct implies a ratification of the purchase made for him
by A.
(b) A, without B’s authority, lends B’s money to C. Afterwards B accepts interest
on the money from C. B’s conduct implies a ratification of the loan.

Ratification must be done within a Reasonable Time after the Act that is
to be Ratified: Ratification to be effective must be made within a reason-
able time after the original contract has been made. If the time has been
expressly fixed for the performance of the contract then ratification must
be made within that time.
Ratification of Unauthorized Act cannot Injure Third Person—Section
200 provides that an act done by one person on behalf of another, without
such other person’s authority, which, if done with authority would have

taxmann®
332 Part I : Indian Contract Act, 1872

the effect of subjecting a third person to damages, or of terminating any

right or interest of a third person, cannot, by ratification, be made to have
such effect.

Illustrations
(a) A, not being authorized thereto by B, demands, on behalf of B, the delivery
of a chattel, the property of B, from C who is in possession of it. This demand
cannot be ratified by B, so as to make C liable for damages for his refusal to
deliver.
(b) A holds a lease from B, terminable on three months’ notice. C, an unauthorized
person, gives notice of termination to A. The notice cannot be ratified by B,
so as to be binding on A.

Effect of Ratification
Ratification is identical to prior authority. Ratification relates back to the
date when the act (contract) was done by the agent, which means that
agency comes into existence from the moment the agent first acts and not
from the time when the principal ratifies the act (contract).
The Act to be Ratified must be Lawful and not Void or Illegal or Ultra Vires
in Case of a Company: It is important that the object and the consideration
of the agreement entered into by the agent and the third party be lawful.
The principal cannot ratify an unlawful agreement.
Case Law
In Bolton v. Lambert407 the managing director of a company, purporting to act as
agent on the company’s behalf, but without its authority, accepted an offer made
by Lambert, the defendant, for the purchase of some sugar works belonging to
them. Lambert subsequently withdrew the offer but the company ratified the
managing director’s acceptance. Held: that Lambert was bound. The ratification
related back to the time of managing director’s acceptance and so the withdrawal
of the offer was inoperative.

Test for Determining Existence of Agency Relationship

Whether a particular persons is an agent can be verified by finding out if
his acts bind the principal or not. The true relationship of the parties in
each case has to be gathered from the nature of the contract, its terms and
conditions, and the terminology used by the parties is not decisive of the
legal relationship408. The law has to see the substance of the transaction
and not the terminology used by the parties.409
07. (1889) 41 Ch. D. 295.
4
408. Tirumala Venkateswara Timber ... v. Commercial Tax Officer 1968 AIR 784, 1968 SCR (2) 476.
409. Superintendent of Stamps, Bom v. Breul and Co. (1944) 46 Bom LR 428.

taxmann®
 ch. 20 : Agency 333

Difference between Agent, Servant and Independent Contractor

In Halsbury’s Laws of England410, the positions of an agent, a servant and
independent contractor are distinguished in following words;
“ An agent is to be distinguished on the, one hand from a servant, and on the
other from an independent contractor. A servant acts under the direct con-
trol and supervision of his master, and is bound to conform to all reasonable
orders given him in the course of his work; an independent contractor, on
the other hand, is entirely independent of any control or interference, and
merely undertakes to produce a specified resulted employing his own means
to produce that result. An agent, though bound to exercise his authority in
accordance with all lawful instructions which may be given to him from time
to time by his principal, is not subject in its exercise to the direct control or
supervision of the principal. An agent, as such is not a servant, but a servant
is generally for some purposes his master’s implied agent, the extent of the
agency depending upon the duties or position of the servant”.

Case Law
In Lakshminarayan Ram Gopal and Son v. The Government of Hyderabad411, it
was held that “Considering the position of the appellants in the light of the above
principles it is no doubt true that the appellants were to act as the agents of the
Company and carry on the general management of the business of the Company
subject to the control and supervision of the Directors. That does not however mean
that they acted under the direct control and supervision of the Directors in regard
to the manner or method of their work. The Directors were entitled to lay down
the general policy and also to give such directions in regard to the management as
may be considered necessary. But the day to day management of the business of
the Company as detailed in the Articles of Association and clause 3 of the Agency
Agreement was within the discretion of the appellants and apart from directing
what work the appellants had to do as the agents of the Company the Directors had
not conferred upon them the further right to direct how that work of the general
management was to be done. The control and supervision of the directors was a
general control and supervision and within the limits of their authority the appel-
lants as the agents of the Company had perfect discretion as to how that work of
general management was to be done both in regard to the method and the manner
of such work. The appellants for instance had perfect latitude to enter into agree-
ments and contracts for such purpose and to such extent and in such manner as
they thought proper. They had the power to appoint, employ, discharge, reemploy
or replace the officers and servants of the Company with such powers and duties
and upon such terms as to duration of office remuneration or otherwise as they
thought fit. They had also the power generally to make all such arrangements and
to do all such things and acts on behalf of the Company, as might be necessary
or expedient and as were not specifically reserved to be done by the Directors.
These powers did not spell a direct control and supervision of the Directors as of a

10. Hailsham Edition-,Volume 1, p. 193.

4
411. AIR 1954 SC 364, 1955 SCR 393.

taxmann®
334 Part I : Indian Contract Act, 1872

master over his servant but constituted the appellants the agents of the Company
who were to exercise their authority subject to the control and supervision of the
Directors but were not subject in such exercise to the direct control or supervision
of the principals. The liberty given to the appellants under clause 4 of the Agency
Agreement to deal with the Company by way of sale and purchase of commodi-
ties therein mentioned also did not spell a relation as between master and servant
but empowered the appellants to deal with the Company as Principals. All these
circumstances establish that the appellants were the agents of the Company and
not merely the servants of the Company remunerated by wages or salary.

Difference between Buyer and Agent

Case Law
In Tirumala Venkateswara Timber v. Commercial Tax Officer412,it was held that
As a matter of law there is a distinction between a contract of sale and a contract
of agency by which the agent is authorised to sell or buy on behalf of the principal
and make over either the sale proceeds or the goods to the principal. The essence
of a contract of sale is the transfer of title to the goods for a price paid or promised
to be paid. The transferee in such a case is liable to the transferor as a debtor for
the price to be paid and not as agent for the proceeds of the sale. The essence of
agency to sell is the delivery of the goods to a person who is to sell them, not as his
own property but as the property of the principal who continues to be the owner
of the goods, and will therefore be liable to account for the sale proceeds.

