Indian Contract Act, 1872 – Agency – CA Inter Law Notes

Indian Contract Act, 1872 – Agency – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

Indian Contract Act, 1872 – Agency – CA Inter Law Notes

Basic – Agency

What is an Agency?

Person cannot do every business transaction by himself because of time constraint and business complexity.
Therefore, business people perform many activities through other person.
The person who carried out the transaction on behalf of other is known as agent. This arrangement is known as contract of agency.

Example:
Devdas appoints Paro to buy a liquor on his behalf. Dev- das is the principal and Paro is the agent. The relationship between Devdas and Paro is called ‘agency’.

Parties – Section 182:

Agent:
A person employed to do any act for another or to represent another in dealings with third person is known as agent.

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

Rules on which agency is based:
There are two important rules on which the agency is based:

Whatever a person can do personally, he can do through an agent.
He who does an act through another does by himself. Consequently, all the acts of the agent are the acts of the principal.

Connecting link:

The function of an agent is thus to bring his principal into contractual relation with third parties.
In other words, the agent is merely a connecting link between the principal and the third parties.

Test of agency:
Where a person has capacity to:

Create contractual relations between the principal and a third party; and
Bind the principal by his own acts, there exists a relationship of agency

Essentials (Featu Res) of Valid Contract of Agency

The essential for a valid agency or feature of agency are discussed as under:

Agreement:

Agency is created by an agreement between principal and agent.
Agency may be express or implied.

Agent Acts in Representative Capacity:

Agent must represent his principal and act on his behalf.
Agent must have power to create legal relationship of his principal with third person.
Thus, an agent need not be a competent person. Even a minor or a lunatic can act as an agent.

No Consideration: Contract of agency can be created without consideration.

Capacity of Party – Sections 184-185:

For a valid contract of agency, principal must be competent person to enter into contract.
Any person can become an agent. Minor or person of unsound mind can become and agent.
Generally, an agent is liable to the principal, but he will not be liable if he is minor or unsound mind.

Distinguish Between Agent And Servant

Matter	Agent	Servant
Authority to Bind	An agent has the authority to act on behalf of principal and to create contractual relations between the principal and third persons.	Servant does not have authority to bind and create contractual relations between his master and third persons. Servant acts under the authority of master.
Control	Agent though bound to exercise his authority in accordance with all lawful instructions which may be given to him by his principal, is not subject to the direct control and supervision of the principal.	The servant acts under the control and supervision of the master and is bound to conform to all reasonable orders given to him in course of his work.
Commission	Agent receives commission based on work done.	A servant is paid salary.
Liability	The principal is liable for the wrong of his agent if they are done within the ‘scope of the authority’.	A master is liable for the wrong of his servant if they are committed in the ordinary course of the servant’s employment.
Act for more than One Person	An agent may work for several principals at the same time	Servant usually serves only one master.

Distinguish Between Independent Contractor and Agent

Matter	Independent Contractor	Agent
Act	An independent contractor act independently in respect of work for which he is engaged.	An agent on the other hand is one who acts according to the instructions of the principal.
Represent	An independent contractor does not represent his employer in dealing with other persons.	An agent represents his principal in dealings with third persons and can bind the principal by entering into contacts with other persons within the scope of his authority.
Personal Liability	He is personally liable for the acts done by him.	He is not personally liable for acts done by him within the scope of his authority.
Instructions	He is not bound to follow the instructions given by his employer. He is employed to do specified work, the manner and means of performance are purely at his discretion.	He is bound to follow all lawful instructions given by his principal.

Kinds of Agent

Various kinds of agents are enumerated below:

General Agent:
A general agent is one who has authority to do all acts connected with particular trade, business or employment, e.g. solicitors, brokers.
The authority of general agent is continuous unless it is terminated.

Particular Agent:
A particular or special agent is one who has authority only to do particular transactions.

Example:
Agent appointed to sell a particular house or to sell a particular piece of land.

Universal Agent:

A universal agent is one whose authority to do all acts which principal can lawfully do.
He has unlimited authority to bind principal.

Mercantile Agent:

A mercantile agent is one who is authorised to sell or buy goods of principal in the customary course of his business as such agent.
He has authority to consign goods for the purpose of sale or to buy goods, or to raise money on the security of the goods.

Factor:
A factor is a mercantile agent entrusted with possession of goods who has authority to buy, sell or otherwise deal with goods, or to raise money on his security.

Broker:

A broker is a mercantile agent who is employed to negotiate and make contracts for sale or purchase or goods on behalf of principal.
He is not given possession of goods. He has no lien on goods.

