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Agency – The Indian Contract Act, 1872

Chapter X of the Indian Contract Act does not include all the aspects of the agency, it tries to cover general terms and it does it effectively. The concept of the agent is fairly extensive and compressing it into sections is a tedious job but the Indian lawmakers efficiently stood up to the task. This article focuses on the status of minors in the contract of agency, it also tries to highlight the key aspects of agency and differentiates between the relationship of master-servant and principal-agent. Furthermore, the article discusses express agency, implied agency, and agency by estoppel as well as the article clears the clouds of doubts surrounding the agency of necessity. 

What is an Agency?

Agency is a concept wherein a person has a command to create a legal relationship with another person(agent), it is also interesting to know that it is absolutely inessential to have a formal agreement for constituting an agency.[1] Similarly, consideration is not necessary to constitute an agency.[2] The overall contract of the agency is intrinsically constituted for the benefit of the Principal. This is true because the Supreme Court of India has held that the rights of an agent against the principal are not exhaustive.[3]

Powers of an Agent

If a person enters such a relationship as an agent, then that person can avail of the powers to do every legal thing that the principal is entitled to do.[4] An agent can create, modify, or terminate contractual obligations between the principal(whom he represents) and some third parties.[5] 

Creation of an Agency

The fascinating thing about the contract of agency is that it can be created expressly as well as impliedly, it is not necessary to have the agreement of an agency in writing.[6] Powers of an agent as described above may or may not be disclosed in an agreement, the inference of relationship between the two parties(principal and agent) can be drawn from the conduct of the principal and the agent and the circumstances present.[7]

Express Agency

When the relationship between an agent and the principal is formulated through a formal document or with a letter of appointment meant for an agent or orally, it is an express agency. For example, a written agreement between the seller of real estate and the broker.[8] 

Implied Agency

When an agency is created through the conduct of the parties or the situation, or by operation of law or out of necessity, that is called implied agency.[9] For example, Joshua has a friend who is a real estate agent. He loves property and wants to buy it. He doesn’t know the process after making an offer so he calls his friend who is a real estate agent so that she doesn’t have to pay extra for an agent. Now his friend guides him through the process and helps to secure the ownership of the property, now the contract of the agency has been formed.

Agency by Estoppel 

Where a person acts in such a way that the other person believes that a third person is authorised to act on his behalf, and also makes him/her clear that the person would be bound by the acts done by the third person.

Agency of Necessity 

The agency which arises when there is a dire need of protecting the assets of a person and he protects such assets without expressly being appointed as an agent is an agency of necessity. It is constituted for when the principal cannot protect or recover his/her own movable or immovable property and when it is an urgent necessity and that the circumstances demand someone to act on behalf of that person without prior authorization from the principal himself/herself, this type of agency created is termed as an agency of necessity.[10] 

The Indian Contract Act, 1872 nowhere mentions or provides information about the agency of necessity, however in section 189 it describes the authority of an agent in the cases of emergency, also it only recognises the existing principal-agent relationship which basically means that only an agent who has a prior contractual relationship with the principal can act in the authority.[11] 

Agent and Servant 

Generally, in business negotiations of the principal and the third parties, the agent acts as a representative of the principal, which intrinsically means that the agent can modify or terminate existing contractual relationships or create new contractual relationships. The distinctive features of an agent are his ability to represent the principal and derivative authority.[12] The difference between the relationship of principal-agent and master-servant is narrow but in Babulal Swarupchand Shah v. South Satara Merchant’s Association Ltd.[13] the High Court of Bombay has stated the difference between an agent and a servant:

“Principal has the right to direct what work the agent has to do, but a master has the further right to direct how the work is to be done. 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. An agent, though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in its exercise to the direct control or supervision of the principal. An agent, as such is not a servant, but a servant is generally for some purposes his master’s implied agent, the extent of the agency depending upon the duties or position of the servant.”[14] 

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The agent undoubtedly has more freedom to complete an act assigned to him by the principal, but it should be by the instructions of the principal and not entirely by the agent’s own conscience, although the act should not demand the performance or completion of any unlawful activity. From this, it can be clearly concluded that an agent is basically a servant but a bit superior. While a servant can also be an agent if he/she deals with third persons on behalf of his/her master.[15] Master would be liable for the wrongful acts of the servant arising during the course of his/her employment, but this is not the case in a relationship of principal and agent. An agent is bound to conduct the act according to the directions given by the principal and if there are no such instructions, then it is implied that the agent should conduct according to the custom. If the agent fails to comply with the instructions and incurs losses for the principal, then the agent would be solely liable. 