Difference between Agency and Bailment

Sl. Bailment Agency
No.
1 Meaning: The term bailment is derived Meaning :When a person appoints an-
from the French word ‘Bailor’, which other to act on his behalf with a third
means ‘to deliver’. party, it is called ‘Agency’.
2 Definition: Voluntarily Change of pos- Definition: ‘Agency’ is the legal relation-
session from one person to another is ship between an agent and Principal; to
called contract of bailment. bring the principal into legal relation-
ship with the third party.
3 Example: ‘X’ delivers a cloth to ‘Y’, a Example :‘X’ appoints ‘Y’ to purchase
Tailor for making a shirt. The contract some property on his behalf. Here ‘X’
between ‘X’ and ‘Y’ is bailment. ‘X’ is a is Principal and ‘Y’ is Agent.
Bailor and ‘Y’ is a Bailee.
4 In bailment, the Bailee does not repre- The agent represents his principal,
sent the Bailor. He does not derive any and derives certain power from his
authority from the Bailor. principal.
5 In Bailment, A Bailee cannot sell the In Agency, an agent can sell the prop-
property under bailment. erty.
412. 1968 AIR 784, 1968 SCR (2) 476.

taxmann®
 ch. 20 : Agency 335

Sl. Bailment Agency

No.
6 A Bailee cannot transfer the ownership An agent can transfer the ownership
of the property. of the property.
7 A Bailee must have possession of the An agent may or may not have posses-
property. sion of the property.

Kinds of Agent
Agents are of various kind. In Kennedy v. De Trafford413 it was observed by
Lord Herschell that “no word is more commonly and constantly abused
than the word ‘agent’. A person may be spoken of as an ‘agent’, and no
doubt in the popular sense of the word may properly said to be an ‘agent’.
Although when it is attempted to suggest that he is an ‘agent’ under such
circumstances as create the legal obligations attaching to agency that use
of the word is only misleading.”
(a) Sub-Agent:
According to Section 190 an agent cannot lawfully employ another to
perform acts which he has expressly or impliedly undertaken to perform
personally. This section is based on the principal that ‘a delegate cannot
delegate’. According to this, a person to whom powers have been delegat-
ed cannot delegate them to another. But if the ordinary custom of trade
or the nature of the agency permits then a sub-agent must be employed.
Section 191 defines sub-agent as a person employed by and acting under
the control of, the original agent in the business of agency. He is the agent
of the original agent.
Sub-agency denotes delegation of power by an agent to a person appointed
by him as sub-agent. The relation of the sub-agent to the original agent is,
as between themselves, that of the agent and the principal.
The effects of appointment of sub-agent
(i) In case of proper appointment:
Section 192 provides that where a sub-agent is properly appointed,
the principal is, so far as regards third persons, represented by the
sub-agent, and is bound by and responsible for his acts, as if he were
an agent originally appointed by the principal.
Although against third person, the principal will be liable for the acts
of sub-agent but the sub-agent is not directly responsible for his acts
to the principal, except in cases of fraud or wilful wrong.

413. (1897) AC 180.

taxmann®
336 Part I : Indian Contract Act, 1872

It is the agent who is responsible to the principal for the acts of the
sub-agent and the sub-agent is responsible for his acts to the agent
only and not to the principal.
(ii) In the case of appointment without authority:
Section 193 provides that where an agent, without having authority
to appoint sub-agent has appointed a person to act as a sub-agent,
then the principal is not bound by the acts of the sub-agent, nor is
the sub-agent liable to the principal. Agent i.e. person appointing sub-
agent will stand in the capacity of principal against that person and
is responsible for his acts both to the original principal and to third
persons. Neither the principal is represented by or responsible for
the acts of the person so employed, nor is that person responsible to
the principal.
(b) Substituted Agent:
Substituted agents are different from sub-agents. Section 194 provides that
substituted agents are not sub-agents but are in fact agents of the principal.
Where an agent, holding an express or implied authority to name another
person to act for the principal in the business of the agency, has named
another person accordingly, such person is not a sub-agent, but a substi-
tuted agent of the principal for such part of the business of the agency as
is entrusted to him.

Illustrations
(a) A directs B, his solicitor to sell his estate by auction, and to employ an auc-
tioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is
not a sub-agent, but is A’s agent for the conduct of the sale.
(b) A authorizes B, a merchant in Calcutta, to recover the moneys due to A from
C & Co. B instructs D, a solicitor, to take legal proceedings against C & Co.
for the recovery of the money. D is not a sub-agent, but is solicitor for A.

Duty of the Agent while Naming Substituted Agent

Section 195 provides that in selecting such agent for his principal, an agent
is bound to exercise the same amount of discretion as a man of ordinary
prudence would exercise in his own case. If the agent has suggested the
name after exercise the reasonable discretion and prudence after that his
responsibility will come to an end and he is not responsible to the principal
for the acts or negligence of the agent so selected.

taxmann®
 ch. 20 : Agency 337

Illustrations
(a) A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor
of good reputation to choose a ship for A. The surveyor makes the choice
negligently and the ship turns out to be unseaworthy and is lost. B is not, but
the surveyor is, responsible to A.
(b) A consigns goods to B, a merchant, for sale. B, in due course, employs an
auctioneer in good credit to sell the goods of A, and allows the auctioneer to
receive the proceeds of the sale. The auctioneer afterwards becomes insolvent
without having accounted for the proceeds. B is not responsible to A for the
proceeds.

(c) Universal Agent:

A universal agent has a universal or an unlimited power to act on behalf
of his principal. A universal agent is one whose authority is unlimited and
who can do any act on behalf of his principal provided such act is legal
and is agreeable to the law of land.
When a person leaves his country for a long time, he may appoint his son, wife
or friend as his universal agent to act on his behalf in his absence.

