PAPER – I:
LAW OF CONTRACT-II
Unit II:
1. Define ‘Agent’ under the Indian Contract Act, 1872. What are the essential elements of a valid contract of agency?
Definition of Agent:
Section 182 of the Indian Contract Act, 1872 defines an Agent as:
“A person employed to do any act for another, or to represent another in dealings with third persons, is called an ‘agent’, and the person for whom such act is done, or who is so represented, is called the ‘principal’.”
In simple terms, an agent is a person who is authorized by another person (called the principal) to act on his behalf in dealings with third parties. The acts done by the agent within the scope of his authority bind the principal as if they were done by the principal himself.
Examples:
- A property dealer who negotiates and finalizes deals on behalf of a property owner.
- A commission agent who purchases goods for a business from the market.
Essential Elements of a Valid Contract of Agency:
For a contract of agency to be valid under the Indian Contract Act, the following essential elements must be present:
1. Agreement Between Principal and Agent:
There must be an agreement between the principal and the agent. The agreement may be:
- Express (oral or written), or
- Implied (inferred from conduct, relationship, or situation).
Note: Consideration is not necessary to create an agency contract (Section 185).
2. Principal Must Be Competent to Contract:
According to Section 183, the principal must be:
- Of sound mind, and
- Of the age of majority (18 years).
Only a competent person can appoint an agent and be bound by his acts.
3. Agent May Not Be Competent:
Under Section 184, an agent need not be competent to contract. Even a minor or a person of unsound mind can be appointed as an agent. However, such an agent cannot be held personally liable to the principal.
4. Intention to Create Legal Relationship:
There must be an intention between the principal and the agent to enter into a legal relationship. Social or domestic arrangements do not constitute agency.
5. Lawful Object and Purpose:
The object of the agency must be lawful. An agency created for unlawful or illegal purposes is void.
6. Authority Must Be Clearly Defined or Understandable:
The scope of the agent’s authority must be:
- Clearly defined in the contract, or
- Capable of being inferred from the circumstances or nature of the relationship.
Conclusion:
A contract of agency is a special type of contract that allows one person (the agent) to act on behalf of another (the principal) to create legal obligations with third parties. While the agreement can be oral or implied and does not require consideration, it must involve a competent principal, a lawful purpose, and an intention to create legal relations. Agency plays a vital role in business transactions and the smooth functioning of the commercial world.
2. Explain the various modes of creation of agency. How can an agency be created by express or implied agreement?
Introduction:
An agency is a legal relationship in which one person (the agent) acts on behalf of another (the principal) in dealings with third parties. According to Section 182 of the Indian Contract Act, 1872, an agent is a person employed to do any act for another or to represent another in dealings with third parties. The contract of agency can be created in various ways, either expressly or impliedly, or even by law.
Modes of Creation of Agency:
The creation of agency can take place through the following modes:
1. Agency by Express Agreement:
This is the most common method of creating an agency. It may be:
- Oral, or
- Written (sometimes by power of attorney).
In this form, the principal directly appoints a person to act on their behalf for a specific purpose. For example, a person gives a written authority to an agent to sell his house.
Example: A gives B written authority to sell his car for ₹5,00,000. This is an express agency.
2. Agency by Implied Agreement:
An agency may also be created by implication, i.e., inferred from the conduct or relationship of the parties. This includes:
(a) Agency by Conduct:
If a person by their actions allows another to act on their behalf, an agency may be implied.
Example: A businessman allows his manager to regularly purchase goods in his name. This creates an implied agency.
(b) Agency by Relationship (Agency by Necessity):
In some relationships, such as husband and wife, the law presumes agency under certain circumstances.
Example: A wife living separately with her husband’s consent may pledge his credit for necessities.
(c) Agency by Custom or Usage of Trade:
If in a particular trade or profession it is customary to treat a certain role as that of an agent, then agency may arise from trade usage.
3. Agency by Ratification (Section 196 to 200):
When a person acts on behalf of another without authority, and the principal later approves or ratifies the act, an agency by ratification is created.
