Under the Indian Contract Act, 1872, a Contract of Agency is a vital form of special contract. It deals with situations where one person acts on behalf of another, creating legal obligations for the principal.
This article explains the concept in a simple and organized manner for UGC NET Commerce preparation.
Meaning of Agency
According to Section 182 of the Indian Contract Act, an agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done is called the principal.
Key Idea: An agency relationship allows the agent to bind the principal legally in contracts with third parties.
Example:
A authorizes B to purchase goods on his behalf. Here, A is the principal, and B is the agent.
Essential Elements of a Contract of Agency
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Agreement: There must be an agreement between the principal and the agent, which can be express or implied.
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Competency of Principal: The principal must be competent to contract (i.e., of sound mind and major age).
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Agent’s Competency: An agent need not be competent to contract, except when the agent is personally liable.
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Intention to Act on Behalf: The agent must act in a representative capacity.
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Legal Relationship: The acts of the agent must create a legal relationship between the principal and third parties.
Modes of Creation of Agency
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By Express Agreement:
Clear appointment either orally or in writing.
Example: A gives B a written authority (power of attorney) to sell his car. -
By Implied Agreement:
Created by conduct, situation, or relationship.
Example: A regularly sends goods to B to sell; B acts as A’s agent by implication. -
By Necessity:
Arises in urgent situations where it is necessary to act without the principal's express authority.
Example: A transporter sells perishable goods to prevent them from rotting. -
By Estoppel:
If a person, by words or conduct, induces others to believe someone is their agent, they cannot deny the agency later. -
By Ratification:
When a principal approves and accepts the acts done on their behalf without prior authority.
Example: A sells goods without authority, but the owner later approves the sale.
Duties of an Agent
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To follow instructions: The agent must act as per the directions of the principal.
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To exercise reasonable skill and diligence: Handle tasks with proper care and competence.
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To render accounts: Provide true accounts of transactions.
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To act in good faith: Avoid conflicts of interest and act in the principal’s best interest.
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To communicate: Keep the principal informed of important developments.
Rights of an Agent
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Right to remuneration: Entitled to agreed payment for services.
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Right of lien: Can retain principal’s goods or property until dues are cleared.
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Right to indemnification: Can claim reimbursement for lawful acts done in the course of employment.
Duties of a Principal
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To pay remuneration: As agreed or customary.
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To indemnify the agent: Against consequences of lawful acts performed in good faith.
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To reimburse expenses: Incurred during agency.
Rights of a Principal
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To receive proper accounts: From the agent.
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To recover damages: If the agent acts against instructions or negligently.
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To repudiate unauthorized acts: Unless already ratified.
Termination of Agency
An agency can come to an end by:
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Completion of business: Once the purpose is achieved.
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Expiry of time: If appointed for a specific period.
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Revocation by principal: Subject to certain limitations.
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Renunciation by agent: The agent can give up the agency.
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Death or insanity: Of either principal or agent.
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Insolvency: Of the principal.
Quick Recap
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Express Agency:
A appoints B in writing to manage his rental properties. -
Implied Agency:
A wife purchases household goods; the husband is bound to pay unless he informs third parties otherwise. -
Agency by Necessity:
A carrier sells goods to prevent spoilage during transportation delays.
Conclusion
To summarize, a Contract of Agency establishes a legal relationship where an agent acts on behalf of a principal to interact with third parties. It is created through agreement, necessity, estoppel, or ratification. Understanding the rights and duties of both agents and principals, as well as the modes of creation and termination, is crucial for mastering the legal aspects under the Indian Contract Act, 1872.