Preface:

A number of issues in the common law arise when agents make contracts on behalf of principals. Should a principal be bound when his agent makes a

contract with some third party on his behalf which the principal would immediately wish to disavow? The t rade-offs resemble those in tort, so the least-cost-

avoider principle is useful for deciding when contracts are valid, and may be the underlying logic behind a number of different doctrines in agency law. In

particular, an efficiency explanation can be found for the undisclosed principal rule, under which the principal is bound even when the third party is unaware

that the agent is acting as an agent.

Agency deals with situations in which one person -- the principal-- uses another person -- the agent-- to act on his behalf. Sometimes the acts of the

agent are attributed legally to the principal, sometimes not. Delineating the conditions under which each is true are what make up the law of agency. The

importance of agency in the common law is shown by its being the subject in 1933 of the second (after Contracts) of the American Law Institute's series of

Restatements. Clearly, agency is central to business dealings. No owner of a business can do everything himself; he must delegate some things to agents, and

this is true not only of large corporations but of sole proprietorships that have employees who work for the owner

The kind of issue we will discuss in this paper is:

The paper enlightens on the law of agency, what is agency? how it is created? The kind of responsibilities on both the parties in contract of agency. How

they are liable to each other. And how they can terminate the contract and get out of the liability created. In the end in light of all the discussion will debate the

above statement.

Agency:

The law which super adds the liability of an agent does not detract from the liability of the principal

The law which super adds the liability of an agent does not detract from the liability of the principal

Delegating your legal authority is called “agency”. A principal gives her authority (rights) to an agent.

The proposed agent must accept the principal's offer to act as an agent; that's the agency contract and it gets the ball rolling in terms of the agent being "out

there" representing the principal, as if she or he were a clone thereof.

Rights given by the principal to the agent can be limited or unlimited (usually limited - why let a clone "out there" to potentially run amuck!).

The critical legal point: an agent’s actions with a third-party binds the principal ... until the third-party has rec’d notice that agency agreement terminated!

THE LAW OF AGENCY:

The Restatement of Agency (Second) defines agency as

According to authority Roscoe Steffen,

Qui facit per alium facit per se: he who acts through another acts himself.

"the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control,

and consent by the other so to act."

The essentials of agency are few... First, the relation is a consensual one; an agent agrees, or at least consents to act under the direction or control of the principal. Second, the relation is a fiduciary one; an agent agrees to act for and on behalf of the principal. He is in no sense a proprietor entitled to the

gains of enterprise--nor is he expected to carry the risks.

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A person who has capacity to contract can enter into contract either by himself or though some other person. If he adopts the first method there is

no question of agency. If he adopts the second method, then there is agency. The person who represents another in his dealing with third parties is called

agent and that person who is so represented by agent is called principal.

Principal:

A principal is a person, legal or natural, who authorizes an agent to act to create one or more legal relationships with a third party.

A principal owes certain contractual duties to his/her agent:

Correlative with the duties of an agent to serve a principal loyally and obediently, a principal’s primary duties to his/her agent include:

To compensate the agent as agreed; and

To indemnify and protect the agent against claims, liabilities, and expenses incurred in discharging the duties assigned by the principal.

Because of the fiduciary relationship, a principal owes his/her agent a duty of good faith and fair dealing. However, a principal can be

relieved of contractual obligations by an agent’s prior breach of contract.

A principal has a duty to act in accordance with the express and implied terms of any contract between a principal and an agent.

When an agent acts within the scope of actual authority, the principal is liable to indemnify the agent for payments made during the course of the

relationship irrespective of whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business.

Agent:

A consensual relationship created by contract or by law where one party, the principal, grants authority for another party, the agent, to act on behalf of and

under the control of the principal to deal with a third party. An agency relationship is fiduciary in nature, and the actions and words of an agent exchanged with

a third party bind the principal.

Classifications of Agent:

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1) Specific or particular agent:

Specific or particular agent is an agent who is appointed to do a single act for the principal. He is appointed mostly by a special power of

attorney. He is also called a Special Agent. His authority ends no sooner the particular act is performed.

