Functions of Contract of Agency

Submitted in partial fulfillment of the requirements

for the award of the degree B.Com.,LLB (Hons)

Submitted by:

J.Sriprasad
Reg.No.BC0160048
2nd year B.Com.,LLB(Hons)

Submitted to:

Mr.Sriram
Assistant Professor in Law

TAMIL NADU NATIONAL LAW SCHOOL

(A STATE UNIVERSITY ESTABLISHED BY ACT NO.9 OF 2012)

Navalurkuttapattu, Srirangam (TK), Tiruchirappali-620009, Tamil Nadu

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 Contents

Particulars Pg.No

Chapter-1: Introduction………..………………………...………………………...5
1.1: Meaning of Agency
1.2: Who may employ an agent and who may be an agent
1.3: Difference between agent and servant
1.4: Conclusion

Chapter-2: Creation of Agency……………………………………….…………8

2.1: Introduction
2.2: Expressed Agreement
2.3: Implied Agreement
a) Agency by Estoppel
b) Agency by Holding out
c) Agency by Necessity
d) Agency by Ratification
2.4: Conclusion

Chapter-3:Authority of an agent………………………………………………...11
3.1: Introduction
3.2: Actual Authority
3.3: Apparent Authority
3.4: Delegated Authority
a) Sub-Agent
b) Substituted Agennt
3.5: Rights, Duties and liabilities of an agent
3.6: Conclusion

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Chapter-4: Conclusion……………………………….………………….……..19

Chapter-1: Introduction
QUI FACIT PER ALIUM FACIT PER SE: He who does an act through another does by himself.

1.1: Meaning of Agency

Section 182 of the Indian Contract 1872 defines the meaning of an agent. “An agent is a person
employed 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 represented, is called the “Principal”. The contract
which creates the relationship of ‘principal’ and ‘agent’ is called ‘agency’.Under a contract of
agency the agent is authorized to establish privity of contract between the Principal (his
employer) and a third party

The function of an agent is essentially to bring about contractual relations between the principal
and the parties. Therefore, in a way an agent is merely a connecting link.After entering into a
contract on behalf of the principal with a third party, the agent drops out of and ceases to be a
party to the contract and the contract binds the principal and the third party as if they have made
it for themselves.

Test of Agency: Agency exists ‘whenever a person has the authority to act on behalf of the other
and to create contractual relations between that other and third parties’.When this kind of power
is not enjoyed, the relationship is not one of agency.1Therefore, only when one acts s a
representative o the other in business dealings so as to create contractual relations between that
other and third persons, that he is an agent and there is an agency.2

1.2: Who may employ an agent and who may be an agent

1
MAHESH CHANDRA v RADHA KISHORE, 1908 12 Cal.W.N. 28.
2
KRISHNA v GANAPATHI, AIR 1955 Mad. 648.

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Section 183 of the Indian Contract Act 1872 deals with who may employ an agent. Any person
who is of the age of majority according to the law to which he is subject, and who is of sound
mind, may employ an agent.

Section 184 of the Indian Contract Act 1872 deals with who may be an agent. As between the
principal and third persons any person may become an agent.Therefore, even a minor or a person
of unsound mind can be appointed an agent. It is so because the act of the agent is the act of the
principal and therefore the principal is liable to third persons for the acts of the minor agent. But
in appointing a minor or a person of unsound mind as an agent, the principal runs a great risk
because he cannot hold such an agent liable for his misconduct or negligence.3

1.3: Difference between agent and servant

 Authority:
Agent: Has authority to act on behalf of the principal and to create contractual
relationship between principal and third parties.
Servant: No such contracting power as in the case of an agent.

 Mode of Remuneration:
Agent: Payment of commission on the basis of services rendered.
Servant: Paid wages/salary and it does not depend on the work done.

 Liability:
Agent: Principal is liable to his Agent’s wrong done ‘within the scope of authority’
Servant: Master is liable for the wrongs of his servant if it is committed in the course of
servant’s employment.

