Introduction to Contract of Agency
A contract of agency is a special contractual arrangement in which one person appoints another to act on his behalf in transactions.[1] The principal is the individual who appoints the other to handle his business. The agent, on the other hand, is the person in charge of the principal’s transaction. The concept of “agency” has been expounded by Ramaswami J. of the Madras H.C. in P. Krishna Bhatta v. Mundila Ganapathi Bhatta[2] in his words:
“In legal phraseology, every person who acts for another is not an agent. A domestic servant renders to his master a personal service; a person may till another’s field or tend his flocks or work in his shop or factory or mine or may be employed upon his roads or ways; one may act for another in aiding in the performance of his legal or contractual obligations of third persons. It is only when he acts as a representative of the other in business negotiations, that is to say, in the creation, modification and termination of contractual obligations, between that other and third persons, that he is an agent. Representative character and derivative authority may briefly be said to be the distinguishing feature of an agent.”
In other words, a principal is one who employs, and the agent is one who is employed for the purposes of the principal, to be represented on his or her behalf. This definition of an agent and principal is contained in section 182 of the Indian Contract Act, 1872. In common parlance, an auctioneer, banker, broker, indenter, advocate and factor, among others, are all various kinds of agents.[3] An agent acts as a connecting link between two parties. Although section 184, for the purposes of liability and responsibility requires that an agent must be one competent to contract, (i.e., he or she must not be of unsound mind, a minor or disqualified by law from contracting under the Indian Contract Act, 1872) any person irrespective of minority or insanity may be an agent as long as they are not bound with liabilities.[4]
Duties of an Agent
An agent’s primary responsibility is to establish contractual relationships between the principal and third parties. Depending on the nature of the company, an agent has specific rights, obligations, and liabilities toward the principal and other parties. The scope of an agent’s authority is governed by the terms of the appointment. However, an agent also has the authority to do whatever in order to protect the principal from loss or injury. The following are the duties and obligations of an agent:-
The basis for this duty lies in the Latin maxim, “delegatus non potest delegare”, which holds that an agent who has been assigned authority cannot delegate it to another person. This is codified in the Indian Contract Act, Section 190. It indicates that an agent who agrees to act personally cannot delegate that responsibility to a sub-agent. This was also established in the case, John McCain and Co v. Pow[5], wherein it was held that an estate agent has no right to designate a sub-agent and assign to him powers that need special expertise and care unless so authorised by the principal.
However, there are some exceptions to this rule, such as when there is a custom of trade to that effect, when the nature of the agency so requires, when action does not require a personal skill, and when the principal expressly or implicitly agrees to or is aware of the appointment of a sub-agent for specific work.
2. Duty to protect and preserve the interest entrusted to him: Section 209
When an agency is terminated due to the principal’s death, insolvency, or mental incapacity, the agent is obligated to take all reasonable efforts on behalf of his late principal’s representatives to protect and preserve the interests entrusted to him.
3. Duty to execute action according to directions of Principal or custom of trade: Section 211
An agent is obligated to conduct his principal’s business in accordance with the principal’s instructions for his beneficial interest or, in the absence of such instructions, in accordance with the custom that prevails in doing similar business at the location where the agent conducts such business. When an agent behaves contradictory to instructions or omits to act upon instructions, and if a loss occurs, he or she must compensate his principal. If a profit occurs, he must account for it.
In Pannalal Jankidas v. Mohanlal[6], a commission agent bought items for his principal and kept them in a godown until they were shipped. The agent was directed to insure them. He charged the insurance premium but did not insure the products. The cargo was destroyed in an explosion in Bombay Harbour. The agent was ruled accountable to reimburse the principal for his loss less the amount obtained under the Bombay explosion (compensation) Ordinance, 1944, under which the government paid up to fifty percent compensation for uninsured commodities lost in the explosion.
In Lilley v. Doubleday[7], the principal authorised his agent to keep his goods at a specific warehouse, but the agent stored a portion of the commodities at a second, equally secure warehouse. These items were destroyed as a result of fire. The agent was found responsible for the loss of the goods.
An agent is also required to maintain confidence, secrecy, and non-disclosure of any sensitive information concerning his principal’s affairs. In the case, Shankarlal Agarwalla v SBI[8], it was held that a banker may be held liable if the state of his customer’s account is leaked, unless the disclosure is required by law, such as a duty to obey an order under any law in force, or a higher duty owed to State or public institutions that supersedes a lower duty, or any statement in a formal claim or with the customer’s permission. In relation to the client’s transactions with it, the bank is under a similar duty of secrecy and would be liable in damages if any loss is caused to the customer by the leakage of secret information.[9]
4. Duty to act with reasonable care and skill: Section 212
As per section 212, unless the principal is aware of his or her lack of skill, an agent is obligated to conduct himself in the course of employment with the same skill as is generally possessed by persons engaged in similar business, i.e., of agency. The agents are always obligated to act with reasonable conscientiousness and to use the skill that he possesses; and to compensate his principal for the direct consequences of his own neglect, lack of skill, or misconduct, but not for loss or damage caused indirectly or remotely by such neglect, lack of skill, or misconduct.