Commission Agent:

A commission agent is one who secures buyers for a seller of goods and sellers for a buyer of goods in return for a commission on the transaction for his labour and trouble.
He buys goods in the market on behalf of his employer in his own name and on the best available terms.
He may have possession of goods or not.
His position is more or less similar to that of a broker.
The duties and responsibilities of commission agent depend upon his agreement with his principal.

Auctioneer:

An auctioneer is mercantile agent who is appointed to sell goods at the public auction.
He has authority to receive the auctioned price.
He has particular lien on the goods for his charges.

Del Credere Agent:
A del credere agent is an agent who in consideration of an extra remuneration guarantees the solvency of the parties with whom he brings the principal into contractual relations and undertakes to indemnify the principal against any damage that may be caused by the party’s failure to perform the contract.
His liability, like that of surety, is secondary and arises only on insolvency of the other party or other similar grounds.

Modes of Creation of Agency

The relationship of principal and agent may be created in any one of the following ways:

Agency by express agreement
Agency by implied agreement
Agency by ratification

Agency by Express Agreement – Sections 186-187:

Normally, a contract of agency is created by an express agreement, Le., the authority is expressly given by the principal to his agent.
Such an agreement may be oral or in writing.
No particular form or words required for appointment of an agent.

Example:
Contract of agency is created by Power of Attorney.

Agency by Implied Agreement – Section 187:
An agency agreement may be implied under certain circumstances from the conduct, situation or relationship of parties.

The agency by implied agreement includes the following agencies also:

Agency by estoppel
Agency by holding out
Agency by necessity

Agency by estoppel:
‘Estoppel’ means that a person is stopped or prevented from denying the truth of a statement, which he has made.
Where a person by his conduct or words spoken or written leads wilfully another person to believe that a certain person is his agent, he is estopped from denying subsequently the fact of agency. Thus, agency is created by implication of law.

Example:
X informs Y in the presence of Z that Z is his agent. Later on, Y enters into agreement with Z believing Z to be the agent of X. Here, Z become X’s agent by estoppel.

Agency by holding out:
Agency by holding out is a kind of agency by estoppel. In this case, there is some prior positive or affirmative conduct of the principal, which indicates that certain person has already his agent.

Agency of Necessity :
Some extraordinary situation force person to act as an agent of some person without authority of that person, such an agency is created as agency by necessity.

To constitute a valid agency by necessity the following conditions must be satisfied:

There must be emergency.
There was necessity to act on behalf of principal.
Agent was not in position to commu-nicate with principal.
Agent has acted honestly and in the interest of principal.

Example:
A horse was sent by railway. On destination, no one was present to take delivery of the horse. The stationmaster had to feed the horse. Here, stationmaster became an agent by necessity.

Agency by Ratification – Sections 196-197:

Ratification means confirmation of the acts already done.
When a person does some acts on behalf of another person without his knowledge or authority. Later on, if the other person ratifies the acts done on his behalf. In such case, agency is created by ratification.
It is also known as expost facto agency.
On ratification, principal is bound by the acts done by agent.
Ratification may be express or implied.

Essentials of Valid Ratification – Sections 198-200

To be valid, ratification must fulfil the following conditions:

By Principal:
Ratification can be made by principal.

Principal in Existence:
Principal must be in existence at the time when contract was entered into in his name.

Capacity of Principal:
The principal must have contractual capacity at the time of:

entering into contract; and
ratification

Full Knowledge:
No valid ratification can be made by a person whose knowledge of facts of the case is materially defective.

Lawful and Legal Act:
Only lawful and legal act can be ratified.

Example:
A holds a lease from B, which can be terminated on three months’ notice. C an unauthorized person gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A.

Reasonable Time: Ratification needs to be done within reasonable time.

Entire Transaction: Entire transaction needs to be ratified.

Communication: For a ratification to be effective, it must be proved that there was communication of ratification to the party who is sought to be bound by the act by the agent.

Authority to Perform:

The act which principal himself is incapable of doing cannot be ratified.
Thus, a minor is not competent to act and hence minor’s act cannot be ratified.

No Damage to Third Party: Ratification by principal should not create any damage to third party. If any damage is suffered, then principal is liable to compensate same.

Agency Relationship Between Husband and Wife

Relationship between husband and his wife is also that of principal and agent.
The husband is treated as a principal and wife as his agent.
The agency relation between husband and wife may be discussed under following two heads:

Wife living with her husband
Wife living apart from her husband

Wife Living With Her Husband:

When wife is living with her husband, she has implied authority to buy the articles of household necessaries.
Following conditions should be satisfied for treating wife as an agent of husband:
- The husband and wife are living together in domestic establishment of their own.
- Wife should be in charge of domestic establishment.
- Wife must have purchased articles or goods suitable to the style in which husband chooses to live.
However, husband can escape his liability if he prove that:
He has forbidden his wife expressly to buy goods on credit. Tradesman is also expressly forbidden to supply goods on credit to his wife.
- The wife was supplied with sufficient articles or goods.
- The wife was supplied necessary funds to purchase the necessaries.
- The goods purchased were not necessaries.

