AGENCY AND ITS CREATION, RECTIFICATION, TERMINATION AND REVOCATION,,,,RIGHTS LIBILITIES AND DUITIES OF PRINCIPAL AND AGENT

INTRODUCTION:

In law, the relationship that exists when one person or party (the principal) engages another (the agent) to act for him—e.g., to do his work, to sell his goods, or to manage his business—is called agency. The law of agency governs this legal relationship, wherein the agent deals with a third party on behalf of the principal. A competent agent is legally capable of acting for his principal in dealings with third parties.

Hence, the process of concluding a contract through an agent involves a twofold relationship:

• Externally, the law of agency is concerned with the business dealings of an economic unit and with the powers of representatives to affect the legal position of the principal.

• Internally, it governs the relationship between the principal and the agent, thereby imposing certain duties on the agent, such as diligence, accountability, good faith, and loyalty.

 

RELEVANT LAW AND PROVISIONS:

• Chapter X of the Contract Act, 1872

• Sections 182 to 238

 

WHAT IS AN AGENCY?

“Agency is a contractual relationship between two parties created by agreement, express or implied.”

 

WHO IS AN AGENT?

An "agent" is a person employed to do any act for another or to represent another in dealings with third persons.

 

WHO IS A PRINCIPAL?

The person for whom such act is done, or who is so represented, is called the "principal".

 

ESSENTIALS OF AGENCY:

i. The relationship of agency is based on a contract.
ii. The contract may be either express or implied.
iii. There should be an agent appointed by the principal.
iv. The person employing the agent must have legal capacity or be competent to do the act for which he employs the agent.
v. The principal must confer authority on the agent to act on his behalf.
vi. The relationship of agency is based on mutual confidence between the principal and agent.
vii. A contract of agency requires no consideration.

 

CREATION OF AGENCY:

I. BY EXPRESS AUTHORITY (Sections 186–187)

A person may be appointed as an agent either orally or in writing. No specific form is required. Authority is said to be express when it is given by spoken or written words.

 

II. BY IMPLIED AUTHORITY (Sections 186–187)

An implied agency arises from the conduct, relationship, or situation of the parties. Authority is said to be implied when it is inferred from the circumstances of the case or from the ordinary course of dealing.

 

Types of implied agency include:

a) Agency by Estoppel (Section 237)

When a person, by his conduct or statement, induces others to believe that a certain person is his agent, he is estopped from subsequently denying that relationship.

b) Agency in Emergency (Section 189)

An agent has authority in an emergency to do all such acts to protect his principal from loss as a person of ordinary prudence would do in his own case under similar circumstances.

c) Agency by Holding Out

Though a form of estoppel, some affirmative conduct by the principal is necessary to create agency by holding out.

d) Agency by Necessity

This arises when there is neither express nor implied appointment, but a person is compelled by circumstances to act on behalf of another.

 

III. AGENCY BY RATIFICATION (Section 197)

Where an agent acts without knowledge or authority or exceeds his authority, the principal is not bound unless he subsequently ratifies the act.

IV. BY OPERATION OF LAW:

Agency by operation of law arises when the law treats one person as an agent of another regardless of intention or contract (e.g., in partnerships, marital relationships).

 

TERMINATION OR REVOCATION OF AGENCY (Section 201)

A. BY ACTS OF THE PARTIES:

i. By mutual agreement between principal and agent.
ii. By revocation of the agent’s authority by the principal.
iii. By the agent renouncing the agency business.

B. BY OPERATION OF LAW:

i. By completion of the business of the agency.
ii. By expiration of the period for which the agency was created.
iii. By the death or insanity of either agent or principal.
iv. By insolvency of the principal or, in some cases, the agent.
v. By destruction of the subject matter of the agency.
vi. Where the principal or agent is a company, by its dissolution.
vii. If the principal becomes an alien enemy.

 

RIGHTS, DUTIES AND LIABILITIES OF PRINCIPAL AND AGENT

 

I. DUTIES OF AGENT:

• i. Duty to conduct business as per principal’s directions (Section 211)
• ii. Duty to act with skill and diligence (Section 212)
• iii. Duty to maintain and render proper accounts (Section 213)
• iv. Duty to communicate with the principal in case of difficulty (Section 214)
• v. Duty not to make secret profits
• vi. Duty not to act in conflict of interest
• vii. Duty to pay sums received for the principal
• viii. Duty not to misuse confidential information
• ix. Duty to safeguard the principal’s interests upon his death or insanity
• x. Duty not to delegate authority without permission
• xi. Liable for the acts of sub-agent
• xii. Liable for misrepresentation and fraud

 

II. RIGHTS OF AGENT:

• i. Right to remuneration (Sections 219–220)
• ii. Right to retain money due from principal (Section 217)
• iii. Right of lien (Section 221) – Right to retain goods or property until dues are paid.
• iv. Right of stoppage in transit, if he paid from his own funds or incurred liability.
• v. Right to indemnity (Sections 222–224) – For acts done lawfully and in good faith.
• vi. Right to compensation (Section 225) – For injuries caused by the principal’s neglect.

 

III. RIGHTS OF PRINCIPAL:

• i. Right to recover damages if agent disobeys instructions.
• ii. Right to demand accounts from agent.
• iii. Right to recover any money collected by the agent.
• iv. Right to claim any secret profit made by the agent.
• v. Right to forfeit the agent’s remuneration in case of misconduct.

 

IV. DUTIES OF PRINCIPAL:

Towards the Agent:

• i. Duty to pay agreed remuneration.
• ii. Duty to indemnify for lawful acts.
• iii. Duty to indemnify for acts done in good faith.
• iv. Duty to compensate agent for loss caused by principal’s negligence.

Towards Third Parties:

• i. Principal is liable for acts done by the agent within the scope of his authority.

 

WHEN IS THE PRINCIPAL NOT BOUND BY THE OBLIGATIONS INCURRED BY THE AGENT?

(Sections 237 & 238)

1. Acts done without authority (Sec. 237):

If an agent, without authority, incurs obligations with a third party, the principal is only bound if he induced the third party to believe that such acts were authorized.

Illustrations:

• (a) A consigns goods to B with instructions not to sell below a certain price. C, unaware of this, buys at a lower price. A is bound.
• (b) A gives B negotiable instruments endorsed in blank. B sells them against A's orders. The sale is valid.

 

2. Misrepresentations and frauds by agent (Sec. 238):

Misrepresentations or frauds committed by an agent within the scope of his business bind the principal as if they were done by him.

But, if done outside the scope of authority, the principal is not liable.

Illustrations:

(a) A, B's agent for selling goods, induces C to buy by making false claims. The contract is voidable by C.

(b) A, ship captain for B, signs bills of lading without receiving the goods. The bills are void between B and the consignor.

 

CONCLUSION:

The law of agency, as codified in Sections 182 to 238 of the Contract Act, 1872, provides a structured framework for understanding how one person (the agent) can act on behalf of another (the principal) in dealing with third parties. This legal relationship facilitates trade, contracts, and operations in both personal and commercial domains.

The agent is expected to act diligently, loyally, and in the best interests of the principal, while the principal is expected to compensate and indemnify the agent for lawful actions. Creation and termination of agency may occur in various ways—by express agreement, implication, operation of law, or necessity.

It is also important to note that the principal can be bound by the actions of the agent even when the agent exceeds authority—if the principal has led third parties to believe such authority existed. However, misrepresentation or unauthorized acts outside the agent’s scope will not bind the principal.

Thus, understanding the rights, duties, and liabilities of agents and principals is essential for maintaining trust and accountability in legal and business relationships.