In India, the agent and principal share a relationship that is contractual in
nature, and therefore it is governed by the terms and conditions of the contract
between them. In agency contracts, there exists a legal relationships between
two people whereby one person acts on behalf of the other.
The person acting on
behalf of the other is called an agent, and the person from whom the agent
derives authority to act is called the principal. Agent and principal are
defined under Section 182 of the Indian Contract Act, 1872. According to the
section 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, or
who is so represented, is called the principal. It discusses the characteristics
and the role of an agent under the Indian Contract Act, 1872.
A section of the
paper also create a distinction between agency and dealership, as to how a
dealer who may appear to be an agent is not actually an agent. It tries to
discuss the relationship between a principal, an agent, a sub-agent. It also
differentiates between the role and duties of an agent, sub-agent and a
substituted agent. The central idea behind the principal-agent relationship is
that the principal is too busy to do various jobs so he/she hires an agent to do
the job on his or her behalf.
Existing Legal Situation
The legal connection in which the agent deals with a third party on behalf of
the principal is governed by agency law. The competent agent has the legal
authority to act on behalf of the principal in front of a third party. As a
result, the process of finalizing a contract through an agent entails a two-way
On the one hand, agency law is concerned with an economic unit's
external commercial relationships and the various representatives' powers to
influence the principal's legal position. On the other hand, it governs the
internal connection between the principal and the agent, imposing obligations on
the representation. The two relationships do not have to be perfectly aligned.
Agency is regarded as an essential component of the existing social order in all
modern legal systems. It performs the most diverse tasks in both public and
private law; in particular, it aids in the organization of the division of labor
in the national and international economy by allowing a principal to
considerably expand his individual zone of action by having one or more others
operate for him.
A principal may also be a group of people who carry on a trade or business
through a partnership, a registered corporation, or another type of corporate
body, in addition to the individual principal. As company units have become more
involved in transactions done at a distance (through the employment of factors
or commercial agents) or have grown, the demand for legal counsel in some form
Continental law also permits the use of legal representatives,
such as a father, mother, guardian, or curator, to allow minors, crazy people,
and other legally incompetent people to act. Although a similar category of
"authority by law" does exist in common law, powers based on familial
relationships are rare and emerge in only a few cases.
Definition and Types of Agents
Agency means that the relationship that exists when one person or party engages
other to act for him or to do his work, to sell his goods or to manage his
business. Agency law deals with the agent- principal relationship and it is a
relationship where one party always has the legal rights or authority to act in
place of another. Agency can be express or implied.
If the agency is express, it
is created by deed, verbally without writing or in writing. If the agency is
implied, it can be inferred from the relation between the parties and the nature
of the employment without proof of express appointment. Agency is recognized in
all modern legal systems as an indispensable part of the existing social order.
It fulfills the most diverse functions in both public and private law; it
assists in organizing the division of labour in the national and international
economy by making it possible for a principal greatly to extend his individual
sphere of activity by having one or more person act for him. In addition to the
individual principal, a principal may be composed of a group of person carrying
on a trade or business by way of a partnership, a registered company, or another
kind of corporate entity.
- Chapter X of the Indian Contract Act 1872 deals with the laws relating
to agency. The laws that are related to agency are important because all
business transactions in the worldwide are carried out agency. Agency law is
an important area of Business law. Principal and agent involve in three main
parties in relationship, they are: The Principal, The Agent, and a Third
Agent is define in the Section 182 of the Indian Contract Act, that a person
employed to do any act for another or to represent another in dealing with
It is also defined in the Section 182 of the Indian Contract Act, that the
person for whom such act was done which id to be represented. The person who
has delegated his authority will be the principal.