Wife Living Apart from Her Husband:

Without her fault:

Where the wife is living apart, without any fault on her part, then she is legally entitled to receive maintenance from her husband.
If husband does not provide her maintenance, the wife has implied authority to purchase the necessaries of her life and husband is bound to pay for the same.

On her own: Where wife is living separately on her own choice or without justification, husband is not responsible for any expenses.

Extent of Agent’s Authority

An agent’s authority means capacity of the agent to bind his principal.
The acts of an agent done within the scope of his authority bind the principal. Such an authority of an agent to bind the principal may be:

Actual or real authority
Ostensible or apparent authority
Authority in an emergency

Actual authority – Section 186:

Actual authority means that authority which has been really delegated to the agent. Authority of an agent may be express or implied.
An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case or the ordinary course of dealing between parties.
Principal is bound by act of agent done within his express or implied authority.

Example:
A owns a shop in Dhanbad, living himself in Calcutta, and visiting the shop occasionally. The shop is managed by B, and he is in the habit of ordering goods from in the name of A for the purposes of the shop, and of paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods from C in the name of A for the purpose of the shop.

Ostensible or apparent authority:

When an agent is employed for a particular business, persons dealing with him can presume that he has authority to do all such acts as are necessary for such a business. Such an authority of an agent is called ostensible or apparent authority.
Ostensible or apparent authority is the authority of an agent as it appears to others. It often coincides with actual authority.

Authority in emergency – Section 189:

An agent has authority, in an emergency to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.
When the agent has acted beyond the authority in emergency, principal is bound by the act of an agent.

When the agent exceeds his authority:
When the agent acts beyond the scope of his authority, he will be personally liable and principal cannot be held liable.

Example:
A consigns goods to B at Calcutta, with directions to send them immediately to C, at Cuttack. B may sell the goods at Calcutta, if they will not bear the journey to Cuttack without spoiling.

Delegation of Authority By Agent – Section 190

General Rule:

The rule is that an agent, who has obtained power from the principal to act, must act himself.
He is not entitled to delegate his authority to another person without the consent of his principal.
The rule is expressed in Latin maxim – ‘Delegatus non protest delegare’ i.e. a delegate cannot further delegate.
It simply means that delegated powers cannot further be delegated.
One cannot delegate that which one has himself undertaken to do.
Therefore, the agent cannot without the permission of the principal, delegate his authority and ask some other person to do the thing.
An agent cannot lawfully employ another to perform acts, which he has expressly or impliedly undertaken to perform personally.

Exceptions to General Rule:
In the following exceptional cases, agent can delegate his authority:

Where the principal is aware of the intention of the agent
Where there is an emergency or unforeseen circumstances
Where the nature of the authority requires it
Where the act is purely ministerial
Where power of the agent to delegate can be inferred
Where the principal permits appointment of a sub-agent
Where custom of trade permit delegation.

Sub-Agent – Sections 191-193

Who is SubAgent? – Section 191
A ‘sub-agent’ is a person:

Who is employed by original agent; and
Who is acting under the control of the original agent in the business of the agency.
- Sub-agent is the agent of the original agent.
- As between original agent and the sub-agent, the relationship is that of the principal and agent.

Effects of Appointment of Sub-Agent:

Sub-agent is appointed properly – Section 192	Sub-agent is not appointed properly – Section 193
Principal is bound by his acts and liable to third party.	Principal is not bound by his acts and not liable to third party. Here, agent is liable to third party as if he is the principal.
Sub-agent is not responsible to principal, except in case of to principal, fraud, wilful wrong etc.	Sub-agent is not responsible to principa1.

Substituted Agent – Section 194

Who is Substituted Agent? – Section 194:

The substituted agent is an agent named by the original agent to act on behalf of principal.
Substituted agent is the agent appointed by original agent to act for principal.
Substituted Agent is also known as co-agent.

Direct Control:

Substituted agent acts under the direct control of principal and not under original agent.
An agent is not concerned with the efficiency of the substitute.

Example:
A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent, but is A’s agent for the conduct of the sale.

Reasonable Care by Agent While Selecting Substituting Agent:

In selecting a co-agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and if he does this, he is not responsible to the principal for the act or negligence of the co-agent.

