CHAPTERIZATION

CH 1: INTRODUCTION

1.1 Agency in General

1.2 Definition of Parties involved in the working of a contract

1.3 Conclusion and research question

CH 2: AGENT’S DUTY IN CONDUCTING PRINCIPAL’S BUSINESS

2.1 Introduction

2.2 Rights and Duties of Agent and Principal

2.3 Agent’s accounts

2.4 Agent’s duty to communicate with Principal

2.4 Agent to be indemnified against consequence of lawful acts

2.5 Conclusion

CH 3: EFFECT OF AGENCY ON CONTRAT WITH THIRD PARTIES

3.1 Introduction to enforcement and consequences of agent’s contracts

3.2 Principal’s liability for acts of agent

3.3 Principal’s right to enforce and burden of proof

3.4 Performance of contract with agent supposed to be a principal

3.5 Liability of principal inducing belief that the agent’s unauthorized acts were authorized

3.6 Conclusion

CH 4: CONCLUSION

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CHAPTER 1: INTRODUCTION

1.1 Agency in General

The Common Law addresses agency as a body of general rules which has the power to
change the relations of another, the principal. Primarily, it is contended that under agency that
what a person can do by themselves in reality be accomplished through an agent but this
cannot be the right contention. The main areas which focuses on this aspects are for instance
when an agent have powers to receive property of his principal or valid disposition of the
property or have powers to entitle and bind contracts on behalf of the principal.

The same aspects can be found under the ambit of torts and evidence law but it is important
to note that the law of agency has not operated in an expected manner outside the sphere and
thus the extent of its reasoning must be scrutinised under each case. Throughout the years, the
stress is laid on the agent’s power to bind the contacts of principal while he on the other hand
does not own any rights or liabilities, though sometimes he may incur and be liable in
addition. But there are certain types of rules which concern the rights, duties and liabilities of
an agent inter se which predominantly deals with the internal working of an agency.

1.2 Definition of Parties involved in the working of a contract

The Indian Contract Act defines the term ‘agent’ and ‘principal’ under section 182.
According to the given section, an agent is a person who is employed by another person to do
any act or represent the latter person on contracting deals with the third party. The person
who employs the agent is referred to as the principal. The imperative feature of the agency is
to render the principal answerable to the third parties.

Primarily, the Doctrine of Agency explicates the relation which is subsisting between a
person who has authority and the person who is bound to the former’s authority with few
exceptions. It is an essential requirement to have a formal agreement in order to constitute an
agency.

1.3 Conclusion and research question

The Doctrine of Agency is the pivot in realm of business which paves way for the efficient
working of the parties involved. The research question of this project is primarily based on
the legal status of the parties involved in the working of contract of agency.

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CHAPTER 2: AGENT’S DUTY IN CONDUCTING PRINCIPAL’S BUSINESS

2.1 Introduction

The agent’s duty in conducting principal’s business is given under section 221 of the Indian
Contract Act. Agent in general is bound to the systematic directions laid down or instructed
by the principal to conduct the business of agency in the due course of time. When the
principal has not given any specific guidelines to be followed, the agent by all means must
act according to the usual custom which prevails on the same business.

In the matter of failing to do the same the agent is held liable to the principal for the amount
of loss sustained in the business and also he must ensure that the profits, if any, must be
shown in accounts to the principal. The rights and duties of an agent and principal is a vast
topic which curtails all the circumstance under which the doctrine of agency is carried out in
the usual course of business.

2.2 Rights and Duties of Agent and Principal

The rights and duties of the agent vis-a-vis the principal is laid out extensively from section
211- 221 and the duties of principal towards his agent is given under ss. 222-225. The rights
and duties have to be ascertained with the expressed or implied contract. It is the primary
duty of an agent or sub-agent to act according to the directions stipulated by the principal. In
the case of an agent acting negligent in disregarding the instruction given to him he is held
liable. Even in the presence of a sub agent, it is important for the agent to act as a prudent
man1.

It is very important to note that in the absence of directions from the principal, the agent is
bound to act according to the customs carried out in the locality which may vary from one
place to another. In case of the absence of usage or customs, the agent can act upon his own
discretion. He may avail any options according to his discretion and will not be held liable if
the principal does not find the outcome of the agent’s decision favouring him2. In the case of
loss sustained, he is liable only if the loss is due to neglect or misconduct.3 The relationship
of agency is fiduciary in nature but these duties may be varied by the terms of the contract.

1
Beni Prashad-Shambu Nath v. Narain Das-Sewa Ram, AIR 1930 Lah 974.
2
Arlapala Nayak v. Narsi Keshavji, (1871) 8 BHC 1 AC 19.
3
Pannalal Jakindas v. Mohanlal, AIR 1951 SC 144.

