Question

Compare between the commission agency and the contract agency, in terms of nature of work, type of contract, contract obligations, assignment of the agent, and the law establishing it.

Answer 1

In the modern day society with a lot of advancements and changes taking place in every field almost every minute, the field of law is no exception. A lot of intricacies have come up in the formation of a valid contract and same is the case with a contract of agency.

A contract of agency has three fundamental constituents- a principal, an agent and a third party. The role played by an agent in the entire process is of much importance and relevance in the successful carrying out of the business. Although the agent simply represents his principal in the conduct of the business, the role played by him is significant as it is him who has the power to affect the legal relations of the principal with third persons.

The Indian Contract Act, 1872 lays down a set of guidelines which highlight the powers, rights and duties of an agent. In the paper at hand, an attempt shall be made to highlight the obligations of an agent in the contract of agency under the Indian Contract Act and a comparison of the same with the English laws.

Who is an Agent?

The word agent is used to refer to various kinds of activity. In the famous case of Kennedy v. De Trafford, Lord Herschell observed No word is more commonly and constantly abused than the word agent. A person may be spoken of as an agent and no doubt in popular sense of the word he may properly be said to be an agent, although when it is attempted to suggest that he is an agent under such circumstances as create the legal obligations attaching to agency that use of the word is only misleading. Often in the field of business, the word agent is used in a complimentary sense and not in the legal sense of the word.

Section 182 of the Indian Contract Act, 1872, opens, by defining who an agent and a principal is. It says, 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 represented, is called the principal. This definition of an agent, in short, subtly tries to bring out the difference between the legal positions of an agent from that of any ordinary person who is employed to do an act. The essence of the matter lies in the fact that in the case of an agent, it is the principal himself who authorises the agent to represent him or act on his behalf and while doing so, he can bring the principal into contractual relations with a third person.

J. Ramaswami of the Madras High Court tried to explain the concept of agency in the case of P. Krishna Bhatta v Mundila Ganpathi Bhatta where he said that in legal terms and phraseology, any person who acts for another cannot be called an agent. If such a thing happens, a servant rendering his services to his master; or a person tilling anothers field or a person working in somebody elses shop or factory would be considered as their agent.

However, it is not so. It is only when a person acts as a representative of another in business dealings and negotiations, between that other person and a third party, he is legally an agent of the person on whose behalf he is acting. To put it succinctly, it may be described as the relationship between a principal and an agent whereby the principal, expressly or implicitly, authorizes the agent to act on his or her behalf and the agent is, thus, empowered to negotiate on behalf of the principal or bring him or her and third parties into a contractual relationship.

The same observation was made by the Supreme Court in Syed Abdul Khader v Rami Reddy where it said that the expression agency is used to connote the relation which exists where one person has an authority or capacity to create legal relations between a person occupying the position of principal and a third partyâ€. An agent is simply an extended hand of the principal and cannot claim independent rights.

What is a contract of agency?

It is often believed that until 13th century, agency was not a part of the common law system. There were three main factors that helped in the effective development of this concept of agency. These factors can be pointed out as: the emergence of attorneys to deal with legal matters; the influence of the canon law; some of the customs of the merchants who were engaged in healthy trade in Europe. The influence of mercantile law which was greatly contributing to the development of commercial activities, also helped the common law to develop the concept that a principal was in direct contractual relation with third parties and such a principle formed the basis for the evolution of the theory of agency.

The origin of such a principle, which said that the principal is in direct contractual relationship with third parties in any contract entered into by his agent on his behalf, emerged from the case of Costace v Forteye. This case was decided in 1389 by the majors and elder men based in the city of London. What happened in this particular case was that an apprentice and attorney of a London merchant bought wine from a French merchant for his master (Fortenye) and when he failed to satisfy the full payment to the seller, the agent was committed to prison. However, the agent (apprentice) i.e. Costance, said that it was his master who had sent him to buy the wine and then the master had approved the bargain.

The Mayor then ordered that the master (defendant) should satisfy the full payment to the French seller and also ordered that the plaintiff should be set free from the prison. The Mayor based his decision on the ground that the apprentice had made the purchase for the use and benefit of the master. The point that can be understood from the above case is that, a direct claim by a third party was admitted against the principal for contracts made by his agent for the benefit of the principal.

Thus, a contract of agency is essentially one where an agent is authorized by the principal to act on his behalf or represent him and in the process, bring the principal into contractual relations with third persons[8].

Test for determining the existence of agency
In Loon Karan Sohanlal v. John & Co., Dhawan J. of the Allahabad High Court put forward the test for determining whether there exists the relationship of agency. He explained that in American Jurisprudence it is clearly mentioned that mere use of the words agent and agency does not by itself create a relationship of agency and the same law is followed in India. He added that it has been held in several decisions that just because the parties have named their relationship as agency is not a conclusive proof unless the incidence of this relationship, as disclosed by evidence, justifies a finding of agency. He also said that the courts, while examining the evidence, must try to find out the true nature of the relationship and the functions and powers assigned to the so-called agent.

