INSTITUTE : University School of

Business
DEPARTMENT : Commerce
Bachelor of Commerce
Legal Aspects of Business and CMT-218

THE INDIAN CONTRACT ACT, 1872 DISCOVER . LEARN . EMPOWER

 Contract Act 1872
Course Outcome
CO Title Level
Number

CO-1 The student will be able to demonstrate the acquaintance Understanding

of himself/ herself with Legal Process and negotiable
instruments
CO-2 The student will be able to explain the new and Understanding
contemporary developments in Indian Corporate Law
CO-3 The student will be able to analyse the Understanding
differencebetween the negotiable instruments and also
about the responsibility of the business towards the
society.

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Contract of Agency
“Agency is the contract between two persons where one person
authorizes the other to act on his behalf and form contractual
relationship with a third person.”
• First Person: Who authorizes the other (Principal)
• Second Person: Who acts on behalf of the first person (Agent)
• Third Person: With whom a contract is formed (Client)

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 Parties to a Contract of Agency

(3) Principal and Client enter into a contract

Principal Client/Customer

(1) Principal gives (2) Agent acts on behalf of

authority to agent to act Agent Principal and forms a contract
on his behalf between Client and Principal
Result of Contract of Agency
• Principal is liable to the client for all acts of Agent.
• Contractual relationship exists between the principal and the
customer.
• Agent is just a link between Principal and Client.
• Agent is not responsible and liable towards the client.
• Agent may have been appointed by the Principal for reward
or without reward.

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Essentials of Contract of Agency
1) Authorization by the Principal
• E.g. LIC company appointed and authorized Joy as their agent. Joy formed
a contract of insurance on behalf of LIC with M/s Kalyani Ltd. Held, LIC is
liable for the contract so formed between them and M/s kalyani ltd., because
they gave the authority to Joy.
2) Representative capacity of Agent
3) Contractual relationship between Principal and third party
4) The principal must be competent to contract
• The principal must not be
• Minor; or Person of unsound mind; or Person disqualified by other law.
5) The agent may not be competent
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6) No consideration is necessary
7) Contract of agency can be express or implied
• E.g. Joy allows her servant to purchase goods for her on credit
from a shop and later pays for them. One day Joy gave cash to
her servant to purchase goods. The servant misappropriated the
money and purchased goods for himself on credit from the same
shop. Held, Joy was liable to the shopkeeper as by her conduct
she had made the shopkeeper believe that her servant was her
agent.
8) Extent of Agent’s Authority or scope of authority

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Sub-Agent u/s 191
• “Sub-agent is a person appointed by and acting under the control of the original
agent in the business of agency.” -According to Sec 191 of ICA, 1872

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Substituted Agent
• A sub-agent is the agent of the agent, whereas a substituted agent is an
agent of the principal, though he is not appointed by the principal
himself but through the efforts of an agent.

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Modes of Creation of Agency

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(A) Agency by Express Agreement
• The relationship of principal and agent can only be established by the
consent of the parties.
• The consent to the contract of agency may be given expressly in
writing or verbally or may also be given impliedly from his conduct.

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(B) Agency by Implied Agreement
• A contract between agent and principal which is not expressed by
words, spoken or written but it is implied from the conduct of the
parties, situations or circumstances of the case, is an implied contract
of agency.
• E.g. A woman allowed her minor son to drive a car, she paying all the
expenses of maintenance and operation. It was held that the son is an
implied agent of the mother and when he made a collision injuring a
person, that person could sue the mother for the fault of her agent.

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Kinds of Implied Agency
a) Agency by Estoppel
b) Agency by Holding Out
c) Agency by Necessity
d) Agency between Husband and Wife

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a) Agency by Estoppel
• Where a person by his conduct or by words spoken or written
induces a third person to believe that the another is his agent then
later the first person cannot deny this fact.

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b) Agency by Holding Out
• Where one person because of his prior acts makes the other party
believe that another is his agent then the first person cannot deny
this fact later.
• E.g. Joy allows her servant to purchase goods for her on credit
from a shop and later pays for them. One day Joy gave cash to her
servant to purchase goods. The servant misappropriated the money
and purchased goods for himself on credit from the same shop.
Held, Joy was liable to the shopkeeper as by her conduct she had
made the shopkeeper believe that her servant was her agent.

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c) Agency by Necessity
• Where:
• Under urgent circumstances;
• One person acts as an agent for the other;
• And there is no opportunity for communication with that other person;
• Then it is implied that the first person acts as an agent for the benefit of the
other person.
• Such agency is called as Agency by Necessity.

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d) Agency between Husband and Wife
• A wife acts as an agent for her husband (the principal) and can pledge his
credit for buying necessaries.