Example: A sells B’s goods without authority. B later accepts the sale. This is agency by ratification.
Essentials of Valid Ratification:
- The principal must be in existence at the time of the act.
- Full knowledge of material facts is necessary.
- The whole act must be ratified.
4. Agency by Operation of Law:
Sometimes, the law creates an agency even without any agreement. This is seen in emergency situations or relationships of necessity.
Example: A carrier transporting perishable goods may sell them to prevent loss. He acts as an agent of the owner.
5. Agency by Estoppel:
If a person, by words or conduct, leads a third party to believe that another person is his agent, and the third party acts upon that belief, the principal is estopped (legally barred) from denying the agency.
Example: A tells C that B is his agent. C sells goods to B assuming A will pay. A cannot later deny B’s authority.
Conclusion:
A contract of agency can arise in several ways — expressly through direct agreement, impliedly through conduct or circumstances, or even by operation of law or ratification. The Indian Contract Act recognizes these diverse modes to ensure flexibility and fairness in commercial and legal relationships. Understanding these modes helps in determining the validity and extent of an agent’s authority in any given transaction.
3. Discuss in detail the rights and duties of an agent towards the principal under the Indian Contract Act, 1872.
Introduction:
Under the Indian Contract Act, 1872, an agent is a person employed by the principal to act on their behalf in dealings with third parties. The relationship between the principal and agent is based on trust (fiduciary relationship) and mutual confidence. The agent is bound to act honestly and in the interest of the principal. In return, the agent is entitled to certain rights for the services rendered.
I. Duties of an Agent Toward the Principal (Sections 211–221):
1. Duty to Follow Instructions (Section 211):
The agent must follow the directions given by the principal. If there are no specific instructions, he must act according to the custom of the business.
Example: If an agent sells goods at a price lower than instructed, he must compensate the principal.
2. Duty to Carry Out Work with Reasonable Skill and Diligence (Section 212):
The agent must act with due care, skill, and diligence. If he acts negligently or fails to perform duties, he is liable to compensate the principal for any loss.
3. Duty to Render Accounts (Section 213):
The agent is bound to maintain and render true and proper accounts of all transactions carried out on behalf of the principal.
4. Duty to Communicate (Section 214):
In case of difficulty, the agent must take all reasonable steps to communicate with the principal and seek instructions.
5. Duty Not to Deal on Own Account (Section 215):
The agent must not deal in the business of agency for his own benefit without the principal’s consent. If he does so, the principal can:
- Repudiate the transaction, or
- Claim any profit made.
6. Duty Not to Make Secret Profit (Section 216):
If the agent makes any secret profit or gains without the knowledge of the principal, he is bound to return it.
7. Duty Not to Disclose Confidential Information:
An agent must maintain confidentiality regarding the business affairs of the principal, even after the termination of agency.
8. Duty Not to Delegate Authority (Section 190):
The agent must not delegate his authority to another person unless:
- The principal permits it, or
- The nature of business requires it (e.g., sub-agent).
9. Duty to Act in Good Faith and Loyalty:
The agent must always act in the best interest of the principal with honesty, fairness, and loyalty.
II. Rights of an Agent Against the Principal (Sections 217–221):
1. Right to Remuneration (Section 219):
The agent is entitled to the agreed remuneration after completing the assigned duty. If no amount is specified, he is entitled to reasonable compensation.
Note: No remuneration is due for misconduct or incomplete work.
2. Right of Retainer (Section 217):
The agent can retain any sum received on behalf of the principal for:
- Advances made, or
- Expenses and remuneration due to him.
3. Right to Recover Expenses (Section 217):
The agent is entitled to be reimbursed for all legitimate expenses incurred during the course of agency business.
4. Right of Lien (Section 221):
The agent has a right to retain goods, papers, or property of the principal received by him until his dues are paid.
5. Right to Indemnity (Section 222 & 223):
- Section 222: The agent is entitled to be indemnified against consequences of lawful acts done in the course of agency.
