Bailment
Q. 6. What is bailment? Explain its essential ingredients.
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Explain and illustrate the nature of bailment clearly.
Ans. Definition [Section 148]. Section 148 of the Indian Contract Act, 1872 defines the word “Bailment”. It provides-
A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them. The person delivering the goods is called the “bailor”. The person to whom they are delivered is called the “bailee”.
Explanation to Section 148 provides:
“If a person, already in possession of goods of another, contracts to them as a bailee, he thereby becomes the bailee, and the owner becomes the bailor of such goods, although they may not have been delivered by way of bailment.”
In A. T. Trust Ltd. v. Trippunthura Devaswami, 1954 IC 305, the Court held “Bailment” is a technical term of the common law. Though etymologically it might mean any kind of handing over, it involves change of possession. A person having custody without possession, like a servant or guest using his host’s goods, is not a bailee. On the whole, a bailment might be described as a delivery on condition to which the law usually attaches an obligation to re-deliver the goods or otherwise deal with them as directed, when the condition is satisfied.
The delivery of the goods by the bailor to the bailee is the essence of the bailment. Unless there is actual delivery, there is no contract of bailment, e.g., if A forgets a box containing jewellery in the shop of a goldsmith, there is no contract of bailment and the goldsmith is not responsible for the safety, custody of A’s jewellery. He does not become the bailee of the jewellery.
Similarly, if B forgets a mobile phone in C’s room, this is not a bailment and C does not become responsible for the safety of the mobile phone as a bailee. The moment C picks it up, he becomes a bailee under Sec. 71 of Indian Contract Act, 1872 under which the liability of finder of the lost article is similar to the bailee:
The main characteristics of bailment
According to Section 148, there are following essential characteristics of a valid bailment:
1. Bailor must deliver goods to the bailee.
2. Bailee must return goods bailed or dispose them according to the directions of bailor.
3. The delivery of possession must be upon a contract.
4. Only the movable properties can be bailed.
1. Delivery of goods by the bailor to the bailee.- Bailment consists in the delivery of goods. Delivery of possession is one of the essential characteristics of bailment. According to Section 148 of the Indian Contract Act, one of the essential elements of bailment is the delivery of goods by one person to another for some purpose. Where there is a transfer of ownership, the transaction may be a sale or exchange but it would not be a bailment.
In Kaliaperumal v. Visalakshmi Adri, AIR 1932 Mad. 42, a lady gave her old ornaments to a goldsmith for being converted into new ones. Every evening, she used to take the half made ornaments, put the same in a box under lock and key. She allowed the locked-box to remain in the shop of the goldsmith. One night, the box containing the half made ornaments was stolen. It was held-There was no bailment as she had not handed over the possession of the ornaments to the goldsmith. Therefore, the goldsmith cannot be held liable as a bailee. When a person keeps his goods in the premises of another person but himself continues to be in control over them, it does not constitute bailment.
The delivery of goods may either be actual or constructive. A constructive delivery may take place when a person who is already in possession of certain goods agrees to hold them as a bailee.
According to Section 149, the delivery to the bailee may be made by doing any thing which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf.
2. Bailee is bound to return goods or to dispose of according to the direction of the Bailor. The goods are delivered to be returned in species or disposed of according to the direction of the bailor when the purpose is accomplished.
Where the person, to whom goods are given is not obliged to return identical subject-matter, either in its original or in an altered form there can be no bailment.
3. The delivery of possession must be upon a contract.- According to Secton 148, another main requirement of a valid bailment is that the delivery of goods must be upon a contract. If the goods are delivered by one person to another person, without a contract there is no bailment. The Allahabad High Court took above view in Ram Gulam v. Govt. of U.P., AIR 1950 All. 206, the plaintiff’s stolen ornaments were recovered by the police, but were stolen again in police custody. The claim against the Government failed because the bailment could arise only by contract.
In State of Gujarat v. Memon Mohammad, AIR 1967 SC 1885, certait goods seized by custom officials were sold as unclaimed property Subsequently, the seizure having been found unsustainable, the Government was held liable for the loss of the goods although the goods were not delivered to them on a contract. The Supreme Court held that they were in the position of a bailee.
4. The property bailed must be movable property. Only the movable properties can be bailed.
Illustration. When A lends some ornaments to B for being used in a marriage, the transaction is one of bailment. In such case, there is an implied contract for the return of the ornaments within a reasonable time,
Q. 7. Discuss the Duties of a Bailee.
Ans. Duties of a Bailee. Under the Contract Act, 1872, a bailee is subject to following duties:
1. Duty to take reasonable care [Section 151]. A bailee is bound to take reasonable care of the goods bailed to him. He is required to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods.
Section 151 of Indian Contract Act provides “In all cases of bailment the bailee is bound to take as much care of goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed.”
For example: Silver is entrusted to a goldsmith for making ornaments. He keeps it locked in an almirah and employs watchman for the night. Despite all these precautions the silver is stolen. It was held-The goldsmith has taken reasonable care of the goods and therefore, he is not liable for the loss.
The bailee is bound to take reasonable care of the goods. However, the position or liability of the bailee is not that of an insurer. If inspite of his care, the goods are lost or destroyed by accident or by an act of God or by the enemy of the State, the bailee would not be liable for the loss.
Consequence of failure to take proper care. Where the bailee fails to take proper care of the thing bailed and such failure results into damage. loss or destruction of the thing bailed, the bailee would be liable to compensate the loss caused by the lack of proper care to the thing bailed. If the bailee has taken the amount of care expected of him under Section 151 of the Indian Contract Act, he will not be liable for the loss, destruction, or deterioration of the thing bailed.
But where there is a special contract fixing the responsibility of the bailee for such loss, destruction or deterioration of the thing bailed then according to Section 152, he may be held liable for the same.
Where the possession of a vehicle is handed over to a hotel employee for valet parking and the parking token is handed over to the vehicle owner, the relationship of bailment is created and therefore, the hotel as a bailee undertakes to park car and return it in safe custody. The bailee is under a responsibility to keep its premises in safe condition in order to reasonably prevent loss, damage or theft of it. [Taj Mahal Hotel Ltd. v. United India Insurance Co. Ltd., AIR 2020 SC 597).
In N. R. S. lyer v. New India Assurance Co. Ltd., Madras, AIR 1983 SC 899, a vehicle was taken to the repairer by the insured after an accident. This was done on behalf of the insurer who entered into negotiations with the repairer about repairing charges. It was held that the insurer would be the bailee and the repairer would be the sub-bailee in such a case.
