Contract of agency is governed under Indian Contract Act, 1872, which explains the legal relationship between the principal and agent.
Introduction
In India, the relationship between agent and principal is contractual in nature, and thus it is regulated through the terms and conditions of the contract between them. In such a form of contract, there is the existence of legal relationships between two individuals in which one person performs activities on behalf of another person.
In this relationship, the principal is the person who gives authority to another person to run activities on their behalf, while the agent is a person who performs activities on behalf of another person. The definition of agent and principal is provided under section 182 of the Indian Contract Act 1872.
What is a Contract of Agency?
A Contract of Agency is like a teamwork agreement in legal terms. Imagine one person, the principal, giving another person, called an agent, the authority to act on their behalf in different situations. It could involve selling things, managing money matters, or even making deals with other people. The agent becomes a sort of representative, making decisions that benefit the principal in these various situations.
Kinds of Agencies: Indian Contract Act
Express Agency: This involves a clear agreement between the principal and agent, either verbally or in writing, outlining the agent’s specific authority.
Implied Agency: The agent’s authority is inferred from the facts or actions of the parties, even if not explicitly stated.
Agency by Ratification: When someone not initially authorised acts for another, and the action is later accepted or ratified by that party.
Agency by Estoppel: The principal’s actions create the impression of the agent’s authority to third parties, holding the principal responsible even if unintentional.
Types of Agents
General Agent
- Has broad authority to conduct various transactions on behalf of the principal.
- Could be a business manager or insurance agent.
- Principal must define limits to avoid excess authority, remaining accountable for the agent’s actions.
Co-Agent
- Appointed by the primary agent with express or implied authority.
- Works under the principal’s control but is an agent of the primary agent.
- Principal holds a contractual relationship with the substituted agent.
Broker
- Engaged to organise sales or negotiate contracts for a commission.
- Acts as an intermediary or negotiator without personal interest in the property.
- Subject to agency rules, representing the client’s interests in transactions.
Del Credere
- Guarantees the creditworthiness of a buyer and assumes risk in case of default.
- Acts as both salesperson and guarantor for the principal.
- Only liable after the buyer defaults, not responsible for other buyer-seller issues.
Commission Agent
- An international agent earning a percentage of generated sales.
- Offers products in an assigned territory per specified sale conditions.
- Commercial relationship without employment ties, receiving no compensation after the agreement.
Factor
- Sells or purchases goods on behalf of others, compensated by commission or salary.
- Requires possession of the principal’s goods.
- Engages more in selling than purchasing, distinct from a mere agent, governed by a contractual relationship.
Essentials for the Formation of Contract of Agency
Principal’s Competency
Section 183 of the Indian Contract Act 1872 explains the eligibility requirement of the principal for the formation of a contract. According to this section, any person can employ an agent who is of sound mind and has attended the majority as per law.
Agent’s Competency
Section 184 of the Indian Contract Act of 1872 explains the eligibility requirements for agents. Any person could be appointed as an agent except for those who are either of unsound mind or have not reached the majority age as per law.
Consideration is Not Essential
As per Section 185 of the Indian Contract Act 1872, there is no consideration for the formation of the agency contract. Mostly, commission is paid to the agent for providing services, but no payment is required while appointing an agent.
Ways of Formation of Agency Contract
There are two manner in which agency contract can be formed such as –
Expressed
The agency contract can be created in an oral or written manner. Any eligible person could make the appointment of an agent to perform duties on their behalf by contract.
Implied
In an indirect manner also, an agent can be appointed by the principal, and consequently, there is the formation of an implied agency contract. This formation of an implied agency contract could be due to particular circumstances or relationships.
Ratification of the Unauthorised Activities Subsequently
If initially the agent is not appointed by the principal but subsequently the principal provides authority and accepts the act, then an agency contract is formed by ratification of the unauthorised activities.0
Rights and Duties of Agent
Agent’s Right
The following are rights of agents under an agency contract:
- Remuneration: The agent has the right to receive remuneration as per the agreement. If there is any misconduct in the activities of the agent, he would not get any remuneration.