- Section 223: Even in cases where the act is done in good faith but causes injury to others (e.g., infringing a third party’s rights), the principal must indemnify the agent.
Conclusion:
The Indian Contract Act provides a balanced framework of duties and rights between the agent and the principal. While the agent must act diligently, honestly, and within the scope of authority, the principal must ensure fair compensation and protection of the agent’s interests. These mutual obligations ensure the effective functioning of agency relationships in business and commerce.
4.
4. What is meant by delegation of authority by an agent? Under what circumstances can an agent appoint a sub-agent?
Introduction:
The general rule of agency is based on the legal maxim:
“Delegatus non potest delegare”
(A delegate cannot further delegate)
This means that an agent, who is appointed to perform duties for the principal, cannot delegate that responsibility to another person unless the nature of the agency or specific circumstances allow it.
However, the Indian Contract Act, 1872 recognizes certain exceptions under which an agent may appoint a sub-agent.
Meaning of Delegation of Authority:
Delegation of authority refers to the process where an agent transfers part or all of his authority to another person (called a sub-agent) to act on behalf of the principal.
- The agent remains responsible to the principal.
- The sub-agent works under the control and direction of the original agent.
Relevant Provision:
- Section 190 of the Indian Contract Act, 1872 deals with delegation of authority by an agent.
- Section 191 defines a sub-agent as a person employed by and acting under the control of the original agent in the business of the agency.
General Rule:
An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally.
Exceptions: When Can an Agent Appoint a Sub-agent?
An agent can appoint a sub-agent in the following circumstances:
1. With the Consent of the Principal:
If the principal expressly or impliedly permits the agent to appoint a sub-agent, such appointment is valid.
Example: A authorizes B to manage his factory and allows B to hire assistants. B can appoint a sub-agent.
2. Custom of Trade or Usage of Business:
If it is a common practice in a particular trade or business to appoint sub-agents, it is presumed that the principal allows delegation.
Example: In shipping and forwarding business, appointing sub-agents at ports is common and acceptable.
3. Nature of the Work Requires It:
If the nature of the work is such that it requires specialized skills or it is impractical for the agent to perform the act personally, then delegation is allowed.
Example: An agent appointed to build a house may appoint a qualified architect or engineer as a sub-agent.
4. Ministerial or Routine Acts:
For clerical, mechanical or routine work, the agent may delegate authority.
Example: Sending documents through a clerk or driver.
5. Emergency Situations:
In emergencies, where the agent is unable to act and quick action is required, delegation is justified.
Legal Consequences of Valid Appointment of Sub-Agent (Section 192):
If a sub-agent is properly appointed:
- The principal is bound by the acts of the sub-agent as if he were an agent directly appointed by the principal.
- The agent is responsible to the principal for the sub-agent’s conduct.
- The sub-agent is responsible to the agent, not directly to the principal, except in case of fraud or willful wrong.
Legal Consequences of Improper Appointment:
If the sub-agent is improperly appointed (i.e., not under allowed conditions):
- The principal is not bound by the acts of the sub-agent.
- The agent is personally liable for all acts of the sub-agent.
- The sub-agent is not liable to the principal.
Conclusion:
Although the general rule prohibits an agent from delegating authority, the Indian Contract Act provides specific situations where such delegation is permissible. Proper delegation must follow legal provisions to ensure that the principal’s interests are protected and the agent remains accountable. Delegation must be based on necessity, consent, usage, or practicality.
5. Explain the concept of personal liability of an agent. In what cases can an agent be held personally liable to third parties?
Introduction:
In general, under the Indian Contract Act, 1872, when an agent acts within the scope of his authority and discloses the name of the principal, the principal is bound by the acts of the agent, and the agent is not personally liable to third parties.
However, there are certain exceptions where the agent can be held personally liable for contracts or actions done on behalf of the principal.
This concept is covered mainly under Sections 230 to 233 of the Act.
General Rule (Section 230):
“In the absence of any contract to the contrary, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.”
Thus, normally, the contract is between the principal and the third party, not the agent.