Types of Agents
General AgentThe general agent possesses the authority to hold out a broad vary of
transactions within the name and on behalf of the principal. the
overall agent is also the manager of a business or could have a lot
of restricted however all the same current role—for example, as an agent or as
an insurance agent approved to check in customers for the house workplace. In
either case, the overall agent has authority to change the principal's legal
relationships with third parties. One United Nations agency is selected a
general agent has the authority to act in any manner needed by the principal's
business. to limit the overall agent's authority, the principal should spell out
the constraints and however the principal is also answerable for any of the
agent's acts in way over his authority.
Co-AgentCo-agent is a person, who is named by the agent with the express or implied
authority of the principal. Section 194 of the Indian Contract Act deals with
the Appointment of a Co-Agent. It works under the control of the principal and
is an agent of the Agent. There is private of contract between the principal and
substituted agent. It is responsible for the principal. The Agent is not
responsible for the acts of the co-agent.
BrokerAn individual or firm employed by others to plan and organize sales or negotiate
contracts for a commission.
A brokers function is to arrange contracts for property in which he or she has
no personal interest, possession, or concern. The broker is an intermediary or
negotiator in the contracting of any type of bargain, acting as an agent for
parties who wish to buy or sell stocks, bonds, real or Personal Property,
commodities, or services. Rules applicable to agency are generally relevant to
most transactions involving brokers. The client is considered the principal and
the broker acts as the clients agent. An agents powers generally extend beyond
those of a broker. A distinguishing feature between an agent and a broker is
that a broker acts as a middleperson. When a broker arranges a sale, he or she
is an agent of both parties.
Del CredreA del credere agency guarantees the creditworthiness of a buyer and, in case of
default, assumes the risk posed to the seller. Del credere means believe in
Italian. A del credere agency is a type of principal-agent relationship wherein
the agent acts not only as a salesperson, or broker, for the principal, but also
as a guarantor of credit extended to the buyer also del credere agent only
becomes liable to pay the principal after the buyer defaults on payment and is
not liable for any other issues that might arise between the buyer and seller.
Commission AgentAn international agent who is paid a percentage of the sales that an agent
generates. The Agent offers products to potential clients in an assigned
territory which is usually a country, strictly in accordance with the sale
conditions indicated to it by the Principal. There is no employment
relationship between the Agent and the Principal, and their relationship is
purely a commercial one. In this regard, on the end of this agreement, the
Agent shall not be entitled to receive any compensation. In international trade
the relationships between the commercial agent and his clients are governed.
FactorPeople who are employed by others to sell or purchase goods, who are entrusted
with possession of the goods, and who are compensated by either a commission or
a fixed salary. A factor is a type of agent who sells goods owned by another,
called a principal. The factor engages more frequently in the sale of
merchandise than the purchase of goods. A factor is distinguished from a mere
agent in that a factor must have possession of the principals property, while an
agent need not. The factor-principal relationship is created by a contract.
Both parties are expected to comply with the terms of the agreement. The
contract is terminable by the factor, by the principal, or by operation of law.
Understanding Rights and Duties of an Agent.
We all know that in the contract of an Agency, there are two people, a
principal, and an agent. The principal is the one who appoints the agent to do a
particular task in the normal course of business. The principal is bound by the
acts of his agents and then he is responsible for all his acts which he did with
the third parties, even though the principal is not directly related to the
third party and their contracts. So, for this there are some rights and duties
mentioned for the agents. There are some rights which the agent will get and
some duties which an agent needs to follow.
Rights Of An Agent:
The rights of an agent are mentioned in the Section 217 to
Section 217 (Right of retain out of sums received on principal's account.)- This
section empowers to retain out any sum which is received on the principal's
account during business.
The money is received for the following payments:
- All the money which is due of himself because of the advances made, he
will retain it from the principal's account.
- The expenses incurred by him for conducting the business.
- Remuneration payable to him.
- Section 219 (Right to remuneration):
According to the contract between agent and the principal, the agent is
entitled to get remuneration. If there is no amount fixed, then he will get
it according to the business. But he will not get the amount for the work
which is done by misconduct.