Distinguish Between Sub-Agent and Substituted Agent

Matter	Sub-agent	Substituted agent
Direct Control	Sub-agent is under direct control of the agent.	Substituted agent is under direct control of the principal.
Privity of Contract	There is no privity of contract between the sub-agent and the principal.	There is a privity of contract between the substituted agent and the principal.
Responsibility	The sub-agent is responsible for his acts only to the agent and the agent is responsible for all the acts of the sub-agent to the principal.	The substituted agent is responsible for his acts only to the principal.
Liability to third party	If the sub-agent is properly appointed then for all his acts the principal is liable to the third party. If the sub-agent is not properly appointed then for all his acts the agent is liable to the third party.	For all the acts of the substituted agent the principal is liable to the third party.

Duties Of An Agent

Duties of an agent are the rights of principal.
Duties of an agent may be broadly classified under following heads:

Follow Direction of Principal or Custom – Section 211:

An agent is bound to conduct the business of his principal according to the directions given by the principal.
In the absence of any such directions, he is bound to conduct business according to the custom, which prevails at the place where the agent conducts such business.
If he acts otherwise, he comes liable to the principal for loss.

Example:
B, a broker in whose business it is not the custom to sell on credit, sell goods of A on credit to C, whose credit at the time was very high. C, before payment, becomes involvement. B must make good the loss to A.

Lilley vs. Doubleday:

Principal instructed the agent to warehouse the goods at a particular place and the agent warehoused them at a different warehouse, which was equally safe, but the goods were destroyed by a fire.
Though this was not due to the agent’s negligence, it was held that he was liable for the loss because any departure from the instructions makes the agent liable.

Carry Work With Care and Skill – Section 211:

An agent is bound to conduct the business of the agency with reasonable care and skill.
The standard of reasonable care required from the agent depends upon the nature of business and circumstances of each case.

Example:
A, air agent for the sale of goods, having authority to sell on credit, sells to B on credit, without making the proper and usual enquiries as to the solvency of B. B at the time of such sale is insolvent. A must make compensation to his principal in respect of any loss thereby sustained.

Maintain Proper Accounts – Section 213: An agent has to maintain proper accounts to the principal and provide copy of it on demand.

Communicate – Section 214: Agent must communicate with, contact the principal, in case of difficulty, and obtain his instruction.

Not to Deal on His Own Account – Section 215: Role of an agent is fiduciary in nature and therefore agent must conduct his business in good faith.

He should not deal on his own account.
If agent deals on his account without principal’s consent or without full disclosure, principal may cancel contract.

Example:
A directs B to sell A’s estate. B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wishes to buy the estate for himself, but conceals the discovery of the mine. A allows B to buy, in ignorance of the existence of the mine. A, on discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option.

Not to Make Secret Profit – Section 216:
The agent should not make any secret profit apart from agreed remuneration.

Pay Sums Received for Principal – Sections 217-218:

It is duty of an agent to his principal all monies received on his behalf.
However, agent can deduct lawful expenses he has incurred for agency work and commission from this amount.

Protect Interests of the Principal – Section 209:

On the death or insanity of principal, agent is terminated.
However, in such case, it becomes the duty of agent to take all reasonable steps to protect interest of principal.

Not to Delegate – Section 190: An agent cannot delegate his authority to perform his act in express or implied manner unless custom of trade or nature of agency so requires.

Rights of Agent

Rights of an agent are the duties of principal.
Rights of agent may be discussed under the following heads:

Right to Retention – Section 217:
An agent may retain the sums received in the business for any advances, expenditure and other payments by him in conducting such business.

Right of Remuneration – Sections 219-220:

Agent has right to receive remuneration as per agreement.
If the remuneration is not fixed, agent is entitled to receive reasonable remuneration.
Agent is entitled to receive remuneration only when it becomes due.
Usually remuneration becomes due when agent complete work undertaken.
An agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business, which he has misconducted.

Right of Lien – Section 221: In the absence of any contract to the contrary, an agent is entitled to retain goods, books and properties for any remuneration due to him.

Right to be In-demnified – Section 222: The principal is bound to indemnify agent against the consequences of all lawful acts within his authority.

Example:
A employs B to beat C, and agrees to indemnify him against all consequences of the act. B thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.

Right of Compensation – Section 225: Agent has right to receive compensation for the loss suffered due to principal’s negligence or want of skill.

Position of Principal And Agent In Relation to Third Parties

If the agent acts within scope of his authority, principal is bound by the act of agent.
The position of principal as regard the contracts made by the agent with third party may be discussed under following heads:

Where agent contract for named principal
Where agent contract for unnamed principal
Where agent contract for undisclosed principal.