Exceptions: When Agent is Personally Liable:
The following are the situations where the agent is held personally liable:
1. Agent Acts for a Foreign Principal:
If the agent contracts on behalf of a principal residing abroad, the law presumes that the agent is personally liable unless there is an agreement to the contrary.
Reason: It is often difficult for third parties to enforce rights against a foreign principal.
2. Agent Does Not Disclose the Name of the Principal:
If the agent does not disclose the name or existence of the principal at the time of entering into the contract, he is personally liable.
Example: If A, an agent, signs a contract with C without disclosing he is acting on behalf of B, A is personally liable.
3. Agent Acts for a Principal Who Cannot Be Sued:
If the principal is not competent to contract (e.g., a minor or a mentally incapacitated person), the agent becomes personally liable.
4. Agent Exceeds Authority:
If the agent goes beyond the scope of his authority and the principal does not ratify the act, the agent is personally liable to the third party.
Example: An agent authorized to sell 100 units sells 200 units. He is liable for the excess unless the principal ratifies.
5. Agent Acts for a Non-Existent Principal:
If an agent enters into a contract on behalf of a non-existent principal (e.g., a company not yet incorporated), the agent is personally liable.
6. Agent Acts in His Own Name:
Where the agent signs the contract in his own name, he is personally bound by it, unless it is clearly stated that he acts as an agent.
7. Trade Usage or Custom:
In some cases, custom of trade holds agents personally liable. For example, commission agents may be personally liable under customary practices.
8. Express Agreement to Be Personally Liable:
If there is a specific contract where the agent agrees to be personally liable (guarantee or co-signing), he can be held responsible.
Rights of Third Parties (Section 233):
According to Section 233:
“In cases where an agent is personally liable, a person dealing with him may hold either him or his principal, or both of them liable.”
This means that the third party has the option to sue the agent, the principal, or both (where applicable).
Conclusion:
While the general rule is that an agent is not personally liable for contracts made on behalf of the principal, several important exceptions exist where personal liability arises. These exceptions are essential to protect third parties from being misled or suffering loss due to undisclosed principals, unauthorized acts, or fraudulent behavior by agents. Thus, agents must act within their authority, disclose the principal, and understand their responsibilities clearly to avoid personal liability.
6. Discuss the legal relationship between principal, agent, and third parties. How does an agent bind the principal in dealings with third parties?
Introduction:
In the law of agency, a legal relationship is established between three parties:
- The Principal (who gives the authority),
- The Agent (who acts on behalf of the principal), and
- The Third Party (who deals with the agent believing him to be representing the principal).
This triangular relationship is governed primarily by the Indian Contract Act, 1872, particularly Sections 182 to 238. The agent acts as a bridge between the principal and third parties, creating contractual rights and obligations for the principal through his actions.
Nature of the Legal Relationship:
1. Between Principal and Agent:
- The principal authorizes the agent to act on his behalf.
- This relationship is fiduciary in nature (based on trust).
- The principal is bound by the acts of the agent when done within the scope of the agent’s authority.
2. Between Agent and Third Party:
- The agent acts as a representative and enters into contracts on behalf of the principal.
- Normally, the agent does not become personally liable unless he breaches his authority or conceals the principal.
3. Between Principal and Third Party:
- When an agent acts within the scope of authority and discloses the principal, the principal is bound by such contracts.
- The third party can enforce the contract directly against the principal.
How Does an Agent Bind the Principal?
An agent binds the principal in the following ways:
1. When Acting Within Actual Authority:
If the agent acts within the actual authority granted by the principal, the principal is legally bound by those acts.
Example: A gives B authority to purchase goods on his behalf. B signs a contract with C. A is bound by the contract with C.
2. When Acting Within Apparent (Ostensible) Authority:
Even if the agent exceeds actual authority but acts in a way that appears authorized to a reasonable third party, the principal is bound. This is called apparent authority.
Example: A lets B behave like his manager in public view. C supplies goods to B assuming he is authorized. A is bound due to apparent authority.
3. Through Ratification (Sections 196–200):
If an agent acts without authority, and the principal ratifies the act later, the principal is bound by it as if it was originally authorized.