- Section 221 (Rights to lien):
If the principal doesn't pay the remuneration
due to the agent, then the agent can retain the goods or property of the
principal. This will be considered as lawful.
- Section 222 (Right of indemnification for lawful acts):
If the agents have
indemnified the principle against the acts which the principal had not done
properly then the principal is entitled to indemnify the agent.
- Section 223 (Right to be indemnified against consequences of acts
done in good faith):
When the agent has agreed to do something for the principal in good
faith, but the principal was illegally related to it then, the principal will
indemnify the agent for the damage caused.
- Section 224 (Non- liability of an employer of agent to do a criminal
When the principal employs the other person to do any criminal/ unlawful act
then the principal will only be liable to compensate for that act.
- Section 225 (Compensation to agent for injury caused by principal's
If the agent faces any injury/damage because of the act done by the principal
negligently, then the principal it liable to recover him from the damages.
Duties Of An Agent
The duties of an agent are mentioned in Section 211 to Section 216 and 218.
- Section 211 (Conducting business according to principal's
agent must work in the business according to the directions given by the
principal. If the agent fails to do so or occurs any loss out of it, then he
will be responsible to accrued/sustain the profit to the principal.
- Section 212 (Working with skill and diligence):
In the conduct of the
business it is very important for the agent to work with diligence. If he fails
to do so and cause any misconduct, then he will be liable to compensate the
loss. As the misconduct can be bot direct and indirect so the loss will be
compensated during the time of direct misconduct only.
- Section 213 (Rendering the proper accounts):
The agent is required to render
proper accounts of the principal. As accounts are needed to show the
performances of the business. It should also include supporting documents of
- Section 214 (Communicating with the principal in cases of
If agent is doing that kind of work which requires the permission of the
principal, then he should seek his advice or instructions during any
- Section 215 (Repudiation of the transaction by the principal):
If the agent
deals with something on his own account during business and does not seek
permission of the principal and if the principal comes to know about it, then he
can repudiate the transactions. If the agent has dishonestly done any act which
is disadvantageous to him.
- Section 216 (Not to deal with the own account):
If the agent tries to deal on
his own accounts without the knowledge of the principle, then the principal is
entitled to claim any kind of benefit which the agent got.
- Section 218 (Agent's duty to pay sum received for principal):
The agent is
bound to pay all the sum to the principal which he has received on his account.
Essentials of Agency
The major essentials to the contract of agency are as follows:Competency of the Principal
The requirement for the competency of the principal has been repeated (as
Section10 of the "act" also requires for "parties competent to contract") and
laid down in the Indian Contract Act under Section 183, where the requirements
for a competent principal have been listed down to.
- Majority, i.e., the principal must have attained the age of majority,
under the relevant laws.
- Sound mind, i.e., the principal must be of sound mind, at least now of
appointing the agent.
The basic rule of thumb here is that the principal should be capable of
performing the tasks (in law), which he wants his agent to do for him. (Tiwari,
2020). Thus, any appointment of an agent by a minor or a person of unsound mind
is explicitly declared to be void.
Competency of the Agent:
The requirements regarding the competency of the agent
have been listed down in Section 184 of ICA, 1872, where it has been explicitly
mentioned that anyone between the principal and the third party may become an
agent, regardless of its age or soundness of his mind. It prescribes that any
person, including a minor and an unsound person, may become an agent. However,
they (the agent) may not be liable to the principal unless they have attained
the age of majority and are of sound mind.
From the general description provided under the section, it can be interpreted
that, any person, including ones who themselves might not be competent enough to
contract (minors and persons of unsound mind included), have the capacity to
represent and bind their principals into direct and valid contractual
Consideration not required: As per the view of the Indian Contract Act, even
consideration is not an essential element for the creation of an Agency; hence
no consideration is required to be presented while the formation of an agency.
However, these provisions do not deprive the agent of his legal and justified
remunerations unless proven to be specified otherwise in the contract.