2) General Agent:

General agent is an agent who is appointed to do all or general acts concerning a particular trade or business of the principal. He is appointed

mostly by general power of attorney. His authority continues until it is terminated.

3) Mercantile agents:

Agent who is authorized by a principal to buy or sell goods, and/or to raise a loan by using the principal's goods as a collateral.

4) Broker:

He brings two parties together into a contract. He is employed to find a buyer or seller. He is intermediary. He has no possession of the goods

and the contract is entered into by parties directly. He buys and sells goods on behalf of another.

5) Commission agent:

He buys or sells the goods for the buyer or the seller and receives commission. He may or may not have possession of the goods.

6) Factor:

He is entrusted with the possession of the goods with discretionary authority to sell, pledge or create any right on the goods with the third person.

He sells the goods in his own name at such price as he thinks fit. He has the authority to receive the price of the goods. He has a general lien on the

goods for the monies due to him.

7) Auctioneer:

He has an authority to sell the goods of his principal in public auction. He has no implied authority to sell by private contract. He has the

possession of the goods. He cannot sell the goods on credit. He cannot accept any payment other than each. He performs a dual role. He is the agent

of the seller till the time of sale and when the goods are sold, he becomes the agent of the purchaser. He has a right of a particular lien on the goods.

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He has authority to receive the price of the goods. He can sue the buyer in his own name or the whole of the purchase price. He has an implied

authority to sell without any restrictions.

8) Del-credere agent:

He is an agent who for an extra commission or remuneration guarantees the performance of the contract by the third person with whom he enters

into the contract on behalf of his principal. His extra commission is known as del-credere commission. He becomes responsible if the other party

does not perform the contract. His liability is therefore secondary. His legal position is partly that of an insurer and partly that of a surety. However,

if the default is on the part of the principal and the buyer refuses to buy, del credere agent is not liable. A del-credere agency may be inferred from

the course of dealings.

9) Sub agent:

An agent appointed by the original agent is called a sub agent. He is under the control of the original agent to the business of the agency (Sec

191).

10) Co-agent:

When two or more persons are appointed as agents by the principal to act as such jointly or severally, they are called Co-Agents. Co-Agents

should concur together in exception of their authority to bind the principal. Unless contrary is proved, they are jointly responsible. An agent who is

appointed as co-agent must exercise some amount of discretion as a man of ordinary prudence would exercise in his own case. If he does this, he is

not responsible to the principal for acts of negligence of the co-agent.

Rights, Duties and Liabilities of Agents

Duties of Agents

1. Agent should follow the instructions given by the principal.

2. If agent comes across any complicated situation, he has to communicate that situation to principal and his advice is to be obtained.

3. Agent should behave in his capacity as agent, he should not run the transaction in his own name. Law of Contract| 4

4. Agent should not make secret profits by utilizing reputation of the principal.

5. Agent should safe guard property of principal particularly upon happening of events like death of principal, insolvency of principal, etc.

6. Agent should maintain proper accounting records to enrol the transactions run by him. Agent has to remit amounts to principal properly.

7. Agent has to remit amounts to principal properly.

8. Agent should not carry on delegation.

Figure: Responsibilities of Agent to Principal

Responsibility Descriptions Duty to comply with the

agency agreement

The agent has to comply with the express and implied terms

(based on custom) of the agency agreement.

Personal performance In general, because a principal places a high degree of trust in

the judgment and skill of an agent, the latter cannot delegate

his or her duties without the principal’s consent. When a

business is appointed an agent, responsibility may, of

necessity, be delegated to others in the organization.

Fiduciary duty

(“fiduciary” comes from

Latin, meaning “holding in

trust”)

From a legal standpoint, this is one of the strictest standards of

care imposed on relationships. The agent has to act in good

faith and in the best interests of the principal. It requires that

the agent:

1. Avoid conflicts of interest, where personal interests

conflict with the best interests of the principal.

2. Disclose anything that may be relevant to the principal’s

interests.

3. Not personally profit from information or opportunities as

a result of the agency relationship.

4. Not compete with the principal.

A fiduciary duty may be displaced by the agent’s specific

instructions.

Duty of care The agent is required to take reasonable care in the

performance of its responsibilities. The skill demanded

depends on the agent’s task and competence.

