Agent-Principal Relationship in Contract Law- An Overview

Agent Principal Relationship in Contract Law- An Overview

The principal-agent relationship arises in various instances, some of these lead to the formation of contracts. Section 182 -238 of the Indian Contracts Act[1] (Hereinafter, the Act) deals with the laws relating to Agency. To understand the concept of Agency, we need to understand the meaning of principal and agent and their rights and duties. According to Section 182 [2]of the Act, “An ‘agent’ is a person employed to do any act for another, or to represent another in dealings with the third person.” A principal is a person for whom such act is done or the one who is represented by the agent. Consideration is not a compulsion to the formation of the agency.[3]

Agency can be created by an agreement which can be either expressed/ apparent or implied.[4] An agent who acts in the scope of his authority binds the principal by his actions. In cases of apparent authority, the transfer is actual through words or conduct but in some cases, the authority might be implied by the conduct of the parties. Example, If an Agent is appointed to do a greater task then he has an implied authority do the sub-tasks required for performing the greater task. Subsequent ratification of the act of the agent also amounts to an agreement of Agency.[5]

It may seem fairly simple to determine agency but how does one derive the relationship where the conduct of the parties is akin to the agency but there is an express clause to the contrary. The courts have dealt with this situation in the case L.I.C v. Rajiv Kumar Bhaskar[6]. The facts of the case were- A college had organized a L.I.C scheme for its teachers and paid a regular premium for them. Their conduct was similar to the Agents of L.I.C. At one instance the college defaulted on the premium due to the which the policy lapsed. Subsequently, one of the teachers died and when the family applied for the LIC claim they came to know about its lapse.

They filed a case in the court contending that the college was acting as the Agent of L.I.C and thus, the policy lapse should not be attributed to the teacher. L.I.C relied on a clause in the acceptance letter by the employer which said he would act not as the agent of L.I.C but as an agent of his employees. The court said that the conduct of the parties was that of Principal and Agent. Further, the teachers were unaware of the terms and conditions of the contract. Hence, the contract was of Agency and the teachers family should get the amount they were entitled to under the policy.

Several other instances arise which make it difficult to determine agency, one such being a situation where the relationship between the two parties seems to be one of Principal and Agent but it is actually of a master-servant. In the case Lakshminarayan v. Government of Hyderabad[7] the court addressed the following issue. The court said that the primary point of difference is that 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. This means that the amount of control over the other person act needs to be taken into account while deciding the nature of the relationship.

Rights and Duties of an Agent

We are now acquainted with the formation of the agent-principal relationship thus, we can proceed to

Rights and Duties which are a part of the contract. The Indian Contract Act is comprehensive on the rights and duties, the table below lists them down in a distinct manner.

Agent[8]

RightsDuties
To do all lawful acts required for the agency. (Section 188)Duty of not delegating, except when custom permits. (Section 190)
Claim Indemnity. (Section 222-4)Use discretion when appointing an agent for the principal. (Section 196)
To withhold the sum received for the principal. (Section 217)Disclose material facts to the principal. (Section 215)
To detain Sale proceeds- Right of Lien. (Section 219/221)Not dealing on his own. (Section 215)
To be compensated for premature revocation of the contract. (Section 205)To communicate with the principal. (Section 214)
Appointment of an Agent for the Principal.  (Section 194)Not to Conceal Dishonestly. (Section 215)
Protecting the interest of the principal. (Section 209)

Principal[9]

RightsDuties
Ratifying acts of the agent. (Section 196)Paying remuneration to the agents. (Section 217)
Disowning agents acts. (Section 196)Paying agents expenses and dues incurred while conducting business. (Section 217)
 Enforcing contracts entered into by the Agent. (Section 226-7)To be accountable for the authorized acts of the agents.
To claim compensation for loss caused due to agents lack of skill or misconduct. (Section 212)Indemnifying agents for lawful acts. (Section 226-8)
Repudiating certain transactions. (Section 215)Accountable for fraud and misrepresentation by the agent. (Section 238)
Choice of not recognizing transaction beyond the scope of authority of the agent. (Section 228)Compensating Agent for loss caused to him due to lack of skill or negligence of the Principal. (Section 225)
 Binding himself by notice/ information of the agent. (Section 229)

Even though these obligations are laid down, breach of duties often takes place. The violation of the duties by the Agent is seen in the case Kaluram Bholaram v. Chimniram Motilal.[10] In this case, the principal asked the agent to procure goods on his behalf. The agent sold his goods to the principal, unknown to the latter.  The court held that the agent had breached the contract by acting dishonestly and infringing his duty under Section 216 of the Act.[11]

Sub Agency

‘Delegatus non potest delegare’, an agent cannot delegate his duty to someone else in ordinary circumstances. The reason for this is that the principal places his trust in the agent which he might not have on any other person. In cases where the principal or the custom permit the appointment of an agent then the principal is bound by the acts of the sub-agent too. An agent has to use his discretion while appointing a sub-agent so as to not cause harm to the principal. In cases where the principal or the custom do not permit the appointment of a sub-agent then the agent himself is bound by the acts of sub-agent and not the principal. [12] A sub-agent is also different from a substituted agent.[13] In case of sub-agent, they work for the principal but the agent is still the part of the transaction and in case of substituted agent the new agent acts as the replacement for the original agent.

Revocation and termination of Agency

Section 201[14] of the act deals with termination of the Agency. It provides five ways through which this can be done.

  1. Principal revoking the authority
  2. Renunciation of the business by the Agent
  3. When the business of the agency is terminated
  4. Death or unsoundness of mind of principal or agent
  5. Insolvency of the Principal.

Revocation of the Agency can be made by the agent or the principal. The Principal can revoke the agency anytime before the agent has used his authority to carry out the said business. Reasonable Notice[15] is required by either party in case of revocation, if no such notice is given then the party revoking might be liable to pay compensation to the other.[16]

To summarize the delegation of authority from one person to another to carry out a particular act or acts is the process of the agency. Some difficulties might even arise even though the act is comprehensive. This blog attempts to give an overview of the concept of agency, it is not exhaustive and is just an attempt at helping the readers have an overview of the topic.


[1] The Indian Contract Act, 1872.

[2] The Indian Contract Act, 1872, Section 182.

[3] The Indian Contract Act, 1872, Section 185.

[4] The Indian Contract Act, 1872, Section 187.

[5] Mulla, The Indian Contract Act, 15th ed, 2016, p. 313.

[6]  Life Insurance Corporation of India v. Rajiv Kumar Bhaskar 2003 ACJ 86.

[7] Lakshminarayan v. Government of Hyderabad (1955) 1 SCR 393.

[8] Mulla, supra note 5, at 314

[9] Id.

[10] Kaluram Bholaram v. Chimniram Motilal (1934) 36 BOMLR 68.

[11] The Indian Contract Act, 1872, Section 216.

[12] Mirza Wardahbeg, Law of Agency: What is the Principal-Agent relationship?

(https://blog.ipleaders.in/law-of-agency-what-is-principal-agent-relationship/)

[13] De Bussche v. Alt (1878) 8 Ch. D, 286

[14] The Indian Contract Act, 1872, Section 214.

[15] The Indian Contract Act, 1872, Section 206.

[16] The Indian Contract Act, 1872, Section 205.

Dishay Chitalia from The WB National University of Juridical Sciences, Kolkata

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