These principles of the contract act are based upon the ideologies of Common
Law, which specify that no consideration is required to give an individual the
authority of an agent, neither does it bar any one of the parties from suing
each other, either it be for the negligence on part of the agent or for the
recovery of due compensation from the principal. (Shapiro, 2003)
Formation of Agency
The term agency
refers to a connection between a principle and an agent in
which the principal delegated his or her authority to the agent to act on behalf
of the principal. An agency contract governs such a connection. The agent's and
principal's rights and responsibilities are governed by the contract's written
or implied provisions.
The relationship between principal and agent can be established in one of four
- Agency by express agreement
- Agency by operation of law
- Agency by ratification
- Agency by implied authority. (Freienfels, 2018)
Agency by expressed agreementDefinitions of express and implicit authority are discussed in section 187 of
the India Contract Act. An authority is explicit when it is conveyed by words
spoken or written.
E.g., By completing a power of attorney in A's Favour, P authorizes A to handle
one of his businesses. P and A's connection as principal and agent has been
established by express authorization.
The use of terms in the agreement is extremely significant in filtering out
the agent's true authority. The phrase for and behalf of was used in the vendor
agreement in Alwie Handoyo v. Tjong Very Sumito. The requirement of permission
in the agent-principal relationship, as well as the use of clear language in the
agreement, was reiterated by the Court of Appeal.
Agency by operation of lawWithout any special agreement or legal necessity to enter any formalities, the
law establishes the connection between Principal and Agent. The Partnership Act
is the best example, in which each Partner acts as the firm's agent.
- When a partnership is formed, each party becomes the agent of the other
partner. By operation of law, such an agency is said to have arisen.
- By law, the promoters of a corporation are its agents when it is
When a partnership contract is signed, a fiduciary duty is created
automatically. Each partner is now responsible for managing the firm's business
and accounting for its activities. Any failure on the part of the partner on
these fronts constitutes a violation of fiduciary duty.
Agency by ratificationAfter completing the required task, the agency can be constituted. This occurs
in the event of ratification, in which the principal endorses the act performed
on his behalf by another person. This confirmation or approval can be expressed
Section 196 of Indian Contract Act establishes a person's rights in relation
to acts performed on his behalf without his consent. This gives the
Principal of Election the option of ratifying or disowning such activities.
For example: The following are some examples from the Indian Contract Act:
- Without permission, A purchases stuff for B. After that, B sells them to
C on his own account, implying that B approves of A's purchase on his own.
- Without B's permission, A lends B's money to C. After that, B accepts
C's interest on the money. B's actions imply that the loan has been
In the case of Bolton Partner v. Lambert T offered to sell land to the managing
director of a company, who accepted without authority on behalf of the firm. T
rescinded the offer and informed the employer of the situation. The unauthorized
acceptance of the managing director was subsequently ratified by the company. It
was determined that the contract is valid. T's retraction of the offer was
useless because P ratified on time. The agent is also placed in the same
position as if he had authority to perform the act at the time it was performed.
Agency by Implied AuthorityThe definition of implicit authority is discussed in Section 187 of the Indian
Contract Act. When things spoken or written, or the customary way of dealing,
are accounted conditions of the situation, such authority is said to be implied.
For example: P is based in Delhi, but he has a business in Manali and travels
there on sometimes. An oversees the company, and P is aware of it. As a result,
A has implied permission from P to administer the company in P's name. P, who
lives in Delhi, hired A to collect a debt owed to him from T, who lives in
Chennai. Now, A is free to pursue any legal action necessary to recover the
The chairman of the company was deemed to be impliedly accountable as an agent
of the company in the Hely-Hutchinson and Freeman & Lockyer case. It was because
of the Board's actions that he was appointed as managing director.
Following are three types of implied agency:
- Agency by Estoppel:
It occurs when a person, through his words or
actions, leads others to believe that another person is his agent. For example:
A consigns things to B for sale and instructs him not to sell at a fixed price.