2. Duty not to make an unauthorised use of the goods [Section 154]. Where the bailee makes an unauthorised use, his responsibility for the goods becomes that of an insurer. Here, he becomes responsible for any loss or damage resulting from the unauthorised use, even if the loss was not due to his negligence.
Section 154 of the Indian Contract Act provides :-
“If the bailee makes any use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them.”
Illustrations.- (a) ‘A’ lends a horse to ‘B’ for his own riding only. ‘B’ allows ‘C’, a family member, to ride the horse. ‘C’ rides with care, but the horse accidentally falls and is injured. ‘B’ is liable to make compensation to ‘A’ for the injury done to the horse.
(b) ‘A’ hires a horse in Calcutta from ‘B’ expressely to march to Benaras. ‘A’ rides with due care, but marches to Cuttack instead. The horse accidentally falls and is injured. ‘A’ is liable to make compensation to ‘B’ for the injury to the horse.
If, however, the loss or destruction was due to some inherent defects in the goods themselves, and would have occurred in any case, this will not be regarded a loss resulting from the unauthorised use of the goods and the bailee shall not be lisible for the loss.
Where the bailee make unauthorised use to the goods, the bailor, under Section 153, has the right to terminate the contract of bailment forthwith.
3. Duty not to mix the goods with his own goods. The goods of the bailor and bailee may become mixed. Such mixing may be (i) with the consent of the bailor; or (ii) it may be the result of an accident, mistake or inadvertence, or (iii) it may be wilful or intentional.
Effects of such mixing :
(i) According to Section 155, where the bailee, with the consent of the bailor, mixes the goods bailed, the bailor and the bailee shal have interest in the proportion of their respective shares, in the mixture thus produced.
(ii) Where goods are mixed by accident, inadvertence or by the act of God, and the mixture is composed of similar kind and quality, belongs to the bailor and the bailee as “tenants-in-common”: any attendant cost of separating them is to be borne by the bailee [Lupton v. White, (1808) 33 ER 817].
(iii) According to Section 156, where goods are wilfully and intentionally mixed and the bailor does not give his consent to such mixing, if they can be separated, the bailee is liable to bear expenses of division. But, according to Section 157, if they are impossible to be separated, the bailor is entitled to be compensated by the bailee for the loss of goods.
Illustrations.-(a) ‘A’ bails, 100 bales of cotton marked with a particular mark to B. B, without A’s consent mixes the 100 bales with other bales of his own, bearing a different mark. A is entitled to have his 100 bales returned and B is bound to bear all the expense incurred in the separation of the bales, and any other incidental damage.
(b) A bails a barrel of cape flour worth Rs. 45 to B. B without A’s consent, mixes the flour with country flour of his own, worth only Rs. 25 a barrel. B must compensate A for the loss of his flour.
4. Not to set up a title [Section 166]. The bailee cannot set up a title to the goods adverse to the title of the bailor. Section 117 of the Evidence Act provides “nor shall any bailee or licensee be permitted to deny that his bailor or licensor had, at the time when the bailment or license commenced, authority to make such bailment or grant such license.
Section 166 of the Contract Act provides.-“If the bailor has no title to the goods and the bailee, in good faith delivers them back to, or according to the directions of the bailor, the bailee is not responsible to the owner in respect of such delivery.
5. To return the goods [Sections 160, 161].-After the purpose or the period of bailment is over, and if the bailment is gratuitous, the thing bailed may be asked to be returned any time. If he does not return, he will be liable for the loss.
6. Duty to return any increase [Section 163]. In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor of according to his direction, any increase or profit which may have accrued from the goods bailed.
Illustration. A leaves cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the calf as well as the cow to A.
In Standard Chartered Bank v. Custodian, AIR 2000 SC 1488, the Supreme Court held-Section 163 of the Contract Act really means that accretions in respect of the goods bailed cannot be a property of the bailee but must be returned when the goods themselves bailed are returned. A necessary corollary to this would be that as the pledge extends to such accretions then when the goods are returned these accretions must also be given back.
Q. 8. Discuss the Rights of Bailee.
Ans. Rights of Bailee. Under the Indian Contract Act, 1872 following rights are available to bailee:
1. Right to get compensation [Section 164]. The bailor is responsible to the bailee for any loss sustained by him when the bailor was not entitled to make the bailment, or to receive back the goods, or to give directions respecting them. Thus, the bailee has right to be compensated in such circumstances.
2. Compensation for the loss caused by non-disclosure of faults in goods bailed. By virtue of Para I of Section 150, when a goods is bailed gratuitously and that contains a fault which is knov’n to the bailor but bailor does not convey it to the bailee and as a result thereof bailee sustains some injury, the bailee can ask for the compensation.
Illusstration (a). A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is vicious. The horse runs away, B is thrown an injured, A is responsible to B for damage sustained.
3. Compensation for the loss caused by the defects of thing bailed. By virtue of Para II of Section 150, when the thing has been bailed for hire or rent, the bailee can ask for the compensation for the loss or injury caused by both latent or patent defects of the thing bailed irrespective of awareness of bailor about those defects.
Illustration (b). A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is injured, B is responsible to A for the injury.
4. Right to be reimbursed for the expenses incurred as necessary expenses [Section 158]. The bailee has the right to be reimbursed for the necessary expenses he has incurred.
5. Right of lien for the payment or reimbursement of necessary expenses [Sections 170, 171]. The bailee is entitled to lien for the payment or reimbursement of necessary expenses.
6. Right to sue [Section 180]. The bailee has the right to sue the wrong-doer, who wrongfully deprives the bailee of the use or possession of the goods bailed or does them any injury.
Q. 9. Discuss the Duties of Bailor.
Ans. Duties of Bailor. Under the Indian Contract Act, 1872, a bailor is subject to following duties:
(1) Duty to disclose defects in the goods bailed [Section 150].– If the bailment is gratuitous, the bailor’s duty is to disclose such defects as are known to him. If the bailment is for hire, the bailor is liable for all defects, irrespective of his knowledge of defact.
Where the bailment is for hire, the bailor is equally liable for latent as well as patent defects in the goods bailed.