(d) Mercantile Agents:

Kinds of Mercantile Agents:
Mercantile agents may be classified:
(a) On the basis of rights, and
(b) On the basis of functions.
(a) On the basis of rights:
(i) Special Agents:
A special agent is also known as a specific or particular agent. Such agent
appointed to perform a particular work or to represents his principal in
particular transaction only. As soon as the said period lapses, the agency
stands terminated. Specific agents have a limited authority and as soon as
the entrusted to him is performed, his authority also comes to an end. A
special agent cannot bind his principal in any act other than for which he is
specially appointed. If he does anything outside his authority, his principal
cannot be bound by it. The third parties that deal with a special agent must
ascertain the extent of the authority he has.
(ii) General Agents:
This type of agents has a general authority to do everything in the course of
his agency and he has to perform all the acts in the interest of his principal.
Thus, a general agent is one that has authority to do all acts connected with
the business of his principal. General agents have an implied authority to
taxmann®
338 Part I : Indian Contract Act, 1872

bind his principal by doing various acts necessary for carrying on the busi-
ness of his principal. Sufficiently wide powers are vested in him to affect
the business deals, enter into trade bargains, to make purchases and also
payments of the purchases, to receive money on behalf of his principal.
(b) On the basis of functions:
(i) Factor:
In the words of Storey, “A factor has been defined as an agent employed to
sell goods or merchandise consigned or delivered to him by his principal
for compensation.” Thus a factor is a general agent who sells the goods
delivered to him in his own name on a commission basis.
He has the following powers:
(a) To sell goods in his own name;
(b) To sell goods on credit at a place and at such time which he thinks
best;
(c) To receive payment for the goods;
(d) To maintain a lien on goods for charges due to him.
(ii) Commission Agent:
A commission agent is one who acts on behalf of his principal in buying and
selling of goods in return for a commission. He makes purchases and sells in
his own name, but does not bear the trade risks. He has expert knowledge
about the goods in which he is dealing and also knows the market trends
in the particular commodity.
A commission agent performs the following duties:
(a) To buy goods at the most reasonable rates and to sell the same at
maximum profit;
(b) To obtain orders from buyers and arrange for the goods from sup-
pliers in his own name;
(c) To arrange for packing, transport and delivery of goods;
(d) To extend credit and collect payments;
(e) To claim from the principal his commission and incidental expenses.
(iii) Del Credere Agent:
A Del Credere Agent is another type of mercantile agent. A Del Credere
Agent by taking extra commission agrees to indemnify the principal against
any loss arising from the failure to perform of the persons with whom the
agent contracts on behalf of the principal. A del credere agent guarantees
his principal for the payment for all the goods he sells irrespective of the
payment received by him or not and for his additional risk which he bears,
taxmann®
 ch. 20 : Agency 339

he is entitled to an additional commission over and above his normal com-

mission. The extra commission paid for such a guarantee is called “del cre-
dere commission.” Thus the principal of a del credere agent is guaranteed
the payment of the sale proceeds of the goods in full.
A Del Credere Agent is not liable towards the buyer in the case default has
been made by the principal. He is also not liable for any disputes that may
arise between principal and the buyer regarding the contract. His liability
is only secondary and contingent pecuniary in nature. He will be liable to
indemnify the principal if the other contracting party fails to perform. A Del
Credere Agent is only liable to make payment in case the other contracting
party fails to perform. His liability cannot be extended for other obligations
arising out of the contract.
(iv) Broker:
In the words of Storey, a broker has been defined as, “an agent employed to
make bargains and contracts in matters of trade, commerce or navigation,
between two parties for a compensation, commonly called brokerage.” He
is a person whose main job is to arrange a buyer for a seller and vice versa,
that is to say, the work of a broker is finished the moment a deal materia-
lises between an intending buyer and a protective seller. Usually, a broker
does not take possession of title to goods, but only negotiates for their use.
(v) Auctioneers:
An auctioneer is a special mercantile agent who sells the goods of his princi-
pal by auction. He gets the possession of the goods and gives prior publicity
to the time and place of auction through daily newspapers, pamphlets and
catalogues. The goods to be sold by auction are displayed at the place of
auction for the benefit of the intending buyers. The seller usually quotes
the minimum price from where the auctioneer starts his sale. The lowest
price is known as upset price.
Auction sale may be “WITH RESERVE” and “WITHOUT RESERVE”. In
case of auction “with reserve”, no sale can take place below the minimum
price fixed by the seller which is known as “Reserve Price”. In case of auc-
tion “without reserve”, the auctioneer is bound to sell the product to the
highest bidder.
The price for which the bid is accepted is called “Knocked down price”, since
the acceptance of a bid by auctioneer is indicated by striking a hammer
on the desk by the latter. After the highest bid is accepted, the auctioneer
becomes the agent for both seller and buyer. For his services, the auction-
eer is entitled to a commission, which is a certain percentage of the sale
proceeds, usually fixed between him and the seller, prior to the auction.

taxmann®
340 Part I : Indian Contract Act, 1872

(vi) Underwriters:
Underwriters are persons who guarantee a company that in case the public
does not subscribe to the entire shares offered by it, they shall subscribe
and pay for the balance of shares specified in the underwriting agreement.
Thus underwriters remove the fear of non-subscription of shares of a com-
pany by the general public since they undertake to buy the shares which
the public does not buy. The underwriters are entitled to an underwriting
commission.
(vii) Forwarding Agents:
Such agents despatch goods to foreign countries on behalf of their prin-
cipals and play an important part in the international trade transactions.
They take possession of goods in the home country and then arrange for
its shipping and insurance before despatching them abroad.
(viii) Clearing Agents:
They assist their principals in importing goods from abroad. They take
delivery of goods when they arrive at the port of destination and after
paying the import and custom duties along with port dues, arranged for
their transportations to their principal’s warehouses.
(ix) Warehouser:
A warehouse keeper is an agent who keeps the goods of his principal in
storage in his godown, in return for storage charges, to be delivered to the
person directed by the principal. He can exercise his right of lien on goods
in his possession in case his charges are unpaid by the principal.
Termination of Agency
Section 201provides that 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 insolvent debtors.
A contract of agency is a species of the general contract. As such, an agency
may terminate in the same way as a contract is discharged except where
the agency is irrevocable. The relation of principal and agent can only be
terminated by the act or agreement of the parties to the agency or by oper-
ation of law. “An agency, when shown to have existed, will be presumed to
have continued, in the absence of anything to show its termination, unless
such a length of time has elapsed as destroys the presumption”.

taxmann®
 ch. 20 : Agency 341

If the time has been fixed by the parties, the contract of agency will come
to an end after the expiration of the time. If the parties did not fix any ap-
propriate time for the termination of contract, the contract is deemed to
be terminated after a reasonable time. “What constitutes a reasonable time
during which the authority continues is determined by the nature of the
act specifically authorized, the formality of the authorization, the likelihood
of changes in the purposes of the principal, and other factors”. Moreover,
the burden of proving the termination or revocation of an agency rests on
the party asserting it.

