1. Introduction:
In the contemporary
Modern arena, no transaction is possible without a proper contract. Indian
Contract Act,1872, apart from general contracts (Section 1 to 75), also provides
a detailed description of Special contracts like the Contract of Agency, which helps
different business stakeholders to formulate the respective business
efficiently.
The Phenomena of Agency defined
under Chapter 10 of the Indian Contract Act,1872, is considered a very imperative
concept in the rapidly growing commercial globe. Further, the perception of creating agency is
born upon the Latin maxim” Qui facit per alium facit per se “, which means
“He who another, act himself”.
The Article aims to
highlight different modes of creating the agency by encountering nuances present
in the concept. After reading the Article
text, Readers get a better understanding and perception of how the law regulates
the agency by imposing liability to both principals and agents in different
circumstances. The Article concludes by
analysing the overall implication of the creating agency.
2. Conceptual
Understanding of Contract of Agency:
The
concept of agency was created by Modern courts to redress disputes that arose
out of certain facts and situations. These situations originated from ordinary
employer-employee relationships. When any employee, in the course of
employment, performs an act that harms any other third individual or entity's
property, the employer is liable to compensate for all such harms.
Section 182 of the Indian Contract
Act,1872, provides a brief description of the term’s “agent” and “Principal.”
An agent is a proxy or representative for another who is obliged to use
authority based on the work entrusted by another person. The principal is the
person for whom the act is done or who authorizes another person to work for
him according to his instructions.
The
Hon’ble Apex Court in the case of Syed Abdul Khader v. Rami Reddy
defined what exactly constitutes the contract of an Agency. The Court held that the agency is used to produce
the relationship between the person entrusted with the authority of the principal
and the third person. Moreover, the court delivered that the Agent is appointed
by the principal as his proxy for the third party. Further, in the case of P. Krishna v. Mundila Ganapathi,
the Madras High Court held that a Contract of Agency is only considered valid
when the agent demonstrates himself as the proxy of the principal in the
business negotiation.
3. Essentials of Valid
Contract of Agency:
There are certain explicit
provisions under Sections 183, 184, and 185 of the Indian Contract Act, 1872, that
deal specifically with the necessary conditions to formulate the contract of Agency
apart from the ordinary essentials mentioned earlier in the Indian Contract
Act, 1872, like Valid agreements, consent of parties, Intention to enter into
valid contracts etc.
Under Section 183 of the Indian Contract
Act, 1872, it advocates that the principal shall be competent to enter into
the contract, i.e., must be major and of sound mind. Likewise, Section
184 states that an Agent must also be competent to enter into a legally binding
relationship, however, with the exception that valid contractual relationship between
Minor agent and Principal but that agent is not held personally liable for his respective
acts.
Moreover, Section 185 very interestingly
explains that there is no requirement of Consideration in the contract of Agency.
The logic behind this provision is that there is no actual agreement between the
Principal and Agent but only between the principal and third party, and the agent
is merely the proxy and not party to contract and thus no requirement of
consideration with Agent at any circumstances.
4.
Modes of Creation of the Agency:
To enforce the principal’s liability towards
the third person, a principal-agent relationship is a most important prerequisite
without which the formulation of contract of agency is impossible. Therefore,
to make the contract of agency legally admissible, the principal is made liable
for the action of agents in the following situations or mode –
1. By
Conferring Actual Authority to the Agent on behalf of the principal
2. Agent
Authority in situation of “Emergency”
3. By
Conduct of Principal through law of Estoppel” ‘
4. Ratification
by Principal of Agent Act.
5. Presumption of Husband Wife Relationship.
4.1 Exercising
Actual Authority by the Agent:
According
to Section 186 of the Indian
Contract Act, 1872, an Agent can exercise its authority by both expressed
and implied agreement. An express contract of agency can be explicitly made orally
as well as in written format. Generally,
in the Contract of agency, the principal appoints the agent through expressed agreement. However, when the agent gets appointed
through a written agreement or deed, it is known as the power of Attorney. This
gives the agent the right to act on behalf of the principal
Moreover,
Section
187 of the Indian Contract Act, 1872, defines implied authority as any circumstances
or situation where, from the conduct of either parties implied authority can be
assured. Implied Authority can be exercised
in the following cases –
1.
