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Essentials for creation of agency

Under the umbrella of the Indian Contract Act of 1872, we study few special contracts. In this paper, we will focus on one such contract, the contract of agency. Contract of agency is given under chapter 10 of the Indian Contract Act,1872, defined in sections 182-238. Contract of agency can precisely be described as a fiduciary relationship between an employer, known as principal and a person, who is authorised to perform any act or act as a representative for the principal while dealing with a third party. The contract between them forms a contract of agency. In the paper, we will study the essentials required to create a valid contract of agency.

Contract Of Agency

To understand agency, we need to understand the terms agent and principal, which are defined under Section 182 of the Indian Contract Act (referred to as Act). The employer, who authorises a person to act as his representatives, whose actions will bind the employer legally with the third party the employee deals with, is known as the principal. And the person authorised to perform such Act or act as a representative is known as an agent.

The term persons discussed above can be a natural person or a legal person. Therefore, the term agent can be given to an individual who is a living person and an imaginary being capable of rights and liabilities as per the law.

The High Court of Madras attempted to clarify the meaning of agency in P. Krishna Bhatta V. Mundila Ganpathi Bhatta [1]. In this case, Justice Ramaswami attempted to explain that any individual acting on behalf of another is not referred to as an agent in legal terms.

An individual who behaves as another person's representative in business transactions and negotiations in front of a third party is referred to as an agent by him. That person may be legally referred to as the representative of the person for whom he is working.

The definition is wide enough to include a casual employee, or a servant, etc., under the category of an agent. Therefore, we need to study the essentials required for a contract to fall under the scope of an agency contract.

The essentials for the creation of an agency are as follows:
  1. The principal should be competent to contract
  2. The agent should be competent to contract
  3. Consideration not required
  4. Intention to create a contract

Competency Of Principal

A person competent to contract under section 10 of the Indian Contract Act, 1872 is qualified for the contract of agency. The conditions for the eligibility are given under section 183 of the Act, which are:
  1. The person should have attained the age of maturity
  2. The person should be of sound mind

Competency Of Agent

The eligibility for a person to be an agent is specified under section 184 of Act 1872. As per the section, any person is eligible to be an agent, but no person who has either not attained majority or is of unsound mind can be held responsible for their actions taken against their actions as an agent.

Consideration Not Necessary

According to section 185 of the Act, no consideration is needed to establish an agency contract. In most cases, an agent is paid by commission for services rendered, although no payment is required at the time of the appointment.

Intention Of The Agent

There is a necessity for the intention to be present on behalf of the agent to act as a representative of the principal. And if the agent enters into a contract with its own beneficiary intention, then the principal is not liable.

Research Question:
  1. Is a minor competent to behave as an agent and a principal? If yes, to what extent are they liable?
  2. Can a contract be considered void against the agent's words? Is explicit consent necessary for the contract's formation?

Competency Of A Minor

Minor As A Principal

As per section 183 of the Act, only an individual who is of sound mind and is a major as per the law is competent to employ an agent.
An agent's appointment involves an agreement between the agent and the principal, and as seen in Mohori Bibee v Dharmodas Ghose[2], minors agreement is void ab inito.

In Shephard v Cartwright,[3] Lord Denning LJ addressed this definition, declaring that an infant is incapable of appointing an official to represent him or by the use of a power of attorney or some other means. He also observed that if he employs an agent, not only the agreement would be void, but everything done by the agent on the minor's behalf is also void and incapable of ratification.
The reason behind the concept considers whether the infant has sufficient discretion to choose an agent to act for him. He is declared incapable of choosing an agent by the law, as he is likely to choose the wrong man.

It is considered that the infant is competent to choose an agent for himself if he is capable of binding himself by the contract. In essence, it means that whatever a person can do personally can do through an agent.[4]

However, there are certain expect ions to the rule the minor cannot appoint an agent. It was held in Madanlal Dhariwal v Bherulal[5] by the High Cout of Karnataka that a minor's guardian could appoint an agent for him. But only the natural guardian of the minor can deal with the property of his benefit solely. Dealing by a de facto guardian without courts permission is void.

Minor As An Agent

As there is ordinarily no liability per se of the agent when the actions performed are under the agency's scope. Therefore agent need not be competent to contract.
It was held in Mohamedally Ebrahim Pirkhan v Schiller[6] that an agent incurs no liability while contracting for the principal; there, he need not be competent in the contract.
As stated in Foreman v Great Western Rly Co[7], an individual may contract through a minor agent, but the minor is not liable to his principal.

Consent Of The Agent

The agency rule is based on the Latin maxim qui facit per alium, facit per se, which roughly translates to he who acts through another is considered in law to act for himself.