Termination of Agency Contract

By the Operation of Law By the Act of the Parties

u Expiry of time
u Termination of agency by the
u Fulfilment of Object Principal

u Death or Lunacy of either Party u Termination of agency by the Agent

u Insolvency of Principal u Termination of agency by both

the parties of the contract
u Destruction of Subject Matter

u Principal - Alien Enemy

Termination of agency by the operation of law

i. Expiry of time: At times contract of agency may get formed for a
particular period. In such a case after expiry of that agreed period,
termination of agency takes place.
ii. Fulfilment of object: At times the contract of agency may be found
for a particular objective or to do a particular venture. In such a case
termination of agency takes place after completion of that venture.
iii. Death or lunacy of either party: Whenever principal or agent come
across death or lunacy, agency contract gets terminated. When an
agency is terminated by the principal dying or becoming of unsound
mind, the agent is bound to take, on behalf of the representatives of

taxmann®
342 Part I : Indian Contract Act, 1872

his late principal, all reasonable steps for the protection and preser-
vation of the interests entrusted to him414.
iv. Insolvency of Principal: Principal should have capacity to contract.
When principal becomes insolvent, he foregoes capacity to contract
and termination of agency takes place. But the act is silent with re-
gard to insolvency of agent. As minor also can act as agent, it can be
conformed that insolvent person may act as agent.
v. Destruction of subject matter: When subject matter of contract gets
destructed, agency contract comes to an end.
vi. Principal has become Alien Enemy: When principal is alien and
war breaks out between the countries, then principal becomes alien
enemy and agency contract gets terminated.
vii. Liquidation of company: On account of legal entity company may
act either as principal or agent. Whatever the status may be, if com-
pany enters into liquidation, termination of agency takes place.
Termination of agency by the act of Parties: The following are the situations
where the agency is terminated by the act of parties.
i. Termination of agency by the Principal: Principal can terminate
the contract of agency by giving notice to agent. By doing so if agent
comes across any suffering. Principal has to compensate the agent.
ii. Termination of agency by the Agent: Agent also can terminate the
agency contract by giving notice to principal but by doing so if prin-
cipal comes across any suffering, agent has to compensate.
iii. Termination of agency by both the parties to the contract: By means
of mutual understanding between principal and agent, the contract
of agency may come to an end.

Effects of Termination
Termination of Sub-agency: According to section 210 the termination
of the authority of an agent causes the termination (subject to the rules
herein contained regarding the termination of an agent’s authority) of the
authority of all sub-agents appointed by him. It means that whenever man
agency gets terminated on account of any reason, sub-agency also goes off.

When Agency cannot be Terminated?

According to section 202 where the agent has himself an interest in the
property which forms the subject-matter of the agency, the agency cannot,

414. Section 209.

taxmann®
 ch. 20 : Agency 343

in the absence of an express contract, be terminated to the prejudice of

such interest.

Illustrations
(a) A gives authority to B to sell A’s land, and to pay himself, out of the proceeds,
the debts due to him from A. A cannot revoke this authority, nor can it be
terminated by his insanity or death.
(b) A consigns 1,000 bales of cotton to B, who has made advances to him on
such cotton, and desires B to sell the cotton, and to repay himself out of the
price the amount of his own advances. A cannot revoke this authority, nor is
it terminated by his insanity or death.

An agent may enforce contract if personally interested in the property that

forms the subject matter of the agency.
Case Law
In Corporation Bank, Bangalore v. Lalitha H. Holla415, it was held that a power
of attorney executed in favour of an agent, recording or recognising an interest
of the agent/attorney, in the property which is the subject-matter of the agency,
cannot be revoked or terminated, even if the instrument does not state specifically
that it is irrevocable, as then, it would be a power coupled with an interest.
If the document does not prima facie satisfy the requirements for the creation of
a power coupled with interest, then merely because the document itself describes
the agency to be an irrevocable one, it does not become an irrecoverable agency.
The Indian Contract Act also provides that in cases where the period of agency is
prescribed and the agency is not, in law irrevocable, then the agent may have a
cause of action against the principal for other remedies, in case the agency is re-
voked within the period. But that does not mean that an agency described as being
irrevocable is to be treated as an irrevocable (one) if, in law, it does not satisfy the
requirements of an irrevocable power of attorney.

Case Law
In Seth Loon Karan Sethiya v. Ivan E. John416, the Supreme Court was concerned
with a power of attorney under which the State Bank of Jaipur was authorised
to execute a decree obtained by one Seth Loon Karan, its debtor (decree-holder
under the decree) against a third person and credit the realisations to the debtor’s
account. The Supreme Court concluded that the said power of attorney was a
power coupled with interest and cannot be terminated to the prejudice of such
interest. The supreme court observed that from the power of attorney, it is clear
that the amount under the decree was specifically earmarked for discharge of the
debts due to the bank. It was constituted as a special fund for the said purpose. The
power to realise that fund was made over to the bank with the further authority to

15. AIR 1994 Kant 133.

4
416. AIR 1969 SC 73.
taxmann®
344 Part I : Indian Contract Act, 1872

set off the amount realised towards the debts due to it. In other words, the power
of attorney is an engagement to pay out of the particular fund the debt due to the
bank and hence the same constitutes an equitable assignment of the amount due
under the decree or so much of that amount as is necessary for discharging the
debts due to it.

Revocation of Agency (Sections 201-210)

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 in-
solvent under the provisions of any Act for the time being in force for the
relief of insolvent debtors.

Right of the Principal to revoke the Authority

According to section 203, if the agency is revocable in nature, then the
principal may, revoke the authority given to his agent at any time before
the authority has been exercised so as to bind the principal.

Rules regarding Revocation of Agency

1. Revocation may be Express or Implied: According to section 207 revo-
cation or renunciation may be expressed or may be implied in the conduct
of that principal or agent respectively417.

Illustration
A empowers B to let A’s house. Afterwards A lets it himself. This is an implied
revocation of B’s authority.