B's instructions are unknown to C, so he enters a contract with B to purchase
the goods at a lesser price than the reserved price. By the contract, A is
Agency by necessity: It emerges under the following circumstances:
first, when acting on behalf of the principal is an actual and concrete
necessity. Second, if communicating with the principle and obtaining his
approval is impossible, and third, when the conduct is done in the principal's
Discharge of Contract and Agency
Section 62 of the Indian Contract, 1872 provides that "if the parties to a
contract agree to substitute a new contract for it, or to rescind or alter it,
the original contract need not be performed."
Discharge can happen through various types:
- Discharge by Performance:
When the parties to a contract fulfil the
obligations arising under the contract within the time and manner prescribed,
then the contract is discharged by performance. Since both, the parties to the
contract fulfil their obligation arising under the contract, then it is
discharged by performance. Now, discharge by the performance of a contract can
When a party to a contract does what he had undertaken to
do under the contract, he is said to have performed his obligation to the
contract. Then it becomes the duty of the other party to do what he had agreed
to do under the contract. Thus, when both the parties perform their respective
obligations, the contract comes to an end.
Sometimes, the party who is bound to perform a promise
under a contract is ready and willing to perform it at the proper time and place
but is unable to do so because the other party does not accept the performance.
This willingness of the party is known as 'Attempted performance' or 'Offer to
perform' or 'Tender'.
- Discharge by Mutual Agreement:
If all parties to a contract mutually
agree to replace the contract with a new one or annul or remit or alter it, then
it leads to a discharge of the original contract due to a mutual agreement.
- Discharge by the Impossibility of Performance:
If it is impossible for
any of the parties to the contract to perform their obligations, then the
impossibility of performance leads to a discharge of the contract. If the
impossibility exists from the start, then it is impossibility ab-initio.
- Discharge of a Contract by Lapse of Time:
The Limitation Act, 1963
prescribes a specified period for performance of a contract. If the promisor
fails to perform and the promisee fails to act within this specified period,
then the latter cannot seek remedy through law. It discharges the contract due
to the lapse of time.
- Discharge of a Contract by Operation of law:
A contract can be
discharged by operation of law which includes insolvency or death of the promisor.
- Discharge by Breach of Contract:
If a party to a contract fails to
perform his obligation according to the time and place specified, then he is
said to have committed a breach of contract.
Also, if a party repudiates a contract before the agreed time of performance of
a contract, then he is said to have committed an anticipatory breach of
- Discharge of a Contract by Remission:
A promisee can waive or remit the performance of promise of a contract,
wholly or in part. He can also extend the time agreed for the performance of
- Discharge by Non-Provisioning of Facilities:
In many contracts, the promisee agrees to offer reasonable facilities to the promisor for the
performance of the contract. If the promisee fails to do so, then the promisor
is discharged of all liabilities arising due to non-performance of the
- Discharge of Contract due to the Merger of Rights:
In some situations,
it is possible that inferior and superior right coincides in the same person. In
such cases, both the rights combine leading to a discharge of the contract
governing the inferior rights.
Termination of Agency
Termination of agency is addressed in Section 201 of the Indian Contract Act.
The principal revoking his authority; the agent renouncing the agency's
business; the agency's business being completed; or either the principal or
agent dying or becoming of unsound mind; or the principal being adjudicated an
insolvent under the provisions of any Act for the time being in force for the
relief of insolvent debtors; or the principal being adjudicated an insolvent
under the provisions of any Act for the time being in force for the relief of
insolvent debtors. (Siman, 2019)
Following the various ways in which an agency can be terminated:
- Termination of agency is discussed in Section 202 of the Indian Contract
Act when the agent has an interest in the subject-matter. In the absence of
an express contract, the agency cannot be dissolved to the detriment of the
agent's personal interest in the property that is the subject-matter of the
agency. For example: A gives B permission to sell A's land and use the
revenues to pay himself the obligations owed to him by A. This authority
cannot be revoked, nor can it be terminated by his insanity or death.