Where agent contract for named principal:

Agent Act Within His Authority – Section 226:

Principal is bound by all lawful acts of an agent, which are done within scope of his authority.
It means an act of an agent is an act of principal.

Agent Act Beyond Authority – Section 227:

Principal is liable only for acts done within authority.

The principal’s liability for the work done by an agent beyond his authority may be discussed under following two points:
1. When work of an agent is separable:
When an agent does some work beyond authority which is separable from authorised work, principal is bound by the authorised work of an agent.

2. When work is not separable – Section 228:
When agent does some work beyond the authority which is not separable from authorised work, principal is not bound by whole of work.
He may cancel the whole transaction.

Notice Given to Agent is Notice to Principal – Section 229:

Any notice given to or information obtained by the agent, shall have the same legal consequences as if it had been given to or obtained by the principal.
This means that the knowledge of the agent is the knowledge of principal.

Principal Inducing Belief That Agent’s Unauthorised Acts Are Authorised – Section 237:
The principal is liable for the unauthorised acts of agent, if the principal by his conduct created an impression on the third party that the agent has authority to do such act.

Misrepresentation or Fraud by Agent – Section 238:

Principal is liable for misrepresentation or fraud committed by his agent while acting in the course of his business.
However, principal is not liable for any misrepresentation or fraud of agent, which do not fall within agent’s authority.

Where agent contract for unnamed principal:

When Principal is Said as Unnamed Principal?
When agent contracts with third party after disclosing the fact that he is an agent but do not disclose the name of principal, in such case, principal is known as unnamed principal.

Liability:

Principal is still liable for the contract of the agents unless there is a trade custom or a term of express or implied, to the effect, which makes the agent personally liable.
Third party cannot sue agent, if name of principal is not disclosed but he is aware about name of principal.
If an agent refuses to disclose the identity of the principal, when asked by third party, he will become personally liable on the contract.

Where agent contract for undisclosed principal

When Principal is Said to be Undisclosed?:

In certain cases, an agent not only conceals the name of the principal but also the fact that he is an agent. This is known as the ‘doctrine of undisclosed principal’.
In such cases, an agent conveys to a third person an impression that he is contracting as a principal himself, i.e. independent party.
In such case, relationship between the principal, agent and third party may be discussed as under:

Position of an Agent:

As agent has contracted in his own name, he is personally liable to third party.
He has all rights of an agent as against principal.
He can sue and be sued by third party.

Position of Principal:
Principal may obtain performance of the contract subject to rights and obligations subsisting between the agent and third party.

Position of Third Party:
When third party comes to know of the principal, then he can sue:

Principal; or
Agent; or
Both

If the third party decides to file a suit against the principal, he must allow the principal benefit of all payments received by him from an agent.

When Agent Will be Personally Liable? – Sections 230-231

General Rule:
Usually agent cannot personally liable for contract entered into by him on behalf of principal.

Exceptions:
However an agent is personally responsible in the following cases:

When agent works for foreign principal
When the agent acts for an undisclosed principal
When agent acts for incompetent principal

Example:
When agent acts for minor

When the contract expressly provides for personal liability of agent
When the agent acts for a principal not in existence.

Example:
The promoters of company yet to be incorporated enter into contract on behalf of company. In such cases, the company i.e., the principal is not in existence until it is finally incorporated.

When the agent signs a contract in his own name
When the agent acts beyond his authority
Where there is a misrepresentation or fraud by agent
Where the trade, usage or custom makes the agent per-sonally liable
Where authority is coupled with interest

Agency Coupled With Interest (Irrevocable Agency) – Sections 202 & 204

Meaning:
Irrevocable agency means an agency, which cannot be revoked by the principal.

When Agency is Irrevocable?
The agency is considered as irrevocable in following cases:

Agency coupled with interest

Agency will be treated as agency coupled with interest where agent himself has interest in subject matter.
Such agency cannot be terminated except where there is an express provision.
Agency coupled with interest does not come to an end on the death, insanity, or the insolvency of the principal.
The interest of an agent must be existing at the time of creation of agency.

Example:
A consigned 100 bags of cotton to B who had advanced ₹ 50,000 to A. A authorized B to sell cotton and pay to himself ₹ 50,000 out of the sale proceeds of cotton. Here, agency coupled with interest is created between A and B. Later on, A cannot revoke the authority of B.

Agent has incurred personal liability:
Where the agent contracts in his own name and makes himself personal liability for his act. In such case, agency becomes irrevocable.

Example:
‘A’ appoints ‘B’ as his agent and ‘B’ purchases as per orders of ‘A’ ‘Rice” in his personal name, A cannot revoke the authority.