2. Reasonable Notice must be Given: Reasonable notice must be given of

such revocation or renunciation by the person who is revoking the agency,
otherwise the damage thereby resulting to the principal or the agent, as the
case may be, must be made good to the one by the other418.
3. Agency cannot be Revoked once the Authority has been Partly Exer-
cised: The principal cannot revoke the authority given to his agent after
the authority has been partly exercised, so far as regards such acts and
obligations as arise from acts already done in the agency419.

417. Section 207.

418. Section 206.
419. Section 204.

taxmann®
 ch. 20 : Agency 345

Illustrations
(a) A authorizes B to buy 1,000 bales of cotton on account of A and to pay for
it out of A’s moneys remaining in B’s hands. B buys 1,000 bales of cotton in
his own name, so as to make himself personally liable for the price. A cannot
revoke B’s authority so far as regards payment for the cotton.
(b) A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it
out of A’s money remaining in B’s hands. B buys 1,000 bales of cotton in A’s
name, and so as not to render himself personally liable for the price. A can
revoke B’s authority to pay for the cotton.

4. Compensation must be given if the Agency is Revoked before the Fix

Period of Time : If there is an express or implied contract that the agen-
cy should be continued for any period of time, the principal must make
compensation to the agent, or the agent to the principal, as the case may
be, for any previous revocation or renunciation of the agency without
sufficient cause420.
5. Revocation will become Effective after the Knowledge of Revocation421:
The termination of the authority of an agent does not, come to an end till
the time the agent is not aware about the fact that the authority has been
revoked by the principal. Against third person the termination of the author-
ity will take effect only when the third person becomes aware of this fact.

Illustrations
(a) A directs B to sell goods for him, and agrees to give B five per cent commis-
sion on the price fetched by the goods. A afterwards by letter, revokes B’s
authority. B after the letter is sent, but before he receives it, sells the goods
for 100 rupees. The sale is binding on A, and B is entitled to five rupees as his
commission.
(b) A, at Madras, by letter directs B to sell for him some cotton lying in a ware-
house in Bombay, and afterwards, by letter revokes his authority to sell, and
directs B to send the cotton to Madras. B after receiving the second letter,
enters into a contract with C, who knows of the first letter, but not of the
second for the sale to him of the cotton. C pays B the money, with which B
absconds. C’s payment is good as against A.
(c) A directs B, his agent, to pay certain money to C. A dies, and D takes out pro-
bate to his will. B, after A’s death, but before hearing of it, pays the money to
C. The payment is good as against D, the executor.

420. Section 205.

421. Section 208.

taxmann®
346 Part I : Indian Contract Act, 1872

Duties of Agent
1. To Conduct Business of the Principal: According to section 211 an agent
is bound to conduct the business of his principal according to the directions
given by the principal, or in the absence of any such directions according to
the custom which prevails in doing business of the same kind at the place
where the agent conducts such business. If the agent will not follow the
instruction given by the principal or acts otherwise then he will be bound
to reimburse or make any loss good to his principal if any loss is sustained
because of the disobedience of agent. But in case of any profit he will be
accountable towards principal.

Illustrations
(a) A, an agent engaged in carrying on for B a business, in which it is the custom
to invest from time to time, at interest, the moneys which may be in hand,
on its to make such investments. A must make good to B the interest usually
obtained by such investments.
(b) B, a broker in whose business it is not the custom to sell on credit, sells goods
of A on credit to C, whose credit at the time was very high. C, before payment,
becomes insolvent. B must make good the loss to A.

Case Law
Lilley v. Doubleday422, the principal instructed to the agent to keep the goods at
A warehouse but the agent placed a part of them at a different warehouse i.e. B
which was equally safe. The goods placed in B’s warehouse get destroyed without
negligence. In this case, it was held that the agent is liable for the loss. Any disobe-
dience or departure from instructions make the agent absolutely liable for the loss.

Case Law
In Pannalal Jankidas v. Mohanlal423 a commission agent purchased goods for
his principal and stored them in a godown pending their dispatch. The agent was
under instructions to insure them. He actually charged the premium for insurance
but failed to insure the goods. The goods were lost in the explosion in the Bombay
Harbour. It was held in this case that agent is liable to compensate the principal
for his loss.
An agent is also bound to maintain the secrecy, confidence and non-disclosure of
any sensitive information about the affairs of his principal. A banker will be liable
if the information of the customer account is leaked. But if the information is
provided due to the compulsion of the law, then bank will not be responsible for
the leakage of the information.
2. To Conduct the Business Skilfully: According to section 212 an agent
is bound to conduct the business of the agency with as much skill as is
22. (1881) 7QBD 510.
4
423. AIR 1951 SC 144.

taxmann®
 ch. 20 : Agency 347

generally possessed by persons engaged in similar business unless the

principal has notice of this want of skill. The agent is always bound to act
with reasonable diligence, and to use such skill as he possesses.
The agent is also bound to make compensation to his principal in respect
of the direct consequences of his own neglect, want of skill, or misconduct.
If the loss or damages are not directly but indirectly or remotely caused by
such neglect, want of skill, or misconduct then the agent will not be bound
to make compensation to his principal.

Illustrations
(a) A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of
money is paid on A’s account, with orders to remit. B retains the money for
a considerable time. A, in consequence of not receiving the money, becomes
insolvent. B is liable for the money and interest, from the day on which it
ought to have been paid, according to the usual rate, and for any further
direct loss—as, e.g., by variation of rate of exchange—but not further.
(b) A, an agent for the sale of goods, having authority to sell on credit, sells to B
on credit, without making the proper and usual enquiries as to the solvency
of B. B at the time of such sale is insolvent. A must make compensation to
his principal in respect of any loss thereby sustained.
(c) A, an insurance-broker employed by B to effect an insurance on a ship, omits
to see that the usual clauses are inserted in the policy. The ship is afterwards
lost. In consequence of the omission of the clauses nothing can be recovered
from the underwriters. A is bound to make good the loss to B.
(d) A, a merchant in England, directs B, his agent at Bombay, who accepts the
agency, to send him 100 bales of cotton by a certain ship. B, having it in his
power to send the cotton, omits to do so. The ship arrives safely in England.
Soon after her arrival the price of cotton rises. B is bound to make goods to A
the profit which he might have made by the 100 bales of cotton at the time of
ship arrived, but not any profit he might have made by the subsequent rise.