(2) Duty to bear extraordinary expenses [Section 158].-Where, by the conditions of the bailment, the goods are to be kept or to be carried, Ar to have work done upon them by the bailee for the bailor and the bailee is to receive no remuneration, the bailor shall repay to the bailee the necessary expenses incurred by him for the purpose of the bailment.
In F.F.C. Co. Ltd. v. Board of Trustees of the Port of Bombay, AIR 2006 Bom 162, the Court held-Under Section 158 of the Indian Contract Act, the bailor is bound to repay to the bailee the necessary expenses incurred by him for the purpose of bailment. Therefore, in respect of port charges of uncleared goods where the consignee fails to turn up and no delivery order has been issued by the steamer agent, port trust would be entitled to recover demurrage charges and other charges from steamer agent.
Illustration. If a horse is lent for journey, the expenses for feeding the horse are normal expenses and fall on the bailee. But if the horse is stolen and expenses are incurred for its recovery or if the horse becomes sick and expenses are incurred on its treatment these are extraordinary expenses. These falt on the bailor.
(3) Duty to Compensate or indemnify the bailee. [Section 164]. The bailor is duty bound to compensate or indemnify the bailee for any loss which the bailee may suffer by reason that the bailor was not entitled to make the bailment or to receive back the goods or to give direction respecting them.
Q. 10. Discuss the Rights of Bailor.
Ans. Rights of Bailor. Under the Indian Contract Act, following rights are available to a Bailor:
1. Right to get back the thing bailed [Section 160].-The bailor has right to get back the thing bailed when the purpose is accomplished or the period for which the thing was bailed has elapsed.
2. Right to get rent. He has right to get rent of the thing bailed where bailment is for price.
3. Bailor entitled to increase or profit from goods bailed[Section 163]. If there is no contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed.
‘A’ leaves a cow in the custody of ‘B’ to be taken care of. The cow has a calf. ‘B’ is bound to deliver the calf as well as the cow to ‘A’.
4. Right to terminate the Contract of bailment in certain circumstances [Section 153]. The bailor has right to terminate the contract of bailment when the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment.
Illustration.-‘A’ lets to ‘B’, for hire, a horse for his own riding. ‘B’ drives the horse in his carriage. ‘A’ can terminate the bailment.
5. Right to sue against the wrong-doer [Section 180].-The bailor is entitled to bring a suit against the wrongdoer in respect of the thing bailed.
Q. 10-A. Explain the meaning of bailee’s right of lien.
Ans. Bailee’s right of lien.-Bailee’s right to lien means to retain the goods till the payment of charges due on it.
Bailee’s right to lien is provided in Section 170 and 171 of the Contract Act. Section 170 is regarding particular lien whereas Section 171 is regarding general lien.
Section 170 provides:
“Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them.”
Under Section 170 for the exercise of particular lien :-
(1) The bailee should have rendered any service exercising the labour or skill in respect of goods bailed.
(2) There must not be any contract to the contrary, and
(3) The goods bailed must be in the possession of the bailee. If he surrenders the goods, his right to lien ends.
In Hutton v. Car Maintenance Co. (1915) 1 Ch 621, the defendant’s car was maintained by the plaintiffs. The car was taken into possession by the plaintiffs for some maintenance expenses having become due and the lien was claimed. The Court held that the plaintiffs had not improved the car but only maintained it and, therefore, they were not entitled to it.
Section 171 provides :
“Bankers, factors, wharfingers, attorneys of a High Court, and policy-brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to that effect.”
Thus, the general lien is different from particular lien. In general lien. the bailee may retain the goods bailed to him as a security for general balance of account for which there must be an express contract. However, the bankers, factors, wharfingers, attorneys of High Court and policy brokers have general lien unless there is a contract to the contrary.
In Syndicate Bank v. Vijay Kumar, AIR 1992 SC 1066, the Supreme Court held that the bank could adjust the dues to it from the F.D.Rs of the depositor and the balance left after adjustment of the dues would belong to the depositor.
In Mercantile Bank of India Ltd. v. Rochaldes, AIR 1926 Sindh. the High Court of Sindh held that the bank could not retain the money when it was entrusted with it by the customer for being transmitted to his own firm.
Distinction between Particular lien and General lien.- Particular and General Lien can be distinguished as follows:
Particular Lien
1. Provisions relating to Bailee’s particular lien is provided under Section 170 of the Contract Act.
2. The right of a particular lien can be claimed by every bailee.
3. The right of particular lien can be claimed only in respect of goods upon which some labour or skill has been exercised by the bailee.
General Lien
1. Provisions relating to general lien is provided under Section 171 of the Contract Act.
2. The right of general lien is granted to Bankers, Factors, wharfingers, Attorneys of High Courts and Policy-brokers generally. Though under Section 171 the parties to the contract of bailment can, by mutual agreement confer right of general lien on a bailee.
3. The right of general lien can be claimed in respect of any goods for any charge due in respect of other goods.
Pledge
Q. 11. Define Pledge with its essential elements. Who is competent to Pledge.
Ans. Definition of Pledge. Section 172 of the Indian Contract Act, 1872 defines the term “Pledge”. According to Section 172 of the Contract Act. “Pledge is the bailment of goods as security for payment of a debt of for the performance of a promise”. In this case the bailor is called ‘pawnor”, and the bailee the “pawnee”
The bailee in a contract of pledge does not become owner, but as having possession and right to possess, he is said to have a special property. Delivery is required for the completion of a pledge.
Delivery may be actual or constructive. The possession in a pledge must be judicial possession. Mere physical possession is not sufficient.
Essentials of Pledge
There are following essential elements of pledge:-
1. Transfer of possession, i.e., delivery of possession to the pawnee. One of the essential requirements of a pledge is that the thing pledged should be handed over to the pawnee by the pawner. Such delivery of possession may either be real or constructive.
In Bank of Chittor v. Narasimbah, AIR 1966 AP 163, a Bank allowed the property pledged to them (a cinema projector and accessories) to remain with the pledgers. The pledgers sold it to a third person. It was held that this was a case of constructive delivery and therefore the sale was held to be subject to pledge.
2. Delivery for securing a debt. The bailment of pledged goods in the form of surety for the realisation of debt money is necessary. The thing must be pledged for ensuring the payment of debt or for the ascertainment of performance of promise undertaken.
3. Pledgee to retain pledged property until debt is fully discharged.- Pledged goods can be retained by the pawnee until the pawner does not pay the debt or performs the act promised to do.