Inferred from the circumstances.
2.
From Spoken or written agreement.
3.
Circumstances arise out of an ordinary course
of dealings.
In
Howard v. Sheward,
the Hon’ble court held that an agent acting on behalf of the principal to sell
the horse carries the implied authority to provide a warranty to the buyer that
the Horse is of sound mind.
4.2 Exercising
Authority During an Emergency:
Section 189 of the Indian Contract
Act, 1872, vividly describes that the Agent is obliged to perform by exercising
all its potential at an optimum level. Moreover, the agent is mandated to exercise
his authority like an ordinary prudent individual to protect the interest or
loss of the principal.
4.3 Exercising
Authority by Estoppel:
Section
237 of the Indian Contract Act, 1872, provides a vivid description of the agency
created by the Estoppel. In this scenario,
the Agent neither has expressed nor implied authority to act on behalf of the Principal.
According to this provision, the principal, through his actions or conducts, demonstrates
that the person is acting as his proxy in the mind of the third person. The essential ingredient to establish this
mode of agency is that the Third Person must create the impression in his mind
that the person doing work is acting on behalf of the principal.
In the Landmark case of Amagas ltd.
v. Mundogas S.A, The Hon’ble Court held by defining the Ostensible
Authority as when the principal through his words or conducts showcase that
Agent has actual authority to act on his behalf to that extent of the Contract.
Moreover, the Third or the contracting party creates an impression that the agent
has really been authorised to act for the Principal.
4.4 Exercise Authority through Ratification by
the Principal:
Ratification means giving
any action subsequent approval. In the contract of Agency, there are many
instances where one person pretends to act on the behalf of another person although
not authorised or entrusted to take care of the same actions. However, Contract
law provides one situation where the act of a pretended agent can be lawfully
authorised. This situation is applicable when after the performance of the
action of agent principal verified or justified the same as authorise or done
on his behalf this situation is known as ratification.
Section 196 and other sections of the Indian Contract Act,
1872, provide seven essential conditions that need to be fulfilled to lawfully ratify
any agent actions.
1. The
first essential discussed under Section 196 is that the act shall be done on
behalf of the person who can approve the prior actions. This concept is
elaborated further in the case of Keighley,
Maxsted & Co. v. Durant, where the plaintiff instructed Robert to
purchase the wheat on the joint account at the particular definite rate.
However, due to high prices, he purchased on his account and the same ratified
by the plaintiff. However, later, the Plaintiff refused to purchase the same.
The court held that Plaintiff will not be
liable as Robert does not purchase wheat on his behalf, and thus, ratification
is ineffective.
2. The
second essential advocates that the principal must be physically existent and
competent to the contract. In the case
of Kelner
v. Baxter, the promoter of the company agreed on behalf of the non-existent
later ratified after established. The Court held such ratification to be
ineffective.
3. The
second essential discussed under Section
197 of the Indian Contract Act, 1872,
which states that Ratification can be made
either through expessed word or writing or through implied conducts and circumstances.
4. The
third essential condition under Section
198 of the Indian Contract Act, 1872,
which advocates that the person making the ratification must have full
knowledge of all the facts and circumstances of all the actions of the agent.
5. According to Section 199, Ratification always be made
of the transactions in order to preclude the Principal to just ratify those
part favourable for his interest.
6. Section 200 explicitly advocates
that the act of ratification must not in any way be harmful or injurious to the
interest of the third party. In case of a contrary, the ratification will be considered
as invalid.
7. The last essential of ratification is that the
act of ratification must be completed in a reasonable time to protect the interest
of the third party from long and unjustified delays.
4.5 Exercising Authority by presumption of Husband-wife
relationship:
Marriage is not itself establish
relationship or contract of agency. But, the contract of agency is established
when a man and woman live together and they showcase themselves as husband and
wife in the eyes of third person. A woman or wife can bind his husband
responsible for all her actions like an authorised agent.
5
Conclusion:
From
the above discussion, it can be deduced that
Contract is one of the most important requirements of the present
commercial world and to meet the need of such complex area of interest there
should be well established procedure to govern it. Modes of creating the agency
is the perfect testimony of the same procedure which assist the agent to bind
the principal of all the justified acts.