 Right to direct:
Agent: Principal has the right to direct what the agent should do.
Servant: Master has not only that right but also the right to say how it is to be done.

3
Pole Vs Leask, 1860, 54 ER 481

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  Scope:
Agent: An agent may work for several principal’s at the same time.
Servant: A servant usually serves one Master.

 Making contact:
Agent: An agent makes a contract on behalf of the principal.
Servant: A servant has no such authority to make a contract on behalf of his master.

1.4: Conclusion

In this chapter introduction to law of agency has been studied. The meaning, who may be an
agent, who may employ an agent and the difference between agent and servant has also been
studied. The next chapter deals with creation of agency by expressed and implied agreement.

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 Chapter-2: Creation of Agency
2.1: Introduction

In this chapter creation of agency will be studied. Creation of agency can be either by expressed
or implied agreement. Under implied agreement the various types of agency are agency by
estoppel, agency by holding out, agency by necessity, agency by ratification will be studied.

2.2: Expressed Agreement

Normally agency is created by an express agreement, specifying the scope of authority of

agent.Section 187 of the Indian Contract 1872 says that the agent may, in such a case, be
appointed either by word of mouth or by an agreement in writing.However, in certain cases, e.g.,
to execute a deed of sale or purchase of land, the agent must be appointed by executing a formal
‘power of attorney’ on a stamped paper.

2.3: Implied Agreement

Section 187 of the Indian Contract Act means implied agency arises when there is no express
agreement appointing a person as an agent, but instead the existence of agency is inferred from
the circumstances of the case, or from the conduct of the parties on particular occasion or from
the relationship between the parties.

a) Agency by Estoppel

Section 237 of the Indian Contract Act 1872, which deals with agency by estoppel also
provides to the same effect.“When a person by his words or conduct has willfully led another
to believe that certain set of circumstances or fact exists, and that other person has acted on
that belief, he is estopped or precluded from denying the truth of such statements, although
such a state of things did not in fact exist”.Section 237 lays down that “ when an agent has,

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 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
agent’s authority’. In other words, an agency by estoppel is created when the alleged
principal by his conduct or words spoken or written, leads willfully the other contracting
party into an honest belief that the supposed agent had authority to act as such and bind the
principal, such a principal will be estopped from denying subsequently his agent’s authority,
although the agent did not in fact possess any authority whatsoever.

b) Agency by Holding out

The kind of agency is a part of the law of estoppel.In this case also the alleged principal is
bound by the acts of the supposed agent, if he has induced third persons to believe that they
are done with his authority.But, unlike an ‘agency of estoppel’, an agency by holding out
requires some affirmative or positive act or conduct by the principal to establish agency
subsequently. However, where the agent is ‘held out’ as having only a ‘limited authority’ to
do acts, the principal is not bound by an act outside the authority.

c) Agency by Necessity

In certain circumstances the law confers an authority on one person to act as an agent for
another without any regard to the consent of the principal. Such an agent is called an
agency of necessity. Bowstead has observed that, “An agency by necessity is conferred
by law in certain cases, where a person is faced with an emergency in which the property
or interests of another are in imminent danger, and it becomes necessary in order to
preserve the property or interests, to act before the instructions of the owner can be
obtained. The law assumes the consent of the owner to the creation of the relationships
of principal and agent”. Generally the ‘agency by necessity rises in the following cases4:

 Where the agent exceeds his authority.

4
De Bussche Vs Alt, 1878, 8 Ch,D. 286

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  Where the carrier of the goods acting as a bailee does anything to protect or
preserve the goods, in an emergency.
 Where a husband improperly leaves his wife without providing proper means for
her maintenance.

d) Agency by Ratification

The term ratification means the subsequent adoption and acceptance of an act originally done
without instructions or authority. Thus when a principal affirms or adopts the unauthorized
act of his agent, he is said to have ratified that act and there comes into existence an agency
by ratification retrospectively. Section 196 deals with the effects of ‘ratification’. It provides
that “Where acts are done by one person on behalf of another, but without his authority or
knowledge, he may elect to ratify or to disown such acts. If he ratifies them the same effects
will follow as if they had been performed by his authority”. By ratifying the unauthorized act
of the agent, the Principal becomes bound by the act as if it had been done originally done by
his authority.