Partly exercise of authority by Agent:
Where the agent has partly exercised the authority, the authority cannot be revoked.

Example:
‘A’ appoints ‘B’ as his agent to procure 10 bags of rice and ‘B’ procures in the name of ‘A’ then ‘A’ cannot revoke his authority.

Pretended Agent – Sections 235-236

Who is Pretended Agent?
A person, who untruly represents himself to be the authorised agent of another and induces a third person to enter into a contract or otherwise deals with him, is called a pretended agent.

Liability of Pretended Agent:
He is personally liable to third party for the loss of damage suffered due to such dealing. However, he is not personally liable if:

The principal ratify the acts of agent
The third party already knew about truth.

Termination Of Agency – Sections 201-210

Meaning: Termination of agency means the end of relationship of principal and his agent.

Modes of Termination:
Termination of an agency may broadly discussed under following two heads:

Termination of agency by act of parties
Termination of agency by operation of law

Termination of agency by act of parties:
Agency can be terminated by either principal or agent in the following manner:

By Agreement:
Agency can be terminated by mutual agreement.

By Revocation of Authority:

The principal may revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal.
The principal cannot revoke the authority given to his agent after the authority has been partly exercised.

By Termination of Agency by Agent:

The agency is terminated if the agent renounces the business of agency.
Renunciation means giving up.

For revocation and renunciation of agency – Sections 205-207

Reasonable notice must be given of such revocation or renunciation.
Revocation and renunciation may be express or implied.
If agency is revoked before specific time which is fixed under contract, damage is payable. – Section 205.

Termination of agency by operation of law:
The agency relationship may be terminated by the operation of law in the following manner:

By Performance: When the transaction is completed, the agency terminates automatically.

By Expiry of Time: Where the agency is for a fixed period, it terminates on the expiry of that time. It is not important that whether work is completed or not.

By Death or In-sanity: Death or insanity of the principal or the agent terminates the agency.

By Insolvency:

The agency is terminated when the principal is declared insolvent.
Insolvent cannot enter into contract.

On Destruction of Subject Matter: The agency is terminated when the subject matter of contract of agency is destroyed.

On Winding up of Company: Agency is also terminated when the principal or agent is company and it goes in winding up.

On Principal Be-coming an Alien Enemy: Agency is terminated when principal, agent is citizen of two different countries, and war breaks out between these two countries.

Practice Questions

Question 1.
Aamod has authority from his principal Binod to sell goods on credit. Aamod sells goods on credit to Chandan without making the proper and ‘ usual enquiries as to Chandan’s solvency. Should Aamod compensate Binod?
Answer:
Aamod must make compensation to his principal Binod in respect of any loss thereby sustained. – Section 212

Question 2.
Anish instructed Yogesh, a transporter, to send the consignment of tomatoes to Kolkata. After covering half the distance, Yogesh found that, the tomatoes will perish before reaching Kolkata. He sold the same at half the market price. Anish sued Yogesh. Will he succeed?
Answer:
Anish will not succeed – Section 189,

Question 3.
Mr. T instructs Mr. K a merchant to buy a ship for him. Mr. K employs a renowned ship surveyor to choose a seaworthy ship for Mr. T. The said ship turns out to be unseaworthy and is lost. Is Mr. K, an agent responsible?
Answer:
Mr. K appointed a renowned surveyor. Therefore, he is not responsible.

Question 4.
Mr. B (a broker) by the orders of Mr. A purchases 10 drums of oil for A from Mr. C. Afterwards Mr. A refuses to receive oil. Mr. C sues Mr. B who informs Mr. A but Mr. A repudiates the contract. Although Mr. B defends but failed. Mr. B has to pay cost, damages and incurs expense. Can B recover any amount from A?
Answer:
Mr. A (employer) is liable to pay Mr. B (Agent) cost, damage and expenses incurred.

Question 5 A authorizes B to buy 500 pieces of sunlight soap for him but B buys 500 pieces sunlight and 200 pieces Henko at a total Price of ₹ 5,000. A refused to pay to B. State the right and liabilities of A in case.
Answer:
A may repudiate the whole transaction.

Question 6.
A is owner of the factory building and a product. A authorizes B to take an insurance policy on factory building for ₹ 2 lacs. B procures a policy for ₹ 2 lacs on factory and another policy for ₹ 2,000 on products. A refused to reimburse to B. What are the rights and liabilities of A?
Answer:
A will need to reimburse B with only 12 lacs and not the insurance value of the products because he was asked to do so.