3. To Maintain and Render Proper Accounts: According to section 213 an

agent is bound to render proper accounts to the principal on his demand.
4. To Communicate with Principal to get Direction: According to section 214
in case of difficult decision it is the duty of an agent to use all reasonable
diligence in communicating with his principal, and in seeking to obtain his
instructions.
5. To pay sums received for principal: According to section 218 the agent
is bound to pay to his principal all sums received on his account.
6. Duty not to Make Secret Profit: As the relation of agent with the principal
is fiduciary in nature so he must not make secret profit.

taxmann®
348 Part I : Indian Contract Act, 1872

7. Duty not to Delegate (Delegatus non potest delagare): As per section

190 an agent cannot lawfully employ another to perform acts which he
has expressly or impliedly undertaken to perform personally. According to
this, a person to whom powers have been delegated cannot delegate them
to another unless and until an ordinary custom of trade or the nature of
the agency permits.
Case Law
In John McCain and Co. v. Pow424, it was held that unless so authorised by the
principal, an estate agent has no right to appoint a sub-agent and delegate to him
his powers which require special skill and care.

Rights of an Agent
1. To get the Remuneration: According to section 219 the agent’s remu-
neration will becomes due on the completion of the act. But an agent
may detain moneys received by him on account of goods sold although
the whole of the goods consigned to him for sale may not have been sold,
or although the sale may not be actually complete. If there is any special
contract then payment for the performance can become due before the
completion of the act.
But an agent who is guilty of misconduct in the business of the agency,
is not entitled to any remuneration in respect of that part of the business
which he has misconducted.

Illustrations
(a) A employs B to recover 1,00,000 rupees from C, and to lay it out on good
security, B recovers the 1,00,000 rupees and lays out 90,000 rupees on good
security, but lays out 10,000 rupees on security which he ought to have known
to be bad, whereby A loses 2,000 rupees. B is entitled to remuneration for
recovering the 1,00,000 rupees and for investing the 90,000 rupees. He is not
entitled to any remuneration for investing the 10,000 rupees, and he must
make good the 2,000 rupees to B.
(b) A employs B to recover 1,000 rupees from C. Through B’s misconduct the
money is not recovered. B is entitled to no remuneration for his services, and
must make good the loss.
2. Right to Retain Money out of Sums Received on Principal’s Account.—
According to section 217 an agent may retain, out of any sums received
on account of the principal in the business of the agency, all moneys due
to himself in respect of advances made or expenses properly incurred by
him in conducting such business, and also such remuneration as may be
payable to him for acting as agent.
424. (1975) 1ALL ER 129.

taxmann®
 ch. 20 : Agency 349

3. Right of Lien: According to section 221 an agent is entitled to retain

goods, papers, and other property, whether movable or immovable of the
principal received by him, until the amount due to himself for commis-
sion, disbursements and services in respect of the same has been paid or
accounted for to him. But if there is any contract to the contrary, right of
lien cannot be exercised by an agent.
Case Law
In Kavita Trehan v. Balsara Hygiene Products Ltd.425, it was held that the lien
of an agent extends only to the retention of the property till his dues are paid. A
legal lien confers on the holder of the article in respect of which it was claimed,
a passive right to detain the article until the debt is paid. Such a lien cannot been
forced by the sale of goods.
In Gopaldas v. Thakurdas426, it was held that the agent’s lien does not give unre-
stricted authority to the agent to deal with the property in any manner the agent
may like. This right is limited in nature. It enable the agent to retain the property
till the agent dues are paid. This right no way grant the right to sell or dispose the
property without the consent of the owner.
A lien is the right of detaining the goods of another until the claim, which
is the basis of such right, is satisfied427. A lien does not create or vest title
in property; it is simply a right of detention. It is purely personal to the lien
holder, and is not subject of assignment or attachment of his property.
Such liens are either general or particular.
A general lien is the right to retain the goods of another to cover and secure
a general balance due from the owner to the person who has the property
in his possession.
A particular lien, also called a specific lien, is the right to detain particular
property for the charges incurred or services rendered in respect of such
property.
When right of lien can be exercised: To exercise the right of lien the fol-
lowing conditions must be fulfilled:
i. The agent should be lawfully entitled to receive from the principal a
sum of money by way of commission earned in the proper execution
of agency contract.
ii. The property over which lien is exercised must belong to the principal
and should not belong to the third party.
iii. The agent must got the possession of the property in the capacity of
the agent during the course of the business of agency.
25. AIR 1992 Del 103.
4
426. AIR 1957 MB 20.
427. Ames v. Palmer, 42 Me. 197.
taxmann®
350 Part I : Indian Contract Act, 1872

iv. The agent can exercise only a particular or special lien and only the
property over which the charges are due can be retained by the agent
as decided in Bombay Saw Mills Co. Re, case428.
Loss of Lien
The agent lien will be lost in the following cases:
i. Lien is a possessory right so when the possession will be lost by the
agent the right will come to an end. After delivery of the goods to
the principal or to the carrier for the transmission to the principal,
the agent would not be able to exercise the right of lien. But if the
property has been taken out of the possession of the agent by fraud
or force then lien will not come to an end. Rights to lien will not be
disturbed with the fact that the principal has become insolvent or
company has been wound up.
ii. In Ram Prasad v. State of M.P.429, it was held that the right of lien is
subject to a contract to the contrary.
iii. Right to lien is lost when the agent waive his right expressly or
impliedly.
4. Right to be Indemnified: The agent is entitled to be indemnified by the
principal for the consequences or losses suffered for doing all lawful acts
in exercise of the authority conferred upon him430.

Illustrations
(a) B, at Singapore, under instructions from A of Calcutta, contracts with C to
deliver certain goods to him. A does not send the goods to B, and C sues B for
breach of contract. B informs A of the suit, and A authorises him to defend
the suit. B defends the suit, and is compelled to pay damages and costs, and
incurs expenses. A is liable to B for such damages, costs and expenses.