Example: B enters into a contract for A without authority. A later accepts it. Now A is bound.
4. By Estoppel (Section 237):
If the principal, by words or conduct, induces a third party to believe that an unauthorized agent had authority, the principal is estopped from denying the agent’s authority.
Example: A tells C that B is his agent. C deals with B. Later A cannot deny B’s authority.
5. When Agent Acts for a Disclosed Principal:
If the agent clearly mentions he is acting for a named principal, the third party can only sue the principal, not the agent (Section 230).
6. When Agent Acts for an Undisclosed Principal:
If the agent does not disclose the principal, the third party can sue either the agent or the principal when the principal becomes known (Section 231).
7. Personal Liability of Agent (Section 233):
In certain cases (foreign principal, undisclosed principal, exceeding authority), the agent may also become personally liable to the third party.
Important Provisions of Indian Contract Act:
- Section 226: Contracts entered into by an agent bind the principal.
- Section 227: Principal is liable even for misrepresentation by agent if made within authority.
- Section 229: Notice given to agent is treated as notice to principal.
- Section 237: Principal is bound by unauthorized acts if he allowed third parties to believe in agent’s authority.
Conclusion:
The agent is a vital link in the legal chain connecting the principal and third parties. As long as the agent acts within the authority given—either actual, apparent, or ratified—the principal is bound by the agent’s acts. The Indian Contract Act thus ensures smooth commercial transactions by allowing principals to act through agents, while protecting the rights of third parties who act in good faith.
7. Describe the various modes of termination of agency. What are the legal consequences of such termination?
Introduction:
An agency is a legal relationship where an agent is authorized to act on behalf of a principal. However, this relationship does not continue indefinitely. It may be terminated in several ways, either by the acts of the parties or by operation of law.
The Indian Contract Act, 1872 deals with the termination of agency under Sections 201 to 210.
Meaning of Termination of Agency:
Termination of agency means ending the legal relationship between the principal and the agent. Once terminated, the agent no longer has the authority to act on behalf of the principal.
I. Modes of Termination of Agency (Section 201):
Termination of agency may take place in two broad ways:
A. By Act of the Parties:
1. By Mutual Agreement:
The principal and agent may mutually agree to end the agency relationship at any time.
Example: A and B enter into an agency contract. Later, both agree to terminate it. The agency ends by mutual consent.
2. By Revocation by Principal (Section 203):
The principal can revoke the agent’s authority before it is exercised. However:
- It must be before the authority is exercised.
- If the agency is coupled with interest, it cannot be revoked unilaterally.
Example: A authorizes B to sell his land. Before the sale, A revokes the authority. It is valid if B hasn’t acted yet.
3. By Renunciation by Agent (Section 206):
The agent may renounce (resign from) the agency by giving notice to the principal.
- If the agency was for a fixed period, premature termination without sufficient cause may lead to liability.
B. By Operation of Law:
4. By Completion of Business:
When the purpose for which the agency was created is achieved, the agency automatically terminates.
Example: A appoints B to sell his house. Once the house is sold, the agency ends.
5. By Expiry of Time:
If the agency was created for a fixed time, it ends after that period expires.
6. By Death of Principal or Agent (Section 201):
The agency relationship comes to an end automatically upon the death of either party.
7. By Insanity of Principal or Agent (Section 201):
If either party becomes of unsound mind, the agency terminates.
8. By Insolvency of Principal:
If the principal is declared insolvent (bankrupt), the agency terminates unless the contract provides otherwise.
II. Legal Consequences of Termination of Agency:
1. Agent’s Authority Ceases (Section 201):
Once the agency is terminated, the agent cannot legally bind the principal in future transactions.
2. Need to Give Notice (Section 208):
Termination becomes effective:
- As to agent: When it comes to his knowledge.
- As to third parties: When they receive notice of termination.
Important: If no notice is given, the principal may still be bound by the agent’s acts.