In situations where the agent must utilise his discretionary power, he must evaluate the principal’s stance. The agent who was assigned to sell a residence got an offer, which he promptly reported to the principal in the case of Keppel v. Wheeler[10]. The agent received a greater bid in a matter of days, which he failed to mention to the principal, resulting in a loss for the principal. In this case, the agent was deemed liable and ordered to reimburse the principal for the difference in prices.
In Jayabharathi Corpn. v. Sv. P.N. Sn. Rajesekara Nadar[11], the agent misled the principal that items had been purchased but afterward indicated that the products could not be purchased because delivery was contingent on a third party, which was contingent on another party. The agent was found to have committed gross negligence and misconduct and was so held accountable. It was observed that Section 212 addresses another aspect, which provides that it is the obligation of an agent to exercise all reasonable diligence to communicate with the principal in instances of difficulties and try his best to seek his directions.
5. Duty to render account: Section 213
In relation to agent’s responsibility as per Section 213 of the Indian Contract Act, an agent must submit appropriate and correct accounts and information to his principal on demand.
6. Duty to communicate with principal and to obtain principal’s instructions: Section 214
In challenging situations, it is an agent’s responsibility to communicate with his principal and seek his directions with all reasonable effort. However, in cases of emergency, an agent may act on his own accord and in good faith without seeking the principal’s directions.
7. Duty to avoid conflict of interest: Sections 215 and 216
Section 215 protects the principal’s rights when an agent engages in agency activity on his own account without the principal’s agreement. Section 216 also allows for the principal’s right to benefit from an agent acting on his own account in the business of agency. Because an agent has a fiduciary position, it is his obligation not to do anything that would clash with his own interests and his duty to the principal. This conflict always emerges when the agent has a personal interest in the principal’s transaction, such as when he buys the property he is assigned to sell or delivers his own products when he is authorised to buy on behalf of the principal. Sections 215 and 216 deal with the duties of an agent to not deal on his own account and to not make secret profits respectively. It must be noted that secret profits here refer to dishonest profits made without disclosing the fact to the principal.
In Armstrong v. Jackson[12], a stockbroker was hired to purchase some shares on behalf of his client. He presented to his principal for signature certain paperwork demonstrating that the acquisition was being made in the market. However, the agent was actually transferring his own shares to the principal. The principal was given the right to rescission.
In the instance of the agent acting on his own, the principal has specific rights against the agent that he can enforce. One of such rights is the right to repudiate the transaction if: any important facts were dishonestly kept from him by the agent; or the agent’s dealings caused him loss or proved detrimental to him. The principal also has the right to claim whatever profits were made by the agent.
8. Duty to pay sum received for principal: Section 218
Section 218 outlines the agent’s obligation to pay payments received on behalf of the principal. The agent is obligated to deposit all payments collected on his behalf to his principal. The agent, on the other hand, has the right to deduct his authorised costs, but only pursuant to this right, the principal’s money must be repaid to him, even if it was obtained under an invalid or unlawful contract. Even if his gains for the principal are from invalid or unlawful transactions, the agent is required to execute this obligation.
The agent in the case of Bhola Nath v Mul Chand[13] did not account for the money he got from a transaction that was found void and illegal. The agent invoked the contract’s illegality as a defence. The court ruled that the agent’s justification of withholding the amount of payment was unjustifiable, and ordered the agency to pay the principal in full.
Conclusion
To conclude, in a contract of agency, there is a fiduciary interest between the agent and the principal, which requires that all obligations entrusted to the agent must be discharged in accordance with the principal’s directions, all profits must be accounted for and communicated with the principal and the agent must act reasonably and skillfully as required.
References
[1] Contract of Agency, available at: https://www.indiafilings.com/learn/contract-of-agency/#:~:text=Contract%20of%20the%20agency%20is,the%20principal%20is%20the%20agent (last visited on February 9, 2022).
[2] AIR 1955 Mad 648.
[3] Duties of an Agent, available at: https://www.lawctopus.com/academike/duties-agent/ (last visited on February 9, 2022).
[4] Dr. R.K. Bangia, Contract-II p. no. 120(Allahabad Law Agency, Haryana, 7th ed., 2017).
[5] (1974) 1 WLR 1643 (CA).
[6] 1951 AIR 144.
[7] (1881) LR 7 QBD 510.
[8] AIR 1987 Cal 29.
[9] Dr. Avtar Singh, Contract & Specific Relief Act 756-773(EBC Publishing (P) Ltd., Lucknow, Twelfth Edition, 2017).
[10] [1927] 1 KB 577.
[11] AIR 1992 SC 596.
[12] 2 KB 822 (1917).
[13] ILR (1901-03).
[14] Duties of Agent, available at:https://www.lawctopus.com/academike/duties-agent/ (last visited on February 11, 2022).
[15] Duties of an Agent in a Contract of Agency, available at: https://www.legalserviceindia.com/legal/article-858-obligations-of-an-agent-in-a-contract-of-agency-a-comparative-analysis.html (last visited on February 11, 2022).
[16] Agents Duty to avoid Conflict of Interest, available at: https://www.legalserviceindia.com/legal/article-2039-agents-duty-to-avoid-conflict-of-interest.html (last visited on February 11, 2022).