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2.3 Agent’s accounts

The fiduciary relationship of agency is curtailed to the fact that the principal places his
confidence on the agent to keep accurate account of his transactions and produce it to the
principal on demand (at the place of business)4. The agent is bound to this duty irrespective
of any contract to that effect. The agent is bound to the principal and not to any other person
when it comes to the duty of account.

The duty is enforced when the agent shows proper account representing the money valued.
The agent is said to render accounts only when he produces the money with proper
explanation and with vouchers supporting the transaction. In case of the principal suing an
agent for accounts, all the varied transactions between them have to be included. The onus
lies on the agent to prove that he furnished proper accounts. The case can be proceeded
against the legal representatives of the agent on the event of his death and be liable to deliver
the vouchers, books and other information pertaining to the accounts.

In few cases, the agent may file a suit against the principal for the accounts. It is not his
statutory right but upon the doctrine of equity under certain special circumstance. The
accounts cannot be reopened once if they are settled unless there is commission of act of
fraud, mistake, undue influence or coercion.

2.4 Agent’s duty to communicate with Principal

It is prima facie the duty of the agent to communicate all the matters regarding the business
and thus this duty must be discharged with due diligence. The agent’s utmost duty is to act
under the direction of the principal. In case of the agent not being able to fulfil this duty, he
must inform this matter at once to the principal without any delay.5 This is explained under
section 214 of the Indian Contract Act.

Under Section 215 of the Indian Contract Act, it is stated that the agent is bound to the
instructions of the principal and thus should not act on his own account without the consent
of the principal. The principal has all the rights to repudiate the transaction, if the agent has
concealed any dishonest fact from him or the outcome of the dealings entered into by the
agent is disadvantageous to him.

4
Indian Contract Act 1872, s 213.
5
Hood v. West End Motor Car Packing Co.,(1917) 2 KB 38.

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2.4 Agent to be indemnified against consequence of lawful acts

Under section 222, it has explicated the circumstance in which the agent is to be indemnified
against the consequence of lawful acts. In this regard, the foremost duty of the principal is to
indemnify the agent against the very consequences of his lawful acts. An agent against all
odds is rightly entitled to claim indemnity when he acts within the scope of authority
entrusted to him. In the case of K.Muneyya and Co. v. K.Varadarajulu6, the principal was
held liable when the goods which were purchased by the agent on behalf of the principal were
lost in a transit.

An agent can claim indemnity even if he performs an act which is void, if he is unaware of
the unlawfulness of the act. The right of indemnity notably extends to liabilities or losses
incurred in the due course of business on performing the act within the scope of authority in a
reasonable way. It is the duty of the agent to prove that the loss incurred was not an outcome
of unlawful or unreasonable act in order to claim the full amount of the liability even in case
they were not in the actual sense enforced against him.

In case the principal denies the right to indemnify, the agent would rescind the contract of
agency.7 It is important to note that there is no implied promise on behalf of the principal to
indemnify an agent if a loss has incurred as a consequence of his own wrong (like
insolvency).

2.5 Conclusion

In conclusion, the scope of agent’s duty in conducting principal’s business is vast and is not
circumscribed to certain circumstances. The aforesaid sections in this Chapter are a few
sections from the special contracts. Further, it is very evident that the law of agency is solely
based on the existence of confidence and faith of the principal on his agent to carry out the
business.

The limitations and the extent of rights and duties specifically tries to protect both the
principal and the agent from incurring loss in the business. The sections mentioned in the
Indian Contract Act, thus deem to protect and safeguard the rights and duties of the principal
and the agent.

6
AIR 1964 AP 17.
7
Rajaram Nandlal v. Abdul Rahim, AIR 1915 Sind 30.

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CH 3: EFFECT OF AGENCY ON CONTRACT WITH THIRD PARTIES

3.1 Introduction to enforcement and consequences of agent’s contracts

In this chapter, the effect of agency in contract with third parties will be explained based on a
select few sections of the Indian Contract Act. The enforcement and consequence of agent’s
act will be explained as under the section 227 and 228. Further in this chapter, sections 232
and 227 will be explained with reference to cases.

3.2 Principal’s liability for acts of agent

Generally, the principal is held responsible for the acts of an agent when his name is
disclosed at the time of making of a contract to the contracting parties. An undisclosed
principal can also enforce the contract made by the agent although the third party is unaware
of his identity. In the case of Chella Ballayya v. Kanuparthi Subbayya8, The principal
authorises the agent to execute a promissory note in favour of a third party. It is important to
note that “promissory note” is included under the expression denoting ‘contract’. The agent in
this case, executes the contract by including in the note a ‘nishani’ (mark) of the principal.
Thus the principal was held to be bound by the note which signifies his identity.

The given sections under the Indian Contract Act assumes thereby that the principal although
is not directly a party to the contract between the third party and the agent, the contract
remains binding on the principal as well. The principal necessarily is bound to the acts of
agent with all its results, which includes profits as well as the losses sustained in the due
course of business. Also, there is no complete necessity for the principal to be liable in case a
formal disclosure is made, it is sufficient to note that the principal is identified by the third
parties.