Case Law
In Kishanlal v. Banwarilal431, Hon’ble Supreme Court allowed an agent to recover
indemnity for the losses incurred by him in forward contract entered into on the
instructions of his principal.
The agent is also entitled to be indemnified by the principal for the con-
sequences or losses suffered for doing all acts done by the agent in good
faith in exercise of the authority conferred upon him432.
28. ILR(1888)13 Bom. 314.
4
429. AIR 1970 SC 1818.
430. Section 222.
431. AIR 1954 SC 500.
432. Section 223.
taxmann®
 ch. 20 : Agency 351

Illustration
B, at the request of A, sells goods in the possession of A, but which A had no right
to dispose of. B does not know this, and hands over the proceeds of the sale to A.
Afterwards C, the true owner of the goods, sues B and recovers the value of the
goods and costs. A is liable to indemnify B for what he has been compelled to pay
to C, and for B’s own expenses. But where the principal employs the agent to
do an act which is criminal, the principal is not liable to the agent, either
upon an express or an implied promise to indemnify him against the con-
sequences of that Act433.

Illustrations
(a) A employs B to beat C, and agrees to indemnify him against all consequences
of the act. B thereupon beats C, and has to pay damages to C for so doing. A
is not liable to indemnify B for those damages.
(b) B, the proprietor of a newspaper, publishes, at A’s request, a libel upon C
in the paper, and A agrees to indemnify B against the consequences of the
publication, and all costs and damages of any action in respect thereof. B is
sued by C and has to pay damages, and also incurs expenses. A is not liable
to B upon the indemnity.

Case Law
In A. Thangal Kunju Mudaliar v. M. Venkatachalam Potti434, it was held that
there can be no agency for the commission of the crime. The wrongdoer will be
personally liable.
It is important to note that where the acts has been done by the agent on
instructions of the principal is apparently lawful, but later turn out to be
unlawful then also the agent is entitled to be indemnified against the losses.

Rights of the Principal

1. Right to Repudiate the Transaction: According to section 215 if an agent
deals on his own account in the business of the agency, without first ob-
taining the consent of his principal and acquainting him with all material
circumstances which have come to his own knowledge on the subject, the
principal may repudiate the transaction, if the case shows, either that any
material fact has been dishonestly concealed from him by the agent, or
that the dealings of the agent have been disadvantageous to him.

433. Section 224.

434. AIR 1956 SC 246.

taxmann®
352 Part I : Indian Contract Act, 1872

Illustrations
(a) A directs B to sell A’s estate. B buys the estate for himself in the name of C.
A, on discovering that B has bought the estate for himself, may repudiate
the sale, if he can show that B has dishonestly concealed any material fact,
or that the sale has been disadvantageous to him.
(b) A directs B to sell A’s estate. B, on looking over the estate before selling it,
finds a mine on the estate which is unknown to A. B informs A that he wishes
to buy the estate for himself, but conceals the discovery of the mine. A allows
B to buy, in ignorance of the existence of the mine. A, on discovering that B
knew of the mine at the time he bought the estate, may either repudiate or
adopt the sale at his option.

2. Right to Claim Benefits: According to section 216 if an agent, without

the knowledge of his principal, deals in the business of the agency on his
own account instead of on account of his principal, the principal is entitled
to claim from the agent any benefit which may have resulted to him from
the transaction.

Illustration
A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought,
and buys the house for himself. A may, on discovering that B has bought the house,
compel him to sell it to A at the price he gave for it.

Case Law
In De Bussche v. Alt435, an agent undertook to sell the principal’s ship. The agent
purchased the ship himself. In 1870, he sold the ship for an immense profit ($160,000
compared to his $90,000 purchase price). The issue was whether agent was bound
to account for the profit. It was held that agent is bound to account for the profit
as before purchase the agent had not disclosed this fact to the principal. Had he
informed the principal before purchasing then the agent would have not been
accountable for such profit.

Duties of the Principal

1. To indemnify Agent: The principal of an agent is bound to indemnify him
against the consequences of all lawful acts done by such agent in exercise
of the authority conferred upon him.

Illustrations
(a) B, a broker at Calcutta, by the orders of A, a merchant there, contracts with
C for the purchase of 10 casks of oil for A. Afterwards A refuses to receive
the oil, and C sues B. B informs A, who repudiates the contract altogether. B
435. (1878) 8 Ch. D 828.

taxmann®
 ch. 20 : Agency 353

defends, but unsuccessfully, and has to pay damages and costs and incurs
expenses. A is liable to B for such damages, costs and expenses.

The principal is also bound to indemnify the agent against the consequenc-
es of that act done by the agent in the good faith though it may cause an
injury to the rights of third persons.

Illustrations
A, a decree-holder and entitled to execution of B’s goods requires the officer of the
Court to seize certain goods, representing them to be the goods of B. The officer
seizes the goods, and is sued by C, the true owner of the goods. A is liable to in-
demnify the officer for the sum which he is compelled to pay to C, in consequence
of obeying A’s directions.

The principal is not bound to indemnify the agent against the consequences
of that act done by the agent if the act is criminal in nature. The employer
is not liable to the agent, either upon an express or an implied promise to
indemnify him against the consequences of that Act.

Illustrations
A employs B to beat C, and agrees to indemnify him against all consequences of
the act. B thereupon beats C, and has to pay damages to C for so doing. A is not
liable to indemnify B for those damages.

2. To Compensate the Agent: The principal must make compensation to his

agent in respect of injury caused to such agent by the principal’s neglect
or want of skill. 436

Illustration
A employs B as a bricklayer in building a house, and puts up the scaffolding himself.
The scaffolding is unskilfully put up, and B is in consequence hurt. A must make
compensation to B.

Effect of Agency on Contracts with Third Person

1. Enforcement and consequences of agent’s contracts: According to sec-
tion 226 contracts entered into through an agent, and obligations arising
from acts done by an agent, may be enforced in the same manner. The
contracts entered by the agent will have the same legal consequences as
if the contracts had been entered by the principal in person.

436. Section 225.

taxmann®
354 Part I : Indian Contract Act, 1872

Illustrations
(a) A buys goods from B, knowing that he is an agent for their sale, but not know-
ing who is the principal. B’s principal is the person entitled to claim from A
the price of the goods, and A cannot, in a suit by the principal, set-off against
that claim a debt due to himself from B.
(b) A, being B’s agent, with authority to receive money on his behalf, receives
from C a sum of money due to B. C is discharged of his obligation to pay the
sum in question to B.

Extent of Principal Liability

The principal is bound for the acts of the agent against third person only
and only if the acts are done in the exercise of the authority conferred upon
the agent. When an agent does more than he is authorized to do, and when
the part of what he does, which is within his authority, can be separated
from the part which is beyond his authority, so much only of what he does
as is within his authority is binding as between him and his principal437.