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(C) Agency by Ratification
• The agent must work within the scope of his authority.
• But when an agent works outside the scope of his authority then the
principal is not liable for such acts of the agent.
• But if the principal wants, he can RATIFY the UNAUTHORISED
ACT of his agent.
• Then the principal shall be liable to the third party for such
unauthorized act of his agent.

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Kinds of Mercantile Agent
1) Auctioneer
• Auctioneer is an agent whose business is to sell goods or other
property by auction i.e. by open sale.
2) Factor
• A factor is a mercantile agent who is entrusted with the
possession of the goods for the purpose of sale.
• He has also the power to sell goods on credit and also to receive
the price from the buyer.

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3) Broker
• A broker is an agent who has an authority to negotiate the sale or
purchase of goods on behalf of his principal, with a third person.
• He himself has no possession of the goods.
• He merely makes the two parties to enter into a contract.
4) Del Credere Agent
• He is a mercantile agent, who, on the payment of some extra
commission, guarantees the performance of the contract by the
third person.
5) Commission Agent
• He is employed to buy and sell goods, or transact business
generally for other persons and receives commission.

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6) Banker
• Sometimes a banker also acts as an agent for its client on such
transactions as:
• Buying or selling securities on behalf of customers
• Paying bills on behalf of customers
• Collecting dividends, bonus for customers
7) Special and General Agent
• A Special agent is one who is appointed to perform a particular
act or to represent his principal in some particular transaction.
• A general agent is one who has authority to do all acts connected
with a particular trade, or business or employment. Such authority
of the agent is continuous until it is put to an end.

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 Duties and Rights of an Agent
• Duties of an Agent:-
1) To act according to Principal’s Direction
• E.g. the principal instructed his manager to insure his goods. The
manager did not. The goods were stolen. Held, the manager was liable.
2) To act with reasonable skill/diligence
• E.g. a stock broker must know all the regulations of a stock exchange.

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3) Duty to render accounts
• Agent should maintain proper accounts of the sums belonging to
the principal which are in his hands, he should not mis-utilise and
mis-appropriate them, and on demand from the principal, he
should render true accounts to his principal.
4) Duty to Communicate
• Obtain necessary instructions
5) Duty not to deal on his own Account
• E.g. the owner authorized his manager to sell goods on his
behalf. The manager sold them off to a fake buyer who was he
himself. Held, the owner could repudiate the transaction.

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6) Duty to pay over all money
• P told A to sell his car. A sold P’s car at Rs.2,80,000 but he told P
that he sold it for Rs.2,50,000. Held, P was entitled to receive the
actual amount recovered from sale of car.
7) Not to use information against Principal
• If he does so, the principal can stop/restrain him from doing so y
obtaining Injunction from court.
8) Not to set up Adverse title
• Agent has no right to transfer ownership rights of goods of
principal to anyone without the consent of the principal.

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9) Not to Delegate
• An agent cannot employ a sub-agent to get the work done through
the sub-agent.

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Rights of an Agent
1) Right to Remuneration
• Where agent works gratuitously, he cannot later demand
remuneration
• If non-gratuitously then he is entitled to receive the agreed
remuneration.
2) Right of Retainer
• The agent may retain/keep with himself all money, property or
documents of his principal until his claims are satisfied.

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3) Right of Lien
• Lien is the right to retain the possession of goods until the debt is
paid like his remuneration, commission etc.
4) Right to be indemnified for lawful acts
• But these acts should be done within the scope of agent’s
authority.
• E.g. An agent pays for all expenses to fight a legal case for his
principal. Held, the agent must be indemnified.

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5) Right to be indemnified for act done in good faith
• e.g. an agent was appointed to import adulterated mustard oil on
behalf of principal. The agent suffered loss and punishment for
importing goods. Held, the agent could not claim indemnity as he
was aware of the illegality of transaction.
6) Right to Compensation
• Where due to the negligence of principal, the agent suffered any
loss, the agent must be compensated for such loss.

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Rights and Duties of Principal
Rights of Principal:-
1. To ask of all accounts
2. To seek damages for loss suffered due to agent’s negligence
3. To demand all money received by agent on his account
4. To demand all secret profit (if any) from agent
5. Right to injunction from court for restraining the agent to use any information
against the principal
6. Right to be indemnified for setting an adverse title to the goods.
(All the duties of agent are conversely the rights of the principal)

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Rights and Duties of Principal
Duties of Principal:-
1. Duty to pay remuneration to agent
2. Duty to indemnify the agent for lawful acts
3. Duty to indemnify the agent for acts done in good faith
4. Duty to compensate the agent for loss suffered by agent due to principal’s
negligence
(All the rights of agent are conversely the duties of the principal)

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 THANK YOU

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