The Essentials of a valid ratification are:5

 The agent must purport to act as agent for a principal who is in contemplation.6
 There should be an act capable of ratification.
 The principal must be in existence.
 The principal must be competent to contract.
 Section 198- The principal must have full knowledge of material facts.
 Section 199- Whole transaction must be ratified.
 Ratification should be made within a reasonable time.
 Section 197-Ratification may be express or implied.
 Section 200- Ratification must not injure a third person.

2.4: Conclusion
5
Bolten Vs Lambert, 1885, 41 Ch.D.295
6
Imperial Bank of Canada Vs Begely 1936, ALJ 944

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In this chapter creation of agency has been studied. Creation of agency can be either by
expressed or implied agreement. Under implied agreement the various types of agency are
agency by estoppel, agency by holding out, agency by necessity, agency by ratification have
been studied. The next chapter deals with authority of an agent. The actual, apparent authority,
delegated authority and rights, duties & liabilities of an agent will be studied.

Chapter-3: Authority of an Agent

3.1: Introduction

In this chapter authority of an agent will be studied. The actual, apparent authority, authority in
an emergency and delegated authority will also be studied. Under delegated authority sub agent
and substituted agent will be studied. Finally the rights, duties and liabilities of an agent will be
studied in detail.The authority of an agent means his capacity to bind the principal to third
parties. The agent can bind the principal only if he acts within the scope of his authority.

3.2: Actual Authority

Section 186 and 226 of the Indian Contract Act 1872 deals with Actual authority. An agent can
do all such acts as have been assigned to him either expressly or impliedly and thereby bind the
principal to third parties by acts done within the scope of his ‘actual’ or ‘real’ authority.The
authority is said to be ‘express’ when it is given by words spoken or written. It is said to be
‘implied’ when it is inferred from the circumstances of the case or the ordinary course of
dealings.

3.3Apparent Authority

An agent can also bind the principal to third parties by acts done within his apparent authority
(although the act is in excess of actual authority); provided the third party acts bonafide and
without knowledge of the limitation of the agent’s authority, Thus ‘actual’ or ‘apparent’

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authority stand on the same footing.Ostensible authority means an authority which the third
parties dealing with the agent can presume to be with the agent in relation to a particular business
ordinarily.In other words, such an authority implies authority to do an act usually necessary in
the course of conducting similar business in accordance with the customs and usages of the
particular place, trade or market.

Section 188 which deals with the extent of agent’s authority lays down the scope of agent’s
apparent authority in these words: “An agent having an authority to do an act or to carry on a
business had authority to do every lawful thing which is necessary in order to do such act, or
which is usually done in the course of conducting such business”. In normal times, therefore, the
scope of an agent’s authority is determined by his ‘actual’ as well as ‘apparent
authority’.Although the apparent authority of an agent may be curtailed by the principal but such
a curtailment is ineffective vis-a-vis the principal and third parties unless the third party has
notice of it.Even if an act of an agent is in excess of his actual authority, the principal will be
bound by the act if it is within the scope of agent’s apparent authority, provided the third parties
act bonafide.

3.4: Authority in an emergency

An agent has authority, in an emergency; to do all such acts for the purpose of protecting the
principal from loss as would be one by a person of ordinary prudence3 in his own case, under
similar circumstances.

3.5: Delegated Authority

This section is based on the well-known maxim of Roman Law, viz., ‘DELEGATUS NON
POTEST DELEGARE’, which means that a delegate cannot further delegate.This section
provides that “an agent cannot lawfully employ another to perform acts which he has expressly
or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-
agent may, or from the nature of agency, a sub-agent must, be employed”.Accordingly an agent
cannot delegate his powers or duties to another without the permission of the principal, except in
certain cases.