4. Special interest of the pawnee. The last essential element of a pledge is that the pawnee has only a special interest in the property pledged, the pledged property remains the property of the Pawnor subject to the pledge and reverts to him after the discharge of the debt.
Who is competent to pledge? Generally, the pledge is made by the real owner. A person who is in possession of goods of others cannot make a valid pledge of the same except in the following cases:
(a) By mercantile agents [Section 178]. When mercantile agent is in possession of the goods or documents of title with the consent of the owner and the pledge is made by the mercantile agent while acting in the ordinary course of business of mercantile agent, and the pawnee acts in good faith and without notice that the pawnor has no authority to pledge, the pledge is valid as if the mercantile agent were expressly authorised by the owner of the goods to make the same. Section 178 authorises only the mercantile agents and hence a pledge by a mere servant or wife is not valid even though they are in possession of goods with the consent of the owner.
The following prerequisites must be satisfied for the validity of a pledge made by a mercantile agent-
(i) The pledger must be a mercantile agent.
(ii) Mercantile agent must have the possession of document of title as a mercantile agent and not otherwise.
(iii) He must be in possession of document of title with the consent of master of the goods.
(iv) Pledge must have been made by the mercantile agent during the course of employment as a mercantile agent.
(v) The pawnee must have acted in good faith and without the notice that the mercantile agent is not authorised to pledge.
(b) By a person in possession under voidable contract [Section 178-A].- Section 178-A of the Indian Contract Act provides. When the pawnor has obtained possession of the goods pledged by him under a contract voidable under Section 19 or Section 19A but the contract has not been rescinded at the time of the pledge, the pawnee acquires title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title”.
According to Section 178-A pledge made by a person who has obtained goods by fraud, misrepresentation, undue influence or coercion would be binding on the true owner, if the pledge is made before the contract is rescinded and the pawnee acts in good faith without notice of the pawnor’s defect of title. But if the goods are obtained by theft there is no consent at all and hence a thief has no title whatsoever not even voidable which he can give to purchaser or pawnee in good faith and without notice of the theft.
Q. 12. Discuss the rights of Pawnor and Pawnee.
Ans. Pawnor’s right to redeem [Section 177]-According to Section 177 of the Indian Contract Act. “even after making the default in payment of the debt, within the stipulated time or performance of the promise, pawnor may redeem the goods pledged at any subsequent time before the actual sale of them but he may do so only after paying any expenses which have arisen from his default”.
In Dwarika v. Bhagwati, AIR 1939 Rangoon 113, there was an agreement to the effect that if the goods pledged were not redeemed after reasonable time, it would he irredeemable, it was held by the Rangoon High Court that this agreement was valid. However, according to Pollock and Mulla (Indian Contract Act and Specific Relief Act), this decision was wrongly decided.
It is submitted that such agreement should be held as invalid because according to Section 177 pawnor has the right to “redeem the goods pledged at any subsequent time before the actual sale of them.”
Rights of Pawnee. The pawnee has the following rights over the goods pledged :
1. Pawnee’s right to retain the goods [Section 173]- Section 173 of the Indian Contract Act lays down: “The pawnee may retain the goods pledged, not only for the payment of the debt, or the performance of the promise, but for the interest of the debt and all necessary expenses incurred by him in respect of the possession or for the preservation of goods pledged.”
However, pawnee cannot retain the goods for debt or promise other than that for which goods are pledged. Section 174 provides:
“Pawnee not to retain for debt or promise other than that for which goods pledged. Presumption in case of subsequent advances [Section 174]. The pawnee shall not in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged, but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee.”
2. Right of the pawnee to recover from the pawner the extra- ordinary expenses incurred by him [Section 175].- Section 175 of the Act provides “The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.”
3. Pawnee’s right to sue the pawner to retain the goods pledged or to sell the thing pledged [Section 176].- Under Section 176, the pawnee possesses three rights:
(a) right to sue.
(b) right to retain the goods pledged as a collateral security, or
(c) right to sell after giving reasonable notice of sale.
In Sunderlal Saraf v. Subhas Chand Jain, AIR 2006 MP 35, the Madhya Pradesh High Court affirmed the above rights of the pawnee enumerated under Section 176 of the Contract Act.
Agency
(Definition, Creation, Rights and Duties of an Agent)
Q. 13. Define the Agency. Define Agent and Principal and discuss the various kinds of agents.
Or
Define Agent and Principal. Is consideration necessary in contract of agency?
Or
Explain the terms “Agent” and “Principal”. What are the different kinds of agent?
Ans. Agency. Chapter X (Sections 182 to 238) deals with different aspects of “Agency”. The term “Agency” is nowhere defined in the Indian Contract Act. 1872. However, it denotes a relation between two parties created by an agreement, express or implied. The relationship of agency arises whenever one person (called the agent) has authority to act on behalf of another (called the principal).
The term “agency” has been described in Anson’s Law of Contract in the following words:
“Although as a general rule one man can not by contract with another confer rights to impose liabilities upon a third party, yet he may represent another, as being employed by him, for the purpose of bringing him into legal relation with a third party. Employment for this purpose is called “Agency”
Agent and Principal [Section 182].- Section 182 of the Indian Contract Act, 1872 defines the terms “Agent” and “Principal” According to this section:
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 so represented, is called the principal.”
Thus, in effect an agent is the connecting link between the principal and third person a sort of conduit pipe or intermediary. This intermediary has the power to create legal relationship between the principal and third parties
Essentials of “contract of agency”. A contract of agency has all the essential features of a contract with some special characteristics of its own.
There are following essential features of a contract of agency :
(a) There must be an agent employed by the principal.
(b) The principal must confer authority on the agent to act for him.
(c) The authority conferred on agent must be such of nature which can make the principal answerable to third parties.
(d) The aim of the employment of the agent must be to establish a legal relationship between the principal and third parties.
(e) No consideration is necessary for creating a relationship of agency as it is based on confidence between the principal and the agent.
The principle of Qui facit per alium facit per se is basis of the relation of agency which means “he who acts by another acts by himself. This principle means that the act of an agent is the act of the principal.
In Varsha Engineering Pvt. Ltd. v. M/s. Vijay Traders, Baroda, AIR 1983 Guj. 166, the Court held that the test of agency would be-Whether the defendant would be able to represent the plaintiff (principal) while dealing with the third party Whether he could create legal relationship between the plaintiff (the alleged principal) and the third parties with whom he entered into the contract. Persons or the distributors who purchase goods from the manufacturer for resale can never be considered as agents as contemplated by Section 182 of the Indian Contract Act.