- When the principal may revoke the agent's, authority is discussed under
Section 203 of the Indian Contract Act. Except as specified in the preceding
section, the principal may revoke the authority entrusted to his agent at
any moment before the authority has been exercised to bind the principle.
- Section 204 of Indian Contract Act talks about revocation of authority
where it has only been partially exercised.
The principal cannot revoke his agent's authority after it has been
partially exercised in terms of acts and duties arising from acts already
performed in the agency. For example: A allows B to purchase 1,000 bales of
cotton on behalf of A and pay for them using A's funds still in B's
possession. B purchases 1,000 cotton bales in his own name.
- Compensation for cancellation by principal or renunciation by agent is
discussed under Section 205 of the Indian Contract Act. If the agency is to
be prolonged for any period, the principal must compensate the agent, or the
agent must compensate the principal for any earlier revocation or
renunciation of the agency without good cause.
- Notice of revocation or renunciation is discussed under Section 206 of
the Indian Contract Act. A reasonable notice of such revocation or
renunciation must be given, or else the damage caused to the principal or
agent must be made good by the other.
- Revocation and renunciation may be declared or implied, according to
Section 207 of the Indian Contract Act. Revocation and renunciation can be
explicit or implied in the principal's or agent's behavior, respectively.
For example: A authorises B to rent A's home. After that, A lets it go on his own.
This implies that B's authority has been revoked.
- Section 208 of the Indian Contract Act discusses when the termination of
an agent's authority takes effect as to the agent and as to third parties.
The termination of an agent's authority has no effect on the agent before it
is known to him, or on third parties before it is known to them. For
example: By letter, A tells B to sell some cotton stored in a warehouse in
Bombay for him, and then, by letter, revokes his right to sell and directs B
to send the cotton to Madras. After receiving the second letter, B enters a
contract with C, who is aware of the first but unaware of the second, for
the sale of cotton to him. C gives B the money, with which B flees. C's
payment is superior to A's.
- Section 209 of the Indian Contract Act discusses the agent's
obligation upon termination of agency due to the principal's death or
insanity. When an agency is ended due to the principal's death or
incapacity, the agent is obligated to take all reasonable means for the
protection and preservation of the interests entrusted to him on behalf of
the late principal's representatives.
- Section 210 of the Indian Contract Act addresses the termination of a
sub-authority. agent's The termination of an agent's authority results in
the termination of the authority of all sub-agents designated by him
(subject to the regulations stated herein about the termination of an
Contracts establishing a relationship of the agency are very common in business
law. These can be express or implied. An agency is created when a person
delegates his authority to another person, that is, appoints them to do some
specific job or a number of them in specified areas of work. Establishment of a
principal-agent relationships confers rights and duties upon both the parties.
There are various examples of such a relationship: Insurance agency,
advertising agency, travel agency, factors, brokers, del credere agents, etc.
The relationship operates in such a way that the agent is responsible for
compensating his or her principal for loss or damage resulting from his or her
actions and the principal owes his or her agent contractual services.
addition, the tasks include- the task of following instructions or customs, the
task of not delegating his responsibilities, the task of avoiding conflicts of
interest, the task of keeping accounts, and the task of sound care and skills.
- Wardahbeg, M. (2019, March 26). Law of Agency: What is Principal- Agent
- Alden, J. (2012). Introduction to Agency and the Types of Agents.
- Avtar Singh, Contract & Specific Relief, Page- 433, 12th Edition, EBC
Publishing (P) Ltd.
- S. (2019, March 21). Termination of Agency under Contract Act. Academike.
- Müller-Freienfels, W. (2018, April 13). Agency. Encyclopedia Britannica.
- Tiwari, A. (2020). iPleaders. Essentials to the Contract of Agency in
- Shapiro, S. (2005) Agency Theory. Annual Review of Sociology, 31 263-284
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