 Sub-Agent
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 Section 191 deals with. A sub-agent is an agent’s agent and he works under the directions of
the agent.The sub-agent is appointed by the agent and the agent delegates to the sub-agent as
part of his own duties.No privity of contract between the principal and sub-agent. So he
cannot sue or sued by the principal. Sub-agent is responsible to the agent alone and is not
generally to the principal.The original agent is responsible to the principal for the acts of the
sub-agent.The sub-agent has no right of action against the principal for remuneration due to
him.There may be sub-agents improperly appointed.In the case of the sub-agent, the agent
remains answerable for the acts of the sub-agent as long as the sub-agency continues.No
special status as available in the case of substituted agency can be made out.7

 Substituted Agent

Section 194 deals with. A substituted agent works under the control and direction of the
principal and he is the principal’s agent. The agent does not delegate any part of his work to a
substituted agent. Privity of contract exists between the principal and substituted agent . So,
he can sue and be sued by the principal. Substituted agent is directly responsible to the
principal and not to the original agent. The original agent is not responsible to the principal
for the acts of the substituted agent. A substituted agent can sue the principal or remuneration
due. A substituted agent can never be improperly appointed since he is appointed with
approval of the principal. In this case one a substituted agent is named his duty ends. A
substituted agent is superior to the sub-agent in status and position.

3.4: Rights, Duties and liabilities of an agent

Rights of Agent:

 Right to receive remuneration. Secs. 219 & 220.

An agent’s remuneration does not become due to him until the completion of the act
assigned to him. This rule is subject to any special contract between the principal and the
agent. If the parties have agreed that the agent will be entitled to commission when he

7
Peacock Vs Baijinath, 1891, 18 I.A. 78
Calico Printers' Association Barday's Bank, 1931 145 LT 51

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 finds a purchaser, who is ready and willing to purchase the property, the agent becomes
entitled to the commission n doing that. According to the nature of the agreement, the
remuneration was payable to the plaintiff when he found a purchaser who was ready,
willing and able to purchase the property and since he had done that, he is entitled to his
commission.8
 Right of retainer. Sec. 217 & 218
The agent has a duty to pay to his principal all sums received on principal’s account. But
he has also a right to retain out of any sums received on account of the principal in the
business of the agency, all money due to himself in respect of advances made or expenses
properly incurred by him for conducting such business and also remuneration as may be
payable to him for acting as agent. Similarly, when an agent sells his principal’s goods,
he may detain money received, for his remuneration on account of the goods sold by him.
Such right can be exercised by an advocate also but the lien must be confined to the costs
incurred in that particular case.9

 Right of lien. Sec. 221.

According to this section, in the absence of any contract to the contrary, 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 commission, disbursement
and services in respect of the same has been paid or accounted for to him. A purchasing
agent can exercise lien over the goods purchased for his principal until the amount due to
him for such purchases has been paid. Such right is, however subject to an agreement to
the contrary. Moreover, such a right is lost, when the agent parts with the possession of
the goods.10

 Right to be indemnified against consequences of lawful acts. Sec. 222.

According to this section, the employer 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.

8
Saraswati Devi v. Motilal AIR 1982 Raj. 108
9
Damodardas Agarwal v. R.Badrilal AIR 1987 AP 254
10
Ram Prasad v. State of Madhya Pradesh AIR 1970 SC 1818

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  Right of no claim of indemnity when acts are apparently unlawful or criminal. Sec. 224.
When an agent commits a crime at the instance of the principal, the agent cannot claim
indemnity from the principal against the consequences of the crime, even though the
principal has expressly or impliedly promised to indemnify him.
 Right to be indemnified against consequences of acts done in good faith. Sec. 223.
Apart from the right of indemnity against the consequences of all lawful acts done by the
agent, the agent is also entitled to indemnity against the consequences of an act done in
good faith, even though the act causes an injury to the rights of third person.11

 Right to compensation. Sec. 225.

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.