Other circumstances, such as a need, a statutory obligation imposed on an individual, or other circumstances, which give rise to the contract of the agency are not always required for the agent to be directly employed by the principal, and the relationship between the principal and the agent does not always emerge out of a contractual relationship; other circumstances, such as a need, a statutory obligation placed on an entity, or other circumstances, which give rise to the contract of the agency are not always required for the agent to be directly employed by the principal. Contract of agency can be created through two modes, namely express agency and implied agency.

An agency can be created by following methods:
  1. By express or implied contract:
    A principal can employ an agent either explicitly or indirectly via a contract. It is possible for the appointment to be written or oral.
  2. By the conduct of party or situation:
    When one person permits another to act on his behalf to the point that a third party would reasonably believe the two are in an agency relationship.
  3. By ratification:
    Assent is given to an act performed by someone who did not have prior authorisation to act or action that violated an agent's authority.
  4. By necessity:
    In an emergency, an individual act on behalf of another without their express permission.

Though no matter how the contractual relation emerges, it cannot be formed without the essential element, i.e. consent.

However, we must note that consent does not always have to be explicit. Even if the 'principal' and 'agent' remain adamant in their refusal to recognise the agreement, a court of law will presume their consent to form a contractual obligation if they consented to a situation that created the contractual principal-agent relationship in some way.

In the case, Eagle Iron Co. v Baugh[8], it was observed that the declaration of an agent, who allegedly declares himself to have the authority, is not valid to prove such authorisation.
An agent's words have been understood to have the same value as the words of a stranger testifying (under oath) clear facts relating to the entity that he claims to be real when it comes to parol proof for demonstrating the existence of agency and establishing authority.

The question raised above holds true in the sense of Indian law. The Indian Contract Act only specifies a few rules for special agency contracts, which may be the deciding factor. Even the explanations/principles given are so broad and general that they apply to all and treat them as agents, regardless of their intention or intent.

This is perplexing because an agent's idea includes everything from a multinational employee hired to manage the company's assets to a cobbler hired to blacken one's shoes beside the driveway.

However, in the Indian context, a simple test[9]can be used to determine whether the contractual contract of agency exists, i.e. specific conditions have been established by the High Court of Patna, which can be used to search for the presence of an agency if necessary.
  • If the agent can work on behalf of the principal, that is, if he intends to engage in transactions on the principal's behalf.
  • If he has the power to enter into, change, or terminate contractual relationships with third parties on behalf of the principal

And if these conditions are met, it is reasonable to conclude that the two parties have entered into a contractual arrangement in which one has agreed to represent the other. In contrast, the other has been granted authority to do so and subsequently bind him into fiduciary relationships with third parties.

Loopholes In The Contract Of Agency

The Indian Contract Act, 1872 defines agency and the essentials for its creation, but it is not exhaustive. In essence, an agency is a contract between an employer and an agent, where the agent performs on behalf of the principal and is not liable for such actions.

The essentials for creating agency creation are not exhaustive, as we discussed the concept regarding the minors liability. As discussed, ordinarily, the agent is not liable; hence a minor can be an agent, but in situations where the agent is liable, the Indian Contract Act does not talk about the minor's liability in such cases.

As discussed, the agent's consent is ambiguous, as the consent of the agent is necessary at the time of the contract, that the agent has consented to act on behalf of the principal. But the consent is not required for the creation of the contract. Chapter 10 of the Act talks about the concept of Agency with the addition of few other concepts, which combine when we discuss the agency.

The Indian contract act, 1872, describes the agency as a fiduciary relationship between an agent and a principal, where the agent deals on behalf of the principal. An agent is a person who represents another person under his control and has the authority to bind that person into a binding legal relationship.

As has been identified, the individual he represents is regarded as the principal. The principal is bound by his agent's actions and may profit from them as if he had done them himself. For all legal purposes, the agent's actions are deemed to be the behaviour of the principal.

The essentials for the formation of such an agency have been discussed in the paper above. As with most items that a person encounters daily, it becomes so routine that he overlooks its complexity. However, as a contract or employment law, the agency is considered a core part of an individual's legal professional life engaged in a business. This task necessitates a high level of practical expertise.

  1. Avtar Singh, Contract & Specific Relief, 12th edition
  1. P. Krishna Bhatta V. Mundila Ganpathi Bhatta AIR 1955 Mad 648
  2. Mohori Bibee v Dharmodas Ghose ILR(1903) 30 Cal. 539 (PC)
  3. Shephard v Cartwright 1953 Ch 728, 755: (1953) I WLR 460 (CA)
  4. Powell, THE LAW OF AGENCY (1952) 242
  5. Madanlal Dhar iwal v Bherulal AIR 1965 Kant 272
  6. Mohamedally Ebrah im Pirk han v Sch iller, ILR (1889) 13 Bom 470
  7. Forem an v Great We stern Rly Co, (1878) 38 LT 851
  8. Eagle Iron Co. v Baugh, 41 South
  9. State of Bihar v Dukh ulal Das, AIR 1962 Pat 140

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