Employment Agreement

Contract of Agency Under Indian Contract Act 1982

Contract of agency is governed under Indian Contract Act, 1872, which explains the legal relationship between the principal and agent.

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.

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.

Different Kinds of agents

In the organisational world, there are some distinct types of agents, such as broker, factor, del credere, and others. In this aspect, a broker is referred to as an agent who has the power to negotiate the purchase and sale of goods on behalf of the principal with a third party. Further, a factor is defined as a mercantile agent who is assigned possession of goods for the purpose of selling them. 

Moreover, del Credere is a mercantile agent who receives some additional commission and ensures the performance of the contract by a third party. If there is failure by a third party for performance of the contract, then del credere would be liable, but normally such a type of agent drops out subsequent negotiations with the principal and third parties.

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.

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