In Krishna v. Ganpati, AIR 1955 Mad. 648, the Court held representative character and derivative authority may briefly be said to be the distinguishing feature of an agent.
A contract of agency is, under the English Law, understood as “the employment of one person by another in order to bring the latter into legal relation with a third person”
Consideration is not necessary [Section 185].- Although the relationship of agency has its genesis in a contract, yet unlike other contracts no consideration is required to create an agency.
Agent’s authority may be expressed or implied [Section 186].- According to Section 186, the authority of an agent may be expressed or implied.
According to Section 187, an authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case, and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.
Thus, we can say that an agent is a person employed to do any act for another or to represent another in dealing with third persons. Where one person gives mere advice to another in matter of business, agency does not arise because such advice only does not create an agency. One of essential characteristics of agency is that the agent makes the principal answerable to third person.
Kinds of Agents
Main kinds of agents are as follows:
1. Del-credere agent;
2. Commission agent:
3. Factor.
4. Broker.
5. Co-agent, and
6. Sub-agent.
1. Del-credere agent.- A del-credere agent is one who for extra- remuneration, called a del credere agent, undertakes the liability to guarantee the due performance of the contract by the other party. Because he charges an extra commission, he is responsible for the solvency and performance of their contracts by the other parties and thus indemnifies his employer against loss. A del-credere agent is liable to pay the seller only if owing to insolvency of the buyer or other similar cause, the seller is unable to recover the price from the buyer. He is not answerable if the buyer though solvent has refused to pay on the ground that the seller has not duly per- formed the contract.
2. Commission agent.- A commission agent is a person who purchases and sells goods in the market on behalf of his employer on the best possible terms and he gets commission for his labour.
3. Factor. A factor is an agent who is given the possession of goods for the purpose of selling them. He is entitled to sell the goods in his own name. A factor has a right to retain the goods for a general balance of accounts
4. Broker. A broker is a mercantile agent employed for the purpose of sale and sale of goods. The main duty of a broker is to establish privity between two parties for a transaction and he gets commission for his labour. He is not entrusted with the possession of the goods. He merely brings the two parties together and if the transaction materialises, he becomes entitled to the commission.
5. Co-agent. Where several persons are expressly authorised with no stipulation that anyone or more of them shall be authorised to act in the name of the whole body, they have a joint authority and they are called co- agents.
6. Sub-agent.– A sub-agent is a person employed and acting under the control of the original agent in the business of the agency.
Q. 14. What are the rules for creating an Agency?
Or
What are the various ways in which relation of agency arises?
Or
No one can become the agent of another person except with the will of that other person. Discuss.
Or
How the agency is created by ratification. What are the rules of ratification of an agency.
Or
Explain the rules for creating an agency. Distinguish between an agent, servant and an independent contractor.
Or
Mention the various ways in which a relationship of agency can be created.
Ans. Creation of Agency. A contract of agency may arise like any other contract, expressly or impliedly. The essential elements of a valid contract are also necessary for the contract of agency except that consideration is not necessary for such contract. The relation of the agency comes into existence whenever one person called the agent has authority to act on behalf of another called the principal and consents so to act. The relationship has its genesis in a contract. [Syed Abdul Khader v. Rami Reddy, AIR 1979 SC 553].
Who may employ agent [Section 183]. No person can employ an agent if he does not possess capacity to contract. So a minor or person of unsound mind cannot become the principal.
Who may be an agent [Section 184]. According to Section 184 of the Indian Contract Act, any person can be appointed as an agent. But a person who is not of the age of majority and of sound mind, cannot be made personally liable for the acts done on behalf of the principal. A contractual relation between the principal and third party may be brought about by a minor agent but a minor agent cannot be made personally liable to the principal for the misconduct, like an adult agent.
Illustration.-A. a principal employed B, a minor to sell his (A’s) watch worth Rs 1,000 in the market. A instructed B not to sell the watch for credit and not to sell it for less than Rs. 900. B sold the watch for Rs. 500 on credit. The sale is binding on A. But A cannot sue B for B’s misconduct as agent, as B is a minor. But if B was not a minor he would be liable to A for the damage suffered by his principal as a result of his misconduct of not obeying the instructions.
Auctioneer. An auctioneer is an agent to sell the goods by public auction. He is an agent within the meaning of Section 2 (a) of Sale of Goods Act. When an person put in possession of goods sells them through auction, the purchaser in good-faith acquires a good title although the owner never authorised to sell the goods.
Consideration [Section 185]. No consideration is required for the creation of an agency.
In Shree Digvijay Cement Co. Ltd. v. State Trading Corporation, AIR 2006 Delhi 276, it was held-The relationship of principal and agent can only be established by the consent of principal and agent. For creating contract of agency in view of Section 185 of the Contract Act even passing of consideration is not necessary.
As regards ‘the test to determine whether relationship is that of agent and principal or that of master and servants, according to Halsbury, –
“If a person has only the right to direct another what work is to be done, the relation is that of principal and agent. But if he has the further right to direct how the work is to be done, the relation is not that of principal and agent but master and servant.”
Modes of constituting an agency. The contract of agency may be in writing under seal, or it may be a simple writing, or it may be by an oral agreement or may be inferred from the conduct of the parties and the circu- mstances of the case as in case of master and servant, or husband and wife or partners inter se. Agency may be created in any one of the following ways :-
(a) By direct appointment, i e., a person may have been appointed a special agent to carry on business and make contracts generally. (Express agency).
(b) By implication from the relation of the parties (Implied agency).
(c) By necessity,
(d) By Estoppel, ie, by holding out,
(e) By ratification.
Distinction between Agent and Servant.-Agent and servant can be distinguished as follows-
Agent
1. An agent does not act under the direct control and supervision of his principal. However, he is bound to obey lawful instructions of his principal.
2. An agent is not a servant.
3. An agent gets commission on the basis of his work.
4. An agent may work for several principals at the same time.
Servant
1. A servant acts under the direct control and supervision of his master and is bound to conform to all reasonable orders given to him in the course of his work.