Test 

Determining whether or not the nature of employment is that of a servant or an agent is a very subjective task. A doctor who is employed as a medical officer can be a servant, even though there is no one controlling the way he/she should work. The amount of direct control is a determining factor for deciding whether the employee is a servant or an agent. If direct control is greater, the chances of an employee being a servant increases. In a similar way, if the amount of independence is higher, the chance of the employee being an agent increases drastically.[16]  

Minor as an Agent 

According to the provision section 184, a person who is not of the age of majority cannot become an agent, but the provision does not mean that the minor cannot bind a principal after getting into the contract of agency.[17] In a situation where a minor is an agent, the principal would be held accountable for the faults done by the minor.[18] An incompetent person cannot contract for himself, but in the contract of agency, the minor or incompetent person can contract for the principal, so as to bind him. So beyond the shadow of a doubt, the competency of an agent to contract for himself is limited, but an agent can definitely contract for his principal. In a scenario, if the principal appoints an agent who he knows is not competent to contract because of his minor status, the principal cannot, later on, call the contract void. He cannot justify that the contract was made by the minor.[19]

Conclusion 

The Indian Contract Act, 1872 is a perfectly structured act, in spite of its perfection, the Law Commission of India keeps on recommending amendments. These amendments are not just random suggestions by committees. A lot of hard work and research goes into it. First, the act needs to be perfectly analysed and then only the commission recommends amendments. Moreover, the amendments recommended by the law commission for Chapter X of the Indian Contract Act are acceptable and are definitely needed for the hour. 

Chapter X of The Indian Contract Act, 1872 is perfectly balanced in its approach. For example, section 189 protects the interests of the principal but it also protects the agent in general. It does so by extending the authority of an agent in an emergency but on the other hand, it also provides defense for the act committed by an agent in that specific situation.

The provisions of the Contract Act fail to explain the determining factor for who is an agent and servant, but it does indirectly provide a test for determining the same. Overall Chapter X is a perfect addition to the entire Contract Act of 1872 and with the amendments recommended by the Law Commission, it has the potential to be the perfect law guide for the contract of agency.

Endnotes

[1] Babulal Swarup Chand Shah v. South Satara Merchant’s Association Ltd. and others, AIR 1960 Bom 548.

[2] The Indian Contract Act, 1872, s. 185.

[3] Pollock and Mulla, The Indian Contract Act, 1872, 1364 (LexisNexis, Pune, 2014).

[4] The Indian Contract Act, 1872, s. 188.

[5]  Mulla, supra note 3.

[6] The Indian Contract Act, 1872, s. 187.

[7] Ibid.

[8] Pollock and Mulla, The Indian Contract Act, 1872, 1365(LexisNexis, Pune, 2014).

[9] The Indian Contract Act, 1872, s. 187.

[10] The Indian Contract Act, 1872, s. 189.

[11] Mulla, supra note 8.

[12] Pollock and Mulla, The Indian Contract Act, 1872, 1365(LexisNexis, Pune, 2014).

[13] AIR 1960 Bom 548.

[14] Babulal Swarupchand Shah v. South Satara Merchant’s Association Ltd., AIR 1960 Bom 548.

[15] Qammar Shafi Tyabji v. CEPT, AIR 1960 SC 1269.

[16] Ibid.

[17] The Indian Contract Act, 1872, sec. 184.

[18] Pollock and Mulla, The Indian Contract Act, 1872, 1391(LexisNexis, Pune, 2014).

[19] Ibid.

Rushikesh D. Patil | Maharashtra National Law University, Nagpur

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