 Right of stoppage of goods in transit

Duties of Agent:

 Duty to follow principal’s directions or customs. Sec. 211.

An agent is bound to conduct the business of his principal according to the directions
given by the principal. If there are no such directions, the agent should conduct the
business according to the custom which prevails in doing business of the same kind at the
place where the agent conducts such business. When the agent does not act in the above
manner, I any loss is sustained by the principal, he must make it good to his principal and
if any profit accrues, he must account for it.

 Duty to carry out the work with reasonable skill and diligence: Sec. 212.
The agent is supposed to take due care and act with reasonable diligence in the matter of
agency.12

11
Khushalrao v. Bapurao AIR 1942 Nag 52
Krishnarao v. Deorao AIR 1963 MP 49

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  Duty to render accounts. Sec. 213.
The agent is to render proper accounts to his principal on demand. This means that he
should maintain proper accounts of the sums belonging to the principal which are in his
hands, he should not misutilize and misappropriate them, and on demand from the
principal, he should render true accounts to his principal.13

 Duty not to deal on his own account. Secs. 215 & 216.
An agent is under a duty not to deal on his own account in the business of agency, unless
the principal consents thereto. If in any transaction, an agent deals on his own account
without the principal’s prior consent, the principal has rights:
To repudiate the transaction: that any material fact has been dishonestly concealed from
him by the agent and that the dealings of the agent have been disadvantageous to him.
To claim from the agent any benefit which may have resulted to him from the transaction.

 Duty not make any profit out of his agency except his remuneration. Secs. 217 & 218.
The agent is to pay his principal all sums received by him on principal’s account. Before
making such payments to his principal, the agent is, however entitled to make such
deductions out of the same as are lawfully due to him. An agent may retain out 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.

 Duty not to delegate authority. Sec. 190.

When an agent has undertaken to perform certain duties personally, he is allowed to
delegate his duties to another person. The rule is contained in the maxim ‘Delegatus non
potest delegare’ which means that an agent to whom some authority has been delegated
cannot further delegate that authority to another person. The relationship of principal and

12
Keppel v. Wheeler (1927) 136 LT 203
Link International v. Mandya National Paper Mills Ltd. AIR 2005 SC 1417
13
Narandas v. Papammal AIR 1967 SC 333
Saroj Kapur v. Nitin Casting Ltd. AIR 1987 Delhi 349

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 agent is based on confidence and trust. When the principal has reposed trust in a
particular agent, the agent cannot substitute another person in his place. An agent cannot
employ a sub-agent to get the work done through him. But there are exceptions to it.

 Duty on termination of agency by principal’s death or insanity. Sec. 209.

The agency must be terminated by the death or insanity of the principal. Since personal
action dies with a person the heirs cannot be made to perform it. Therefore it must be
terminated.14

 Duty to communicate. Sec. 214.

It is the duty of an agent, in case of difficulty to use all reasonable diligence in
communicating with his principal and in seeking to obtain his instructions.

Principal’s liability for the acts of an Agent:

When agent acts within the scope of his actual and apparent authority: Section 189.

The principal is liable or all acts of the agent done within the scope of his ‘actual’ or
‘apparent authority’. The fact that a particular act of the agent is in excess of actual
authority does not affect the principal’s liability and the principal remains liable there for
as usual, provided the act in question is within the scope of the agent’s apparent authority
and the third party acts bonafide without knowledge of the curtailment. The principal is
also liable for all such acts of the agent which are necessary for protecting the principal
from loss in an emergency.

When agent exceeds his actual as well as apparent authority: (Sections 227 & 228):

In this case the principal has either option to disown the unauthorized acts or to ratify the
same. Where he ratifies, he becomes liable for those acts as if he had authorized them
originally but where he opts to disown them, the following rules shall apply:Where the
excess is separable from the authorized portion, the principal is liable only for the

14
Salton Vs New Beeston Cycle Co., 1900, 1 Ch.D. 43
Parker Vs Smith, 1812, 104 ER 1133

15
 authorized portion. Sec.227.Where the excess is not separable from the authorized
portion, the principal is not bound by the transaction.. In such a case the principal is
entitled to repudiate the whole transaction and the agent shall be personally liable for
that. Sec. 228.