Question 7.
Mr. Roy consigns some fruits to his agent Mr. Paul at Mumbai with direction to send those fruits to Mr. Karan at chembur. Mr. Paul sold fruits, which were spoiling at Mumbai below cost price without prior consent of Mr. Roy. Whether Mr. Paul’s action was valid?
Answer:
Mr. Paul’s action was valid. – Section 189

Question 8.
Mr. Barun tells Mr. Tarun in presence of Mr. Arun that he is the agent of Arun who maintains silence instead of denying Barun’s statement. Later on Barun sells Arun’s goods to Mr. Tarun. Arun now disputed Barun’s , title to the goods, as Barun was not agent of Arun. Explain whether Arun is right?
Answer:
Arun, the principal is not right. – Section 237

Question 9.
A gives authority to B to sell A’s land and pay to himself out of proceeds,
the debt due to him from A. Consider the following circumstances and advise A:
I. A wants to revoke his authority
II. If A becomes of unsound mind ?
III. If A dies?
Answer:
Principal cannot terminate authority of an agent when it is coupled with interest. Such agency is irrevocable, unless there is contract to contrary. -Section 202
Therefore, A cannot revoke his authority. At the same time, it cannot be terminated due to insanity or death of A.

Question 10.
Amar is employed at London. To recover his debts at Bombay due to Bobby, he appoints Chetan to recover his debt. Can Chetan give discharge of debt?
Answer:
An agent has authority to do every lawful thing, which is necessary in order to do such act. – Section 188 Chetan, an agent has authority to take action to recover debts as well as on payment of debts; he can give valid discharge of debt.

Question 11.
Amar directs Bobby his solicitor to sell his family property by auction and employ an auctioneer. Accordingly, Bobby appoints Chetan as an auctioneer to conduct sale. Who is an agent here? Why?
Answer:
Where an agent holding express or implied authority to name another person to act for the principal and he named another person accordingly, such person is not sub-agent but an agent of principal. – Section 194.
Therefore, in the given case, for the conduct of sale, Chetan is an agent. He is not sub-agent.

Question 12.
Amar instructs Bobby a merchant to buy a ship for him. Bobby employs a ship surveyor of good reputation to choose a ship for Amar. The surveyor makes the choice negligently and the ship turns out to be unseaworthy and is lost. Who is liable to Amar?
Answer:
While selecting the substituting agent or co-agent for principal, the main agent is required to exercise the same amount of care as a man of ordinary prudence would exercise in his own case. If he does so, he is not responsible to the principal for the acts or negligence of agent so selected. – Section 195
Therefore, Bobby is not liable to Amar but surveyor is liable to Amar.

Past Examination Questions

Question 1.
What tests can be applied in determining whether a person is an agent of another? State any five circumstances where under an agent is personally liable to a third party for the acts during the course of agency. (CA May 2003)
Answer:

Question 2.
What do you understand by ‘Agency by ratification’? What is the effect of ratification? Point out any four elements of a valid ratification. (CA November 2003)
Answer:

Question 3.
State the circumstances when an agent is personally liable for the contracts entered into by him on behalf of his principal (CA May 2005)
Answer:

Question 4.
Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area. Mr. Singh bought a house for ₹ 20 lakhs in the name of a nominee and then purchased it himself for ₹ 24 lakhs. He then sold the same house to Mr. Ahuja for ₹ 26 lakhs. Mr. Ahuja later comes to know the mischief of Mr. Singh and tries to recover the excess amount paid to Mr. Singh. Is he entitled to recover any amount from Mr. Singh? If so, how much? Explain. (CA November 2005)
Answer:

Sections 215 & 216 of Indian Contract Act, 1872 provide that where an agent without the knowledge of the principal, deals in the business of agency on his own account, the principal may:
repudiate the transaction, if the case shows, either that the agent has dishonestly concealed any material fact from him, or that the dealings of the agent have been disadvantageous to him.
claim from the agent any benefit, which may have resulted to him from the transaction.
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover ₹ 6 lakhs from Mr. Singh being the amount of profit earned by Mr. Singh out of the transaction.

Question 5.
Mr. A of Alwar engaged Mr. S as agent to buy a house. Mr. S bought a house for ₹ 40 Lakhs in the name of a nominee and then purchased it himself for I 44 lakhs. He then sold the same house to Mr. A for I 46 lakhs. Mr. A later comes to know about the mischief of Mr. S and tries to recover the excess amount paid to Mr. S. Is he entitled to recover any amount from Mr. S? If so, how much? Explain. (CA November 2005, May 2016)
Answer:
Question is based on provisions of sections 215-216 of Indian Contract Act, 1872. Please refer answer of previous question. Mr. A is entitled to recover ₹ 6 lakh from Mr. S an agent being amount of profit earned by Mr. S out of transaction.