3. Agent Must Protect Principal’s Interests (Section 209):
After termination, the agent must take reasonable steps to protect and preserve the principal’s interests until the principal appoints another agent.
4. Termination Doesn’t Affect Past Acts:
Acts lawfully done by the agent before termination remain binding on the principal.
5. Irrevocable Agency (Agency Coupled with Interest):
If the agent has a personal interest in the subject matter of the agency (e.g., to recover a debt), the agency cannot be revoked to the prejudice of such interest (Section 202).
6. Agent’s Right to Compensation:
If the agency is terminated without sufficient cause, especially before the expiry of fixed time, the injured party (agent or principal) may claim compensation.
Conclusion:
The contract of agency can end in various ways, either by consent or due to legal reasons such as death or completion of the purpose. However, proper notice must be given to the agent and third parties to avoid liability. Some agencies, like those coupled with interest, are irrevocable. The Indian Contract Act ensures fair protection to all parties involved by setting clear rules on termination and its consequences.
8. What is ratification in the context of agency? Discuss the essentials and legal effects of a valid ratification by the principal.
Introduction:
In the law of agency, sometimes an agent may act without authority or may exceed his authority while dealing on behalf of the principal. In such cases, if the principal later approves or confirms the unauthorized act, it is known as ratification.
Ratification gives legal validity to an act that was originally unauthorized. The concept is governed by Sections 196 to 200 of the Indian Contract Act, 1872.
Meaning of Ratification:
According to Section 196 of the Indian Contract Act:
“Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or disown such acts.”
If he ratifies, it has the same legal effect as if the act was originally done with his authority.
Example:
A, without B’s authority, purchases goods on B’s behalf. Later, B accepts the transaction. This is ratification, and now B is bound by the contract.
Essentials of a Valid Ratification:
To be legally valid, the following conditions must be fulfilled:
1. The Act Must Be Done on Behalf of the Principal:
The person who performs the act must have intended to act for and on behalf of the principal.
Example: If A buys goods in his own name, and later B tries to ratify, it is invalid because the act was not done on B’s behalf.
2. The Principal Must Be in Existence at the Time of the Act:
A non-existent person (like a company not yet incorporated) cannot ratify a prior act.
Example: A contracts for a company not yet formed. Once formed, the company cannot ratify the act.
3. The Principal Must Have Full Knowledge of Material Facts (Section 198):
Ratification must be based on complete knowledge of all material facts. If the principal is misled or unaware, the ratification is not valid.
4. The Act Must Be Lawful (Section 200):
An act that is illegal or void cannot be ratified.
Example: A makes a contract to smuggle goods on behalf of B. B cannot ratify it.
5. Ratification Must Be Whole (Section 199):
The principal must ratify the entire act — he cannot approve one part and reject another.
6. Within Reasonable Time:
Ratification must be done within a reasonable time, especially before the third party withdraws or the situation changes.
7. Principal Must Have Legal Capacity:
At the time of ratification, the principal must be competent to contract (i.e., not a minor or of unsound mind).
Legal Effects of Valid Ratification:
If ratification is done properly, it has the following legal consequences:
1. Relation Back (Retrospective Effect):
Ratification relates back to the time the act was originally done. It is as if the act was authorized from the beginning.
Effect: Third parties are bound from the original date of the act, not from the date of ratification.
2. Binding on the Principal:
The principal becomes legally bound by the acts of the agent, just as if he had authorized them in the first place.
3. Agent is Freed from Liability:
Once the act is ratified, the agent is not personally liable for having acted without authority.
4. Third Party Becomes Bound:
Just as the principal is bound, the third party is also bound to the contract after ratification.
5. No Need for Fresh Contract:
Ratification does not require a new contract; the existing contract becomes enforceable upon ratification.
Conclusion:
Ratification is a powerful legal tool in the law of agency that allows principals to adopt and validate unauthorized acts of agents, provided certain conditions are met. It plays an important role in maintaining flexibility and fairness in commercial transactions. However, to avoid misuse, the Indian Contract Act lays down strict rules ensuring that only lawful, informed, and complete acts can be ratified.