Liabilities of Agents.

Actually agents bind over principal to his activities but there are some situations where agent comes across personal liability. Those situations are as

follows;

1. Terms of contract of agency may create personal liability to agent.

2. The tradition which is in operation in that particular type of business. May also create personal liability to agent.

3. If agent does not behave in his capacity as agent and thus runs the transaction in his own way, personal liability arises.

4. When agent acts for foreign principal, agent is personally liable.

5. Pretending agent is personally liable.

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6. When agent acts for principal who has not come into existence, agent is personally liable.

7. In case where principal cannot be sued, Customer sues agent and thus agent is personally liable.

8. When agency is coupled with interest then also agent is personally liable.

When is the Agent Liable? An agent can be held liable when she is acting on behalf of an undisclosed principal. As long as the agent had authority to act

on behalf of the principal, the third party can hold either the agent or the principal liable if the third party later discovers the person it dealt with was only an

agent. As well, an agent can be held liable when he indicates that he is authorized to act for a principal but is in fact not authorized—regardless of whether or

not the agent is honestly mistaken. This would be considered a breach of warranty of authority.

Rights of Agents.

1. Right of Retainer: Agent has right to deduct the amount which is due to him by principal, from amount payable to principal.

2. Right of stoppage in transit: In case where agent is personally liable, he has right to stop the goods in transit. The good may be moving towards

customer or principal.

3. Right to claim Remuneration: As per the terms of agency contract, agent has rights to claim remuneration.

4. Right of Indemnity: Principle of indemnity gets operated between principal and agent where principal is implied indemnifier and agent is implied

indemnity holder. So agent can make principal answerable for all types of sufferings.

5. Right of lien: Agent can exercise right of lien but contract act has not specified whether it is general lien or particular lien. Therefore, the nature of

agent’s lien depends upon mutual understanding.

Modes of Creation of Agency:

The following are different modes of creation of agency.

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1. Agency by Express agreement.

2. Agency by Operation of law.

3. Agency by Ratification.

4. Agency by Implied authority.

Agency by Express agreement: 

Number of agency contract come into force under this method. It may be Oral or documentary or through power of attorney.

Agency by operation of law: 

At times contract of agency comes into operation by virtue of law.

Agency by Ratification: 

Ratification means subsequent adoption of an activity. Soon after ratification principal – agent relations will come into operation. The person who

has done the activity will become agent and the person who has given ratification will become principal.

Ratification can be express or implied. In case where adoption of activity is made by means of expression, it is called express ratification.

For example: According to partnership act, every partner is agent of the firm as

well as other parties. It is implied agency. On account of such implied agency

only a partner can bind over firm as well as other partners, to his activities. In

the same way according to companies act promoters are regarded as agents to

the company.

For example: Without A`s direction, B has purchased goods for the sake of A. There after A has given his support (adoption) to B`s activity, it is called Ratification.

Now A is Principal and B is agent.

The ratification where there is no expression is called implied ratification.

Requirements:

1. Acceptance by the principal must be clear (may be written, oral, or implied by the principal’s

behaviour).

2. Ratification must occur within a reasonable time after creation of the contract; what is

reasonable depends on the facts.

3. The principal must accept the whole agreement. If not, a new agreement is formed between the

principal and the third party directly

4. The principal must have been identified by the agent at the time of negotiation.

5. The principal has the legal capacity to enter into the contract both at the time of negotiation and

ratification.

Agency by implied authority: 

This type of agency comes into force by virtue of relationship between parties or by conduct of parties.

For example: Mr. Q has P`s money with him. Without P`s direction Q has lent that money to R. There after R has paid interest directly to P. Without any

debate P has taken that amount from R. It implies that P has given his support to Q`s activity. It is implied ratification.

For example: A and B are brothers, A has got settled in foreign country without any request from A, B has handed over A`s agricultural land on these bases to a

farmer and B is collecting and remitting the amount of rent to A. Here automatically A becomes principal and B becomes his agent.

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Agency by implied authority is of three types as shown below;

Agency by Necessity

Agency by Estoppel

Agency by Holding out.