Illustration
A, being owner of a ship and cargo, authorizes B to procure an insurance for 4,000
rupees on the ship. B procures a policy for 4,000 rupees on the ship, and another
for the like sum on the cargo. A is bound to pay the premium for the policy on the
ship, but not the premium for the policy on the cargo.

If the act done by an agent is beyond the scope of his authority and cannot
be separated from what is within the authority of the agent, the principal
is not bound to recognize the transaction438.

Illustration
A, authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one
sum of 6,000 rupees. A may repudiate the whole transaction.

2. Consequences of notice given to agent: As per section 229 any notice given
to or information obtained by the agent, provided it be given or obtained
in the course of the business transacted by him for the principal, shall, as
between the principal and third parties, have the same legal consequences
as if it had been given to or obtained by the principal.

437. Section 227.

438. Section 228.

taxmann®
 ch. 20 : Agency 355

Illustrations
(a) A is employed by B to buy from C certain goods, of which C is the apparent
owner, and buys them accordingly. In the course of the treaty for the sale,
A learns that the goods really belonged to D, but B is ignorant of that fact. B
is not entitled to set-off a debt owing to him from C against the price of the
goods.
(b) A is employed by B to buy from C goods of which C is the apparent owner. A
was, before he was so employed, a servant of C, and then learnt that the goods
really belonged to D, but B is ignorant of that fact. In spite of the knowledge
of his agent, B may set-off against the price of the goods a debt owing to him
from C.

3. Agent cannot personally enforce, nor be bound by, contracts on behalf

of principal: In the absence of any contact to that effect an agent cannot
personally enforce contracts entered into by him on behalf of his principal,
nor is he personally bound by them.
When the Agent will be Personally Liable: The agent will be personally
liable in the following cases:—
(1) Where the contract is made by an agent for the sale or purchase of
goods for a merchant resident abroad;
(2) Where the agent does not disclose the name of his principal;
(3) Where the principal, though disclosed, cannot be sued.

Right of Parties to a Contract Made by Agent not Disclosed.

Right of the Principal
1. If an agent makes a contract with a person who neither knows, nor has
reason to suspect, that he is an agent, his principal may require the perfor-
mance of the contract and in such a case the other contracting party will
have the same rights against the principal as he would have had as against
the agent if the agent had been principal.
2. Where one man makes a contract with another, neither knowing nor
having reasonable ground to suspect that the other is an agent then also
the principal may requires the performance of the contract. This rights to
ask performance is subject to the right and obligations subsisting between
the agent and the other party to the contract439.

439. Section 232.

taxmann®
356 Part I : Indian Contract Act, 1872

Illustration
A, who owes 500 rupees to B, sells 1,000 rupees worth of rice to B. A is acting as
agent for C in the transaction, but B has no knowledge nor reasonable ground of
suspicion that such is the case. C cannot compel B to take the rice without allowing
him to set-off A’s debt.

Rights of Other Contracting Party:

i. Right to Refuse to Perform the Contract : If the principal discloses
himself before the contract is completed then the other contracting
party may refuse to fulfil the contract, if he can show that, if he had
known who was the principal in the contract, or if he had known
that the agent was not a principal, he would not have entered into
the contract440.
ii. Right of person dealing with agent personally liable: In cases where
the agent is personally liable, a person dealing with him may hold
either him or his principal, or both of them liable.441

Illustrations
A enters into a contract with B to sell him 100 bales of cotton, and afterwards
discovers that B was acting as agent for C. A may sue either B or C, or both, for
the price of the cotton.

Consequence of inducing agent or principal to act on belief that principal

or agent will be held exclusively liable: When a person who has made a
contract with an agent induces the agent to act upon the belief that the
principal only will be held liable, or induces the principal to act upon the
belief that the agent only will be held liable, he cannot afterwards hold
liable the agent or principal respectively442.
Liability of Pretended Agent: Section 235 provides that a person untruly
representing himself to be the authorized agent of another, and thereby
inducing a third person to deal with him as such agent, is liable, if his alleged
employer does not ratify his acts, to make compensation to the other in
respect of any loss or damage which he has incurred by so dealing.
Person Falsely Contracting as Agent, not Entitled to Performance: Section
236 provides that a person with whom a contract has been entered into in
the character of agent, is not entitled to require the performance of it, if
he was in reality acting, not as agent, but on his own account.

440. Section 231.

441. Section 233.
442. Section 234.

taxmann®
 ch. 20 : Agency 357

Effect of Misrepresentation or Fraud by Agent on Agreement

Misrepresentation 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 principals. In case misrepresentations are made or
frauds has been committed by agents in matters which do not fall within the
authority of the agent authority will not cast any liability on the principal443.

Illustrations
(a) A, being B’s agent for the sale of goods, induces C to buy them by a mis-
representation, which he was not authorized by B to make. The contract is
voidable, as between B and C, at the option of C.
(b) A, the captain of B’s ship, signs bills of lading without having received on
board the goods mentioned therein. The bills of lading are void as between
B and the pretended consignor.

Questions
1. Explain the term agent. Discuss the general rules of agency. What is the test
of agency? Explain your answer with the help of statutory provisions and
judicial pronouncements.
2. With the help of statutory provisions and judicial pronouncements explain
the difference between Agent, Servant and Independent Contractor. Also
explain the difference between Buyer and Agent.
3. Explain the difference between Agent and Bailee.
4. Explain the various types of agent and agent authority.
5. Explain with the help of statutory provisions and judicial pronouncements
the extent of liability of principal in case agent acts without authority
6. Explain the method by which agency contract will be terminated. Also explain
the circumstances when the agency contract will not be terminated
7. Explain Revocation of Agency. What are the rules regarding revocation of
agency?
8. What are the rights and duties of the agent? Explain with the help of statutory
provisions and judicial pronouncements.
9. What are the rights and duties of the principal? Explain with the help of
statutory provisions and judicial pronouncements.
10. Explain the effect of agency on contracts with third person.

443. Section 238.

taxmann®
358 Part I : Indian Contract Act, 1872

11. Explain the rights of other contracting party.

12. Explain the following :
(i) Pretended Agent
(ii) Substituted Agent
(iii) Sub-Agent
13. Explain the effect of misrepresentation or fraud by agent on agreement.

taxmann®