Liability for agent's misrepresentation or fraud: Section 238:

The principal is liable for misrepresentation made or fraud committed by the agent acting
within the scope of his actual or apparent authority during the course of his agency
business.For this purpose the law treats the principal and his agent as one and it is
immaterial which of them makes the false statement or commits the fraud. Therefore, the
principal is not liable for misrepresentation made or fraud committed by the agent in
matters which do not fall within his authority.Notice given to agent as notice to principal:
Section 229: The principal is bound by the notice given to or information obtained by the
agent in the course of the agency business.Therefore knowledge of the agent is
knowledge of the principal ; the principal is said to have constructive notice.But where
knowledge is not acquired by the agent in the course of the agency business, it cannot be
imputed to the principal.

Liability based on the doctrine of estoppel: Section 237:

The liability under this section is based on the doctrine of estoppel and not on any real
authority.A principal, who so act as to make it appear that he has conferred on his agent
authority to make certain contract is estopped from disputing the validity of the contract
as against a person who dealt for value with the agent in the bonafide belief that the
authority has actually been given. Such a principal is bound by the acts of the agent
although the agent did not in fact possess any authority in relation to those acts.

3.5: Conclusion

In this chapter authority of an agent has been studied. The actual, apparent authority, authority in
an emergency and delegated authority has also been studied. Under delegated authority sub agent

16
and substituted agent has been studied. Finally the rights, duties and liabilities of an agent has
been studied in detail.

Chapter-4: Conclusion

An agent is a person employed 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 represented, is called the
“Principal”. The contract which creates the relationship of ‘principal’ and ‘agent’ is called
‘agency’.The meaning, who may be an agent, who may employ an agent and the difference
between agent and servant has also been studied in detail.

The creation of agency can be either by expressed or implied agreement. Under implied
agreement the various types of agency are agency by estoppel, agency by holding out, agency by
necessity, agency by ratification have been dealt in the project.

The actual, apparent authority, authority in an emergency and delegated authority has also been
studied. Under delegated authority sub agent and substituted agent has been studied. . The rights
and duties of an agent have been done in a detailed manner.

17
 References

Books
 Avtar Singh, Contract and Specific Relief, 11th edition 2013
 Dr.R.K.Bangia, Indian Contract Act, 15th edition 2016
 Dr.S.R.Myneni, Contract-II, 1st Edition 2011

Case Laws:

 Bolten v. Lambert, 1885, 41 Ch.D.295

 Calico Printers' Association v. Barday's Bank, 1931 145 LT 51
 Damodardas Agarwal v. R.Badrilal AIR 1987 AP 254
 De Bussche v. Alt, 1878, 8 Ch,D. 286
 Imperial Bank of Canada Vs Begely 1936, ALJ 944
 Keppel v. Wheeler (1927) 136 LT 203
 Khushalrao v. Bapurao AIR 1942 Nag 52
 Krishna v. Ganapathi AIR 1955 Mad 648
 Krishnarao v. Deorao AIR 1963 MP 49
 Link International v. Mandya National Paper Mills Ltd. AIR 2005 SC 1417
 Mahesh Chandra v. Radha Kishore, 1908 12 Cal.W.N. 28.
 Narandas v. Papammal AIR 1967 SC 333
 Parker v. Smith, 1812, 104 ER 1133
 Peacock v. Baijinath, 1891, 18 I.A. 78
 Pole v. Leask, 1860, 54 ER 481
 Ram Prasad v. State of Madhya Pradesh AIR 1970 SC 1818
 Saroj Kapur v. Nitin Casting Ltd. AIR 1987 Delhi 349
 Salton Vs New Beeston Cycle Co., 1900, 1 Ch.D. 43
18
 Saraswati Devi v. Motilal AIR 1982 Raj. 108

19