2. A servant is not an agent.
3. A servant gets fixed salary or wages.
4. A servant usually serves only to one master.
Distinction between Agent and Independent Contractor.- An agent and an Independent Contractor can be distinguished as follows-
Agent
1. An agent is liable to act in the matter of the agency.
2. An agent is subject to the lawful instructions and control of his principal.
Independent Contractor
1. An independent contractor merely undertakes to perform certain specified work.
2. An independent contractor is independent in the manner and means of performance of the work.
Q. 14-A. What is an implied agency? Under what conditions, a husband is liable for debts taken by his wife?
Ans. Meaning of Implied Agency.- Under Section 186 of the Contract Act, “the authority of an agent may be express or implied”. Section 187 provides, “An authority is said to be express when it is given by words, spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.”
In Dingle v. Hare, (1859) 7 CBNS 145, the agent was authorised to sell the manure. He gave a warranty of 50% lime phosphate in it. It was a trade practice to give such warranty in dealing manure. The Principal was held bound by the warranty given by the agent even though he had not expressly authorised the agent for it.
In Chairman, LIC v. Rajiv Kumar Baskar, AIR 2005 SC 3087, the Supreme Court held-In Salary Saving Scheme of LIC, the terms and conditions of the policy are to be performed through employer. In a contract of insurance, the principle that no third party has any role to play between the insurer and insured does not apply to the contract of insurance.
Liability of husband for debts taken by his wife. It is a legal presumption that the wife is agent of her husband if the husband and wife are living together as the wife will normally do the household shopping for which the husband will pay. Since all domestic matters are ordinarily entrusted to the wife, she should have reasonable supply of goods and service sufficient in quantity and necessary in fact according to the conditions in which they live for the use by her husband, by herself and the children. The wife can pledge the credit of her husband for domestic purpose. There are following conditions necessary for the liability of the husband on pledging his credit or debt taken by his wife :-
(1) Co-habitation in domestic establishment
(2) Liability for necessaries
(3) No reasonable allowance to the wife.
(1) Co-habitation in domestic establishment. When the wife and husband live together in domestic establishment, the wife can pledge the credit of her husband and he becomes liable for the debt taken by her for supplies of necessaries.
In Debenham v. Mellon, (1980) 6 App case 24, the wife and husband were the manageress and manager of a hotel in which they were living and they had no separate domestic establishment. The wife pledged the credit of her husband for clothes. The husband was held not liable as the wife and husband were not living together in their domestic establishment.
(2) Liability for necessaries. The wife can pledge the credit of her husband only for the necessaries. The necessaries are those which are needed for domestic purposes. Thus, if a wife in the absence of her husband purchases food-grains or clothes necessary to wear, these are certainly necessary items for house hold purposes but if items of luxurious such as gold necklace, a diamond ring etc. are purchased, these cannot be said to be necessaries. The term ‘necessaries’ is a question of fact and the onus to prove lies on the person who supplies goods to the wife. (Clifford v. Laton. (1827) 3 C & P 15).
In the instant case it was held that the husband was not liable for pledging his credit for bills by then with an eye specialist. (Kaanhayalal v. Inderchandji, AIR 1947 Nag 84).
(3) No reasonable allowance to the wife. Where the husband gives reasonable allowance to his wife and duly pays it, the wife cannot borrow the goods by pledging the credit of her husband.
Anson in Law of Contract has summarised the law, when the husband is not bound for pledging his credit by the wife, as follows:
(1) Express warning by the husband to trader not to supply goods on credit
(2) Expressly forbidding wife not to pledge his credit though not in the knowledge of the trader.
(3) Supply of sufficient allowance to the wife to buy articles without pledging his credit.
Q. 15. Discuss the rights of an agent against principal.
Or
What are the rights of an agent against his principal ?
Ans. Agent’s Rights Against Principal. Under the Indian Contract Act. 1872, an agent has following rights against his principal :
1. Right to retainer [Section 217].– An agent may retain out of sums received on principal’s account, 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.
2. Right to Remuneration [Sections 219 and 220]. An agent is entitled to his remuneration, after the completion of the business unless there is any special contract to the contrary.
But he is not entitled to his remuneration in respect of that part of the business which he has misconducted.
The remuneration is payable only in rupees when the work for which the agent was appointed accomplishes. Before the accomplishment of work no remuneration is payable to the agent (Saraswati Devi v. Motilal, AIR 1982 Raj. 108].
3. Right of Lien [Section 221].-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.
Right of lien is meant to make good the expenses incurred by the agent during the exercise of his power. The right is extinguished in following three circumstances-
(1) Immediately after the possession is lost, the right of lien comes to an end. Lien is a possessory right.
(2) It can be extinguished by waiver. It may be waived by way of an agreement express or implied.
(3) The agent’s lien is subject to the contract to the contrary. If it has been excluded by the contract it cannot operate.
4. Right to be indemnified [Section 222].- An agent is entitled to be indemnified by the principal against the consequences of all lawful acts done by the agent in exercise of the authority conferred upon him.
5. Agent to be indemnified against consequences of acts done in good faith (Section 223).- An agent is entitled to be indemnified by the principal against the consequences of acts done in good faith though they cause an injury to the rights of third persons.
Illustration. – A. a decree-holder, and entitled to execution of B’s goods requires the officer of the court to seize certain goods representing them to be the goods of B. The officer seizes the goods and is sued by C. the true owner of the goods. A is liable to indemnify the officer for the sum which he is compelled to pay to C in consequence of obeying A’s direction.
According to Section 224, where any person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that act.
Illustration- A employs B to beat C. and agrees to indemnify him against all consequences of the act B thereupon beats C and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.
In Firm Pratap Chandra Nepali v. Firm of Venkat Sethi & Sons, AIR 1974 SC 1223, the Supreme Court held-An agent who is employed to do some criminai act is, however, not entitled to be indemnified by the principal.
6. Right to get compensation [Section 225]-An agent is entitled to be compensated by the principal for any injury caused to him by the principal’s neglect or want of skill. Thus an agent has no right to get compensation where the injury results from his own negligence or acquiescence after knowledge of the risk of the agency, for the agent is presumed to undertake ordinary consequences of the risk incidental to the agency.
Illustration. A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully put up and B is consequently hurt. A must make compensation to B.
7. Agent can personally enforce, by contracts, on behalf of principal. According to Section 230 of the Contract Act:
“In the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.”
Section 230 furuther provides that such a contract shall be presumed to exist in the following cases:
(a) where the contract is made by an agent for sale or purchase of goods for a merchant resident abroad;
(b) where the agent does not disclose the name of his principal:
(c) where the principal, though disclosed, can not be sued.