Applying this test, it was held that a procurement agent is not an agent in the legal sense of the term as he does not represent another and is directed to do an act on a commission.

For the creation of a legally valid contract of agency, there are certain requirements that need to be fulfilled.

The Indian Contract Act provides that in order to take up the role of a principal, a person should have attained the age of majority according to the law to which he is subject and should be a person of a sound mind.
Another point highlighted by this act is that a minor cannot take up the position of a principal. This is based on the simple logic that since a minor cannot enter into a contract, the appointment of an agent by him under a contract of agency would also be void.

However, there are certain exceptions to this rule. In cases where the minor is capable of binding himself by the contract, he may appoint an agent to enter into a contract on his behalf. Moreover, there is nothing in this act that prevents the guardian of a minor from appointing an agent for him. Also, no consideration is necessary for a contract of agency.

As far as the question whether it is compulsory for an agent to be competent to contract is concerned, it is clearly mentioned in section 184 that as between the principal and third persons any person may become an agent. This is mainly because an agent under ordinary circumstances incurs no personal liability while acting on behalf of his principle and thus it is not compulsory that he should be competent to contract.

Same is the condition under the English law where it is possible for a person to contract through a minor but the minor will not be responsible to his principal. In case of a company, it may act as an agent beyond its capacity

Whenever a contract of agency is entered into, it is the principal and the agent who predetermine their mutual rights and obligations. Their mutual undertakings may be expressed or implied as can be inferred to a greater or less extent, from the nature and the circumstances of the particular agency. The obligations that are peculiar of certain categories of agents, such as factors and brokers, are defined by their usage. However, there exist certain duties of general nature that are generally imposed by law upon every agent unless excluded or modified by a special contract. We shall now be dealing with some of such duties in detail.

Duties of an agent
1. Duty to execute mandate- It is the foremost duty of an agent to carry out the mandates of his principal. He should perform the duty assigned to him in the best possible manner and in case of any failure on his part, he would be held absolutely liable for the principals loss.

In England, the rule of equity which is followed in almost all the cases states that, if an order is sent by a principal to an agent to make an insurance for him and the agent after charging the principal, never in fact makes the insurance, the agent would be considered as the insurer himself. In such cases, the agent is usually held liable to the principal for the amount lost due to the absence of insurance.

The same position was reiterated by the Supreme Court in Pannalal Jankidas v Mohanlal, where the agent who was asked by the principal to get the goods insured and in fact charged the premium from the principal but never got the insurance, was held liable to compensate the principal when the goods were lost in an explosion.

2. Duty to follow Instructions or Customs- Section 211 of the Indian Contract Act provides that it is the paramount duty of the agent to act according to the instructions of the principal and to regulate his activities in such a manner so as not to go beyond his authority. In Bostock v Jardine, it was clearly laid down that any disobedience of or departure from the instructions is enough to make the agent absolutely liable for the loss.

Whenever the directions are not clearly mentioned, the agent is supposed to follow the customs which are most prevalent among businesses of the same kind and in the place where the agent conducts such businesses.
The English law of agency follows like provisions. It provides that where an agent acts in contravention of the instructions of his principal, if any loss is sustained in the process, he is liable to make good for it. In Lilley v Doubleday, where the agent did not act according to the instructions of the principal and the goods were destroyed, he was held liable.

It is held that an estate agent cannot make a contract with a third party that would be binding upon his principal. This was first laid down in the case of John v Philip.

In USA too, the provisions are somewhat similar and it is the agents supreme duty to pursue the terms of his authority and adhere strictly to the instructions given by his principal. Any voluntary deviation by the agent from the instructions provided, is at his own peril, and, subject to the exceptions hereinafter stated, renders him liable to the principal for any loss resulting unless the principal, with full knowledge of the facts, ratifies such acts.

Certain exceptions present under the law of agency in USA where an agent is not required to perform this duty are:-
(a) Where obedience to such duty would require him to perform an illegal or immoral act;
(b) Where a departure from instructions or mandates is justified by the occurrence of an unforeseen emergency, or the performance of which has, without the default of the agent, become impossible.
(c) Where obedience would impair his security for advances made upon goods consigned to him for sale.

3. Duty of reasonable care and skill- Section 212 of the Indian Contract Act states that in a contract of agency, an agent is required to conduct the business with such skill and diligence as is usually observed by persons engaged in businesses of the same kind. He is supposed to perform his acts efficiently and diligently and in case of his failure to do so, he is liable to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill or misconduct. However, he cannot be made liable with respect to the losses or damages which are indirectly or remotely caused by such neglect, want of skill or misconduct. Also, if the agent satisfies the standards that are required in the kind of business he is engaged in, he will not be held liable to compensate the principal.