Any transaction with the authority of the agent which is deemed to be detrimental to the
principal is said to be valid based on the circumstances and the principal is bound to the
contract even if it is unfavourable in contacting with the third parties. Moreover, when a
transaction is performed within the authority of agent, it is valid irrespective of it being
beneficial to the principal under the given circumstances. Under this section, there are no
specific conditions pertinent to the circumstances in which a principal can sue or be sued on a
contract in his own name.

8
AIR 1918 Mad 24.

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3.3 Principal’s right to enforce and burden of proof

The principal has rights pertaining to the contracts entered into on his behalf by the agent
within the scope of the agent’s authority. It is quick to identify that the principal’s rights and
liabilities under his agent’s contract will be excluded in express terms of the contract.
Moreover the principal under no exceptions will be deprived of his right to enforce the
contract under his own name or be exonerated from the liabilities of the contract. It is the
duty of the principal to prove that the third parties dealt with his agent under the stipulated
contract.

In the case of Kulasekarapatnam Hand Match Workers Cooperative Cottage Industrial

Society Ltd. v. Radhell Lalloolal9, a certain buyer of goods refused to take delivery of goods
on the ground that the goods did not match the description. The agent promises to take back
the goods in case it is not according to the description and pay for the same. The agent acted
for the benefit of the principal and thus it makes the principal liable when the buyer returns
the goods.

The burden of proof lies on the principal to explicate that the act was done within the scope
of authority or ostensible authority exercised by the agent and it can be proved by showing a
written instrument or by practice.10

3.4 Performance of contract with agent supposed to be a principal

Section 232 of the Indian Contract states that how the third party deals with the agent
supposing him to be the principal and how the principal intervenes and act accordingly
subjecting himself to the rights and obligations subsisting between the agent and the other
party. In case the principal allows the third party to innocently treat the agent as the principal,
he is deprived of the option of suing them under his own name in the near future11.

In the case of an undisclosed person willing to sue a contract made by the agent is subjected
to all equities. For instance, if the third party uses any defence that may have availed them
against the agent. Under English Law, it is not required for the third parties to go beyond
showing that they believed the agent to be a principal in case a suspicion arises.

9
AIR 1971 MP 19 I.
10
Suga Kuer v. Firm Brijraj Ramniwas, AIR 1937 Pat 526.
11
Ferrand v. Bichoffshein, (1858) 4 CBNS 710, 717, 114 RR 908,913.

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3.5 Liability of principal inducing belief that the agent’s unauthorized acts were
authorized

Section 237 of the Indian Contract Act, explains that the principal is liable for the acts of the
principal in cases where the he has induced the third party through his word or conduct that
the agent acted within the scope of his authority. This section does not apply if the existence
of relationship between the principal and the agent is furnished. The principal by all means is
bound by the unauthorised acts of the agent which he induces the third party to believe that
under good faith the agent has acted within the scope of the general authority vested in him.
Thus being a typical case of ostensible authority to a contract.

The doctrine of estoppel arises under this section when it comes to the matter of liability.
This is established through the form of natural justice due to the fact that the principal
without any intentional fraud allows the agent to do an act which is subjected to be injurious
to the third party; he should himself suffer the injury rather than the innocent third party.

In order to prove that a person is bound to the given un-ratified action of an agent without the
presence of real authority, it is the onus of the person to prove that his supposed authority was
ostensible to the other contracting party. The evidence to be attached must prove that the
contracting party was led to believe in all honesty that the existence of the authority was
deemed to be apparent to them. The third party must prove that the act was done within the
scope of the ostensible authority claimed by the agent and this can be shown with a written
instrument or shown by a way of practice as well12.

3.6 Conclusion

In conclusion, it can be ascertained that the sections can be interpreted in order to favour the
circumstance under which the liability of principal inducing belief that the agent’s
unauthorized acts were authorized. The chapters thus focussed on the respective areas with
reference to the cases and primarily laid emphasis on the laws pertaining to the particular
provisions.

12
Ibid

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CHAPTER 4: CONCLUSION

The Chapters dealt under this project laid much emphasis on the fiduciary relationship of the
parties involved in the working of a contract of agency. This project to an extent covered and
discussed the vast concept of the legal status of the party under the realm of law of agency.
The stipulated relationship involved between the parties in essence is the backbone of
performing the contract. The Doctrine of Agency has been part of the trading industry for
many centuries now and thus the scope of agency has tremendous audacity.

The legal status has thus evolved throughout the years to accommodate the dynamic business
trends. It is imperative to acknowledge the precedents which were essential involved in the
reforms and improvement of the legal status of the party. The parties are thus protected and
safeguarded by the law in all means. Thus the Law of Agency is crucial for the efficient
performance of the acts pertaining to business.

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