Q. 16. Describe in brief the various duties of an agent towards his principal.
Or
Mention the duties of an agent towards his principal ?
Ans. Agent’s duties towards his principal. Under the Indian Contract Act, 1872, the agent has the following towards his principal:
1. Duty to follow directions or customs [Section 211]. An agent is bound to carry out the business entrusted to him according to the directions of principal. In the absence of his directions, the agent must follow the customs prevailing in the business of the same kind at the place. If the agent makes any departure from the instructions of the principal or the custom, he must make good to the principal for any loss sustained and if any profit accrues, he must account for it.
The agent is, however, not bound to take any separate or special care (Padam Parshad v. The Punjab National Bank Ltd., AIR 1974 P & H 22).
Illustration- A. an agent engaged in carrying on for B. a business in which it is the custom to invest from time to time at interest, the moneys which may be in hand, omits to make such investments. A must make good B. the interest usually obtained by such investment.
2. Duty to take reasonable care and skill [Section 212].- An agent must conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business unless the principal has a notice of his want of skill. The agent is always bound to act with reasonable diligence. The agent will have to make compensation to his principal for any direct loss or damage arising from his own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct.
3. Duty to keep accounts [Section 213]. An agent is bound to render proper accounts to his principal on demand.
4. Duty to communicate with Principal [Section 214].- An agent is bound, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instruction.
5. Duty to avoid conflict of interests [Section 215].- When an agent deals, on his own account, in business of agency without principal’s consent, the prineipal may repudiate the transaction if the case shows either that any material fact has been dishonestly concealed from him by the agent or that the dealings of agent have been disadvantageous to him.
Illustration. A directs B to sell A’s estate. B buys the estate for himself, in the name of C. A on discovering that B has bought the estate for himself, may repudiate the sale if he can show that B has dishonestly concealed any material fact, or that the sale has been disadvantageous to him
6. Duty to hand over secret profits or duty not to earn secret profits [Section 216]. If the agent, without the knowledge of his principal, deals in the business of the agency on his own account, the principal is entitled to claim from him any profit which has resulted from the transaction.
7. Duty to give all sums received under agency [Section 218].- An agent is bound to pay to his principal all sums received on his account subject to deduction, such as, money due to himself in respect of advance made or expenses properly incurred, and also the remuneration due to him.
8. Duty not to delegate [Section 190]- As a general rule, an agent has no right to delegate his authority to a third person without the consent of his principal except in cases where the very nature of the business may require the delegation of authority.
9. Duty to protect the interest entrusted to him on death or insanity of principal [Section 209]. Where the agency is terminated due to death or insanity of the Principal, the agent is bound to take on behalf of the representatives of his late principal all reasonable steps for the protec tion and preservation of the interests entrusted to him.
Authority of agent, Liability of Principal, Sub-agent and Termination of agency
Q. 17. Write an essay on the authority of an agent.
Or
Explain and illustrate the nature of agent’s authority in normal cases and in an emergency. What is agency by estoppel?
Ans. Agent’s Authority-The authority of an agent may be express or implied. An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case and things spoken or written in the course of dealing may be accounted for, from circumstances of the case.
The power to sell will not authorise the agent to borrow money or to pledge the goods. [Timblo Imos Lad. v. Jorge Anioal Mates Sequira, (1977) 3 SCC 474]
Illustration. A owns a shop in Serampore, living himself in Calcutta and visiting the shop occasionally. The shop is managed by B and he is in the habit of ordering goods from C in the name of A for the purposes of the shop and paying for them out of A’s funds with A’s knowledge B has an implied authority from A to order goods from C in the name of A for the purposes of the shop.
In Ram Lakhan Mukhdeo, AIR 1982 Pat 19, the parties agreed for filing of the award in the court. The award which was registered one, was handed over to one of the parties by the authorities. It was held that the party must be deemed to have implied authority of the arbitrators for filing the award in the court on their behalf under Section 186 of the Contract Act.
Extent of agent’s authority [Section 188]- An agent who has an authority to do an act has authority to do every lawful thing which is necessary in order to do such act.
An agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business.
Illustration. A constitutes B his agent to carry on his business of a ship builder. B may purchase timber and other materials, and hire workmen. for the purposes of carrying on the business.
Agent’s authority in an emergency [Section 189].- An agent has authority, in an emergency, to do all such acts for the purposes of pro- tecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.
In Hari Kishan Singh v. National Bank of India Ltd, AIR 1940 Lah. 412, it was held that Section 189 was intended to protect the agent, if for the purposes of safeguarding the interests of his principal he does certain acts without any instruction from his principal. In such a case, the agent is exempted from all liability provided he acts like a man of an ordinary prudence and the acts are performed by him at the time of emergency.
Illustration. A consigns provisions to B at Calcutta with directions to send them immediately to Cat Cuttack. B may sell the provisions at Calcutta if they will not bear the journey of Cuttack without spoiling.
Agency by estoppel
Agency by estoppel arises when one person puts another in such a position as to lead other persons to think that they are entitled to treat the later being authorised to act as agent for the former in respect of certain class of business. In such a case, the former is estopped from denying to those who have acted on the belief which he has by his conduct thus, induced, that the later person was in fact his agent. This is illustrated by the relation of factor to their principals. If a principal entrusts goods to factor and does not authorise him to sell, the principal is estopped from denying that the factor had no authority, if the factor sells the same to someone who buys bona fide without notice of the limitation of the factor’s authority.
Partnership is based on the mutual agency between the partners. When anyone of the partners retires, such information should be given to the persons who deal with the partnership firm. Otherwise the rest of the partners as well as the outgoing partner will be made liable on the basis of holding out or estoppel.
Illustration. If a master allows his servant to purchase goods for him of B habitually upon credit. B becomes entitled to look to the master for the payment for such things as are supplied in the ordinary course of dealing
Q. 18. Explain the liability of Principal towards third persons for the act of his agent. When the principal is liable for the fraud committed by his agent?
Or
Can a principal be held bound by the obligation incurred on his behalf by his agent to the third party ?
Ans. Principal’s obligation for acts of agents. A principal is held bound by the obligations incurred on his behalf by his agent Sections 226 to 228 deal with the law regarding the obligations of the principal for the contract of his agent.