Question 6.
State whether following statement is correct or incorrect: A minor cannot be appointed as an agent. (CA November 2007)
Answer:
Statement is incorrect. Any person can be appointed as an agent.

Question 7.
R is the wife of P. She purchased some sarees on Credit from 0- 0 demanded the amount from P. P refused. 0 filed a suit against P for the said amount. Decide in the light of provisions of the Indian Contract Act, 1872, whether 0 would succeed? (CA May 2008)
Or
K is the wife of A. She purchased some sarees on Credit from B. B demanded the amount from A. A refused to make the payment. B filed a suit against A for the said amount. Decide in the light of provisions of the Indian Contract Act, 1872, whether B would succeed? (CA May 2013)
Answer:
Wife is considered as an implied agent of her husband. Wife has authority to pledge her husband’s credit for necessaries. However, wife has no authority to pledge her husband’s credit for necessaries in following situations:

Where she is given sufficient money to purchase necessaries
Where goods purchased on credit are not necessaries
Where the seller has been warned clearly not to give credit to his wife
Whether the wife is prohibited from buying goods on credit or contracting debts
Applying above provisions, Q can recover amount of sarees from P, if sarees purchased by R are necessaries.

Question 8.
P appoints A as his agent to sell his estate. A, on looking over the estate before selling it, finds the existence of a good quality granite-mine on the estate, which is unknown to P. A buys the estate himself after informing P that he (A) wishes to buy the estate for himself but conceals the existence of granite-mine. P allows A to buy the estate, in ignorance of the existence of mine. State giving reasons in brief the rights of P, the principal, against A, the agent. What would be your answer if A had informed P about the existence of mine before he purchased the estate, but after two months, he sold the estate at a profit of ₹ 1 lac? (CA May 2008)
Answer:
Agent has duty to disclose all material circumstances. He has duty not to deal on his own account without principal’s consent. If an agent deals on his own account, without obtaining the consent of his principal and without disclosing him with all material circumstances, then the principal may cancel the transaction. – Section 215

If an agent, without the knowledge of his principal, acts on his own account in the business of the agency, then the principal may claim any benefit, which may have accrued to the agent from such a transaction.
Hence in the first instance, though P had given his consent to A permitting the latter to act on his own account in the business of agency, P may still repudiate the sale as the existence of the mine, a material circumstance, ‘ had not been disclosed to him.
In the second instance, P had knowledge that A was acting on his own account and also having knowledge that the mine was in existence; hence, P cannot repudiate the transaction under section 215. In addition, under section 216, he cannot claim any benefit from A as he had knowledge that A was acting on his own account in the business of the agency.

Question 9.
State whether following statement is correct or incorrect:
An ‘agency coupled with interest’ may be terminated, at the instance of the principal at any time. (CA November 2009)
Answer:
Statement is incorrect. An agency coupled with interest cannot be terminated at any time.

Question 10.
State whether following statement is correct or incorrect:
Ratification of agency is valid even if knowledge of the principal is materially defective. (CA May 2002, 2010)
Answer:
Statement is incorrect. Principal whose knowledge of fact is materially defective cannot validly ratify agent’s work.

Question 11.
State whether following statement is correct or incorrect:
No consideration is required to create an agency (CA November 2001)
Or
Agency cannot be created without consideration. (CA November 2013)
Answer:
Statement is correct. No consideration is required to create an agency.
Section 185

Question 12.
Sunil borrowed a sum of ₹ 3 lakh from Rajendra. Sunil appointed Rajendra as his agent to sell his land and authorized him to appropriate the amount of loan out of the sale proceeds. Afterwards, Sunil revoked the agency. Decide under the provisions of the Indian Contract Act, 1872 whether the revocation of the said agency by Sunil is lawful? (CA May 2014)
Answer:
Agency coupled with interest becomes irrevocable. Agency becomes irrevocable where the agent himself has interest in the property, which forms the subject matter of agency. It cannot be terminated to the prejudice to interest of an agent.

In the given case, agency coupled with interest is created and it does not come to end on death, insanity or insolvency of principal. When Sunil appointed Rajendra as his agent to sell his land and authorized him to appropriate the amount of loan out of the sale proceeds, interest was created in favour of Rajendra and the said agency is irrevocable. The revocation of agency by Sunil is not lawful.

Question 13.
State whether following statement is correct or incorrect:
Agency coupled with interest is irrevocable. (CA May 2015)
Answer:
Statement is correct. Agent coupled with interest cannot be terminated except where there is an express provision to cause prejudice to the interest of the agent. Again, agency coupled with interest does not come to an end on the death, insanity or the insolvency of principal.

Indian Contract Act, 1872 – Agency – CA Inter Law Notes

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