By Necessity: 

At times it may become necessary to a person to act as agent to the other

By Estoppel: 

The principal is "estopped" from objecting to the agreement made by the agent if the principal could have intervened to prevent

the confusion over authority; e.g., if the principal overheard the agreement being made and failed to assert that the agent was

unauthorized.

By Holding out: 

For example: A has handed over 100 quintals of butter for transportation, to a road transport company. Actually it is bailment

contract, assume that in the transit all vehicles have got stopped where it takes one week for further movement. So the transport company authorities have sold away the butter in those nearby villages. Here

agency by necessity can be seen.

In presence of A, B says to C that he (B) is A`s agent though it is not so actually. A has not restricted B from making such statement. Here

agency by Estoppel can be seen 

B is A`s servant and A has made B accustomed to bring good on credit from C. On one occasion A has given amount to B to bring goods from C on cash basis. B has misappropriated that amount

and has brought goods on credit as usually, here is agency by holding out and therefore A is liable to pay amount to C.

Law of Contract| 8

Termination of Agency Contract:

Termination of agency may take place in two ways either by the operation of law or by the act of parties.

Termination of agency by the operation of law. 

The following are the situations where the agency is terminated by the operation of law.

1. Expiry of time: At times contract of agency may get formed for a particular period. In such a case after expiry of that agreed period, termination of

agency takes place.

2. Fulfilment of object: At times the contract of agency may be found for a particular objective or to do a particular venture. In such a case termination of agency

takes place after completion of that venture.

3. Death or lunacy of either party: Whenever principal or agent come across death or lunacy, agency contract gets terminated.

4. Insolvency of Principal: Principal should have capacity to contract. When principal becomes insolvent, He foregoes capacity to contract and termination of

agency takes place. But the act is silent with regard to insolvency of agent. As minor also can act as agent, it can be conformed that insolvent

person may act as agent. Law of Contract| 9

5. Destruction of subject matter:  

When subject matter of contract gets destructed, agency contract comes to an end.

6. Principal – Alien Enemy: When principal is alien and war breaks out between the countries, then principal becomes alien enemy and agency contract gets

terminated.

7. Liquidation of company: On account of legal entity company may act either as principal or agent. Whatever the status may be, if company enters into liquidation,

termination of agency takes place.

8. Termination of Sub-agency: Whenever man agency gets terminated on account of any reason, sub-agency also goes off.

Termination of agency by the act of Parties. The following are the situations where the agency is terminated by the act of parties.

1. Termination of agency by the Principal: 

Principal can terminate the contract of agency by giving notice to agent. By doing so if agent comes across any suffering. Principal has to

compensate the agent.

2. Termination of agency by the Agent: Agent also can terminate the agency contract by giving notice to principal but by doing so if principal comes across any suffering, agent

has to compensate.

3. Termination of agency by both the parties to the contract: By means of mutual understanding between principal and agent, the contract of agency may come to an end.

Conclusion:

It has already been observed that an agent is appointed to bring the principal into contractual relations with third parties and

the acts of the agent are the acts of the principal.

As a rule, therefore, an agent cannot personally enforce contracts entered into by him on behalf of the principal, nor can he be

personally held liable for them, unless there is a contract to the contrary (Sec. 230). The principal is the right person to enforce such

contracts and to be held liable there for.

There are, however, certain exceptions to this rule, where an agent is presumed to be personally liable, unless a contract to the contrary exists.

At the very outset it is worth noting that in certain cases where the agent is personally liable, a person dealing with him may hold either him or his

principal or both of them liable (Sec. 233). In other words, the liability of the principal and the agent is ‘joint and several’ in some cases.

Even where the agent is personally liable, the principal is also liable to third parties and hence the saying:

“The law which super adds the liability of an agent does not detract from the liability of the principal.”

Law of Contract| 10

He third party dealing with an agent who is personally liable can choose between (a) suing both principal and agent, jointly, (b) electing to sue one

of them. It is important that a judgment obtained against one only and remaining unsatisfied is no bar to a second suit against the other party, i. e., if the third

party sues the agent and obtains no satisfaction, he may afterwards sue the principal because the liability is ‘joint and several’.

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