- Right to Retention: The agent has the right to retain the amount of money received on account of the principal, the entire outstanding balance regarding advances, or the expenditures to run the business.
- Right to lien: If commission and disbursement are not received by the agent, then he has the right to lien on the property of the principal until he receives his due, subject to some conditions.
- Indemnity: The compensation shall be provided to the agent by the principal against the outcomes of the entire legal activities performed by them.
- Right to compensation: For any losses or damages faced by the agent because of the lack of competency of the principal, compensation shall be provided to the agent.
Agent’s Duty
Following are the duties of an agent under an agency contract:
- Carry out the business of the principal: The business of the principal shall be conducted by the agent as per the guidance provided by them.
- Reasonable knowledge and diligence: It is the duty of the agent to carry out activities by using reasonable skills and diligence.
- Communication: The agent must communicate with the principal and carry out activities according to the directions provided by the principal.
- Provide Accounts: As per the demand of the principal, the agent shall provide the appropriate accounts.
- Evade conflict of interest: If the agent performs activities without the permission of the principal, then the principal could reject the transaction if the agent significantly performs activities in a dishonest way or if it is disadvantageous for the principal.
- Prohibition on Making Secret Profits: Agents cannot generate secret profits.
- Remittance of sum: It is the duty of the agent to transfer the entire amount of money received on behalf of the principal.
- Not to delegate: The agent does not have any right to delegate duties to another person that are implied on him. Only in cases of consent of the principal, nature of work, ministerial action, and trade customs can a sub-agent be appointed by the agent.
Termination of Agency
Following are the ways in which a contract with an agency gets terminated, such as:
Revocation
When the authority of the agent is revoked by the principal, termination of the agency takes place. There are some specific norms for revocation, such as:
- Revocation is possible by the principal at any time prior to the exercise of authority.
- If, as per the terms and conditions of the contract between the principal and agent, the contract of agency has to continue up to a particular time, any prior revocation by the principal should be compensation for the agent.
- The termination does not take effect until it has been communicated to the agent.
- Termination of the agent’s authority assists in the termination of the power of sub-agents under him.
Rejection by the Agent
The agency gets terminated when renunciation is made by the agent.
Completion of Business
Subsequent to the completion of business, agencies get terminated.
Death or Insanity
In case of death or insanity of an agent or principal, the agent gets terminated.
Insolvency of the Principal
In the event that the principal becomes insolvent, the termination of the agency takes place.
Expiry of Term
If an agent was appointed for a particular time period, then the agency gets terminated automatically after that time. Even if the work was not completed, termination occurs.
Impact of Termination
Only when the agent or third party becomes aware of the termination, does it take place. Moreover, the termination of the power takes place immediately when the agent becomes aware of the termination. But, in the case of a third party, termination occurs only when the third party becomes aware of the details of the termination
Conclusion
In business law, agency contracts are quite common and such a contract could be formed either in an express or implied manner. The agency is formed when authority is delegated by one person to another for the performance of a particular task. There are certain rights and duties of the principal and agent as mentioned in the Indian Contract Act 1872, which must be followed by them. Vakilsearch also provides help and support regarding agency contracts.
Frequently Asked Questions
What is the contract of agency in case law?
The contract of agency in case law refers to a legal relationship where one party, the agent, acts on behalf of another, the principal, with the authority to make decisions in various transactions. This arrangement is governed by established legal precedents and cases defining the rights and obligations of both parties.
What is the Contract Act 1982?
The Contract Act 1982 is not a recognised legal statute. However, if you are referring to the Indian Contract Act of 1872, it is a crucial piece of legislation in India. It outlines the rules and regulations governing contracts, defining rights, duties, and obligations of parties entering into contractual agreements.
What is the contract under Indian Contract Act 1872?
The Indian Contract Act of 1872 is a foundational legal framework in India that governs contracts. It defines essential elements, enforceability criteria, and legal remedies related to contracts. It establishes guidelines for forming valid contracts, specifying the terms under which parties can create, perform, and enforce agreements.