Enforcement and consequences of agent’s contracts [Section 226).- Section 226 of the Contract Act deals with enforcement and consequences of agent’s contracts. It provides:
Contract entered into through an agent, and obligations arising from acts done by an agent may be enforced in the same manner, and will have the same legal consequences, as if the contract has been entered into and the acts done by the principal in person.
This section is based on the principle embodied in the maxim-Qu facit per alium facit per se which means that the act of an agent is the act of the principal
Illustration A, being B’s agent with the authority to receive money on his behalf, receives from C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B.
Obligation of principal when agent exceeds authority [Section 227]. Section 227 deals with obligation of principal when agent exceeds his authority. According to Section 227, when an agent does more than he is authorised to do and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, the principal is liable only for so much part of what he does as is within agent’s authority.
Illustration-A, being the owner of a ship and cargo, authorises B to procure an insurance for rupees 4.000 on the ship. B procures a policy for rupees 4,000 on the ship, and another for the like sum on the cargo. A is bound to pay the premium for the policy on the ship but not the premium for the policy on the cargo.
Obligation of principal when excess of agent’s authority is not separable [Section 228]. This section provides :
An agent does more than he is authorized to do and what he does beyond the scope of his authority is not separable from what is within it the principal is not liable for the transaction.
Illustration- Where A authorises B to buy 5.000 sheeps for him and B buys 5,000 sheeps and 200 lambs for a sum of rupees 6,000. A may repudiate the whole transaction.
Ostensible authority (Section 237]. Section 237 of the Contract Act embodies the principle of ostensible authority This section lays down” when an agent has 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 the words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agents authority.
In Anson’s Law of Contract it is pointed out-“The principal may, by words or conduct, create an inference that an authority has been conferred upon an agent even though no authority were given in fact. In such a case. if the agent contracts within the limits of his apparent authority, although without actual authority the principal will be bound to third parties by his agent’s acts. The doctrine of apparent authority, or ostensible authority as it is usually called is really an application of the principle of estoppel which a reasonable man would draw from his works or conduct.”
Ostensible or apparent authority is the authority of an agent as it appears to others. It often coincides with actual authority. But sometimes ostensible authority exceeds actual authority. An apparent or ostensible authority may arise from the course of dealing adopted in a particular case. It is the conduct of the principal which portrays the apparent authority of the agent.
Principal’s liability for agent’s misrepresentation or fraud [Section 238]. Section 238 lays down that misrepresentations made or frauds committed by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principal; but misrepresentations made or frauds committed by agents in matters which do not fall within their authority, do not affect their principals.
Illustration. A being B’s agent for the sale of goods induces C to buy them by misrepresentation, which he was not authorised by B to make. The contract is voidable, as between B and C, at the opinion of C.
Under Section 238 of the Contract Act, misrepresentation or fraud committed by an agent may be classified into two categories.-
(a) under his actual or ostensible authority, and
(b) not covered within his authority.
The principal is liable for the acts which fall under actual or ostensible authority of the agent, but he is not liable if they fall outside his authority.
In Lloyds v. Grace Smith & Co., 1912 AC 716, it was held-A principal is liable for the fraud of the agent within the scope of his authority whether the fraud is committed for the benefit of the principal or for the benefit of the agent.
In Rupram Kailash Nath v Co-operative Union, AIR 1967 All. 382, it was held-It is a well settled law that the principal will be liable for the deceit of his agent if he has either authorized him to make a statement knowing its falsity or if he has not intervened although knowing that the agent made a false statement or will.
Q. 19. What do you understand by ‘Sub-agent’? When may an agent validly appoint a sub-agent? Discuss the liabilities of a Principal and an Agent for the acts of a sub-agent.
Or
‘Delegatus non potest delegare.’ Discuss this statement and explain its exceptions with the help of suitable examples.
Or
A person to whom authority has been delegated cannot delegate that authority to another. Discuss the consequences of delegation of authority by an agent.
Or
“Delegatus non-potest delegare”. Discuss the applicability of the maxim in the law of agency and state the exceptions to the rule.
Ans. Delegation of agent’s authority. The general rule is “delegatus non-potest delegare” the meaning of this maxim is that an agent to whom another has delegated his own authority (has reposed confidence). cannot delegate that authority to a third person. This rule is based on the principle that agency is a contract based on trust and mutual confidence between the parties. A principal may have mutual confidence in his agent but not in the subsequent sub-agent appointed by the agent.
Section 190 of the Contract Act deals with delegation of an authority by the agent. It provides:
“An agent cannot lawfully employ another to perform acts whichbhe has expressly or impliedly undertaken to perform personally.
unless by the ordinary custom or trade a sub-agent may, or from the nature of the agency a sub-agent, must be employed.”
The general principle is that the agent cannot delegate his authority to a third person, but there are two exceptions to this general rule. They are:
(i) when the ordinary custom of trade permits employment of a sub- agent, or
(ii) when the nature of agency demands that employment of a sub agent is necessary by the agent.
Besides two exceptional conditions, no agent is authorised to delegate his authority if the nature of his act is purely managerial and he is supposed to use his personal skill in discharge of his duty or where he is personally required to perform his duties.
Sub-agent [Section 191].-“Sub-agent” is a person employed by. and acting under the control of the original agent in the business of the agency.
Legal position of sub-agent properly appointed (Section 192].- Sub-agent may be either properly appointed or improperly appointed. If he is appointed by the agent with the authority of the principal he is called a sub-agent properly appointed. If he is appointed without authority of the principal, he is improperly appointed.
When the sub-agent has been appointed with the consent of the principal, the principal is bound by his acts and is responsible for his action as if he was an agent appointed by the principal.
The agent is responsible for acts of the sub-agent to the principal.
The sub-agent is not responsible for his acts to the principal. He is only responsible for such acts to the agent.
But if the sub-agent is guilty of fraud or wilful wrong against the principal, he becomes directly responsible to the principal.
In Nav Bharat Corporation Bombay v. M.P. Electricity Board, AIR 2006 NOC 1518 (MP), the Court held-The sub-agent should be clothed with precisely the same rights and incur precisely the same obligation and is bound with the same duties is in regard to his immediate employer as if he was the sole and real principal. His position is much superior than that of a servant in the matter of discretion to be taken as and when needed.
Sub-agent improperly appointed [Section 193].- If the sub-agent is appointed without the authority of the principal, the principal is not bound by his acts. The principal is not responsible for any transaction made by the sub-agent or for any act done by him.