The English law also follows the same line and says that the kind of care and skill which an agent is supposed to bestow depends on the nature of his profession. For instance, an insurance agent is must make sure that the clauses usually required for the protection of the principal are present in the policy. Similarly, an estate agent must be well aware of the laws of the land and also must take care to ensure the solvency of the tenant. The English Act also lays down that a person who is acting as an agent should command enough legal knowledge to sufficiently safeguard the interests of the principal in the course of the agency.

Under the US law of agency, it is said that when an agent is appointed, he impliedly undertakes that he will exercise reasonable skill, care, and diligence in the performance of the agency. As a rule, it is laid down that, where an agent is receiving compensation for the services he is rendering, that particular degree of skill, care, and diligence is required, and suffices, which is usually exercised by persons of common capacity and prudence who are engaged in similar transactions.

Obviously, the degree of skill, care, and diligence with which an agent undertakes to perform his duty, is a question of fact, depending, not only upon the nature of the act to be performed, but upon all the circumstances of the case such as what are the instructions communicated, the usages of trade and the customs followed in that business, the manner of the previous dealings, and the degree of skill which the agent professes

Thus, if the transaction is of a nature that requires expert skill and knowledge, the agent impliedly undertakes, if a different intention does not appear from his part that he will exercise the skill and knowledge of an expert. On the other hand, if the agent does not profess to be an expert, and the principal, being well aware of this fact, nevertheless finds him suitable for the duty, it will not be implied that the agent undertook to exercise the skill and knowledge of an expert, nor will the agent be held liable if his performance is not of a higher standard upon which the principal has reason to bank upon.

Section 212 covers another aspect which says that it is the duty of an agent to use all reasonable diligence to communicate with the principal in cases of difficulty and try his best to seek his instructions. In all such situations where the agent is misinforming the principal and a loss occurs due to his misconduct, he is liable to the principal as was held in Jayabharthi Corp v. Sv P.N. Rajasekhara Nadar.

4. Duty to avoid conflict of interest- This duty deals with two aspects. Firstly, as described in Section 215, it is said that in situations where the agent acts on his own without obtaining any permission of the principal or acquainting him with the true state of affairs or if the principal comes to know that certain material facts were dishonestly concealed from him or the agent dealt with the business in such a manner so as to be disadvantageous to the principal, the principal has all the rights to repudiate the transaction. However, such repudiation must be made within reasonable time after discovering the fact

The second aspect is dealt with by section 216 whenever the agent without the knowledge of his principal engages in transactions on his own account rather than on the account of the principal and makes benefit out of such transactions, the principal is entitled to claim any such benefit from the agent.

Similar laws are followed in England and it is explained that since an agent is in a fiduciary relationship with the principal, it is his duty not to do any such thing that would bring into conflict his own personal interest and his duty towards his principal.

Under the US law, the provision is that whenever the agent assumes to deal with himself in a manner in which he is likely to deal with third persons, then in such a situation, his own interest and that of his principal necessarily become antagonistic and the principal may repudiate such a transaction irrespective of the fact whether or not it has resulted in a loss to him and without regard to it being bona fide.

5. Duty not to make secret profit- The Indian law of agency provides that it is the duty of an agent not to make secret profits. Now, the question is, what is secret profit? To put it simply, it means any benefit and advantage that is obtained by the agent which is much more than his agreed remuneration and which he would never have made had he not been that agent. The principal is entitled to claim interest on the illicit profit made by the agent.

In England, accepting bribe falls within the term profit of this sort. In Andrews v Ramsay, an auctioneer who received who received a commission from the buyer in addition to his usual remuneration from his principal, he was bound to give the commission to the principal. Also in cases where the agent sells his own goods or stock to the principal without making him aware of this fact and charges the prevailing market price, it is held that he is liable to account for any profit that he made in the transaction.

However, in cases where an agent merely makes use of the knowledge received in the course of business and makes some profit out of it, he is not liable to the principal if he neither makes any use of the principals property nor diverts any of his opportunities.

The position in US is that an agent who is employed to buy on behalf of the principal may not buy from himself. Also, an agent who is appointed to sell cannot himself become the purchaser. It is also clearly stated that any sort of evidence of custom cannot be admitted to convert a broker who is employed to buy for his employer into a principal to sell to him unless the employer has knowledge of such an arrangement and assents to the dealing on the footing of such custom. It is also laid down that agent will not be permitted to accomplish indirectly what he is not allowed to do directly; for instance by selling to a third person acting in his interest.

6. Duty to remit sums- Section 218 of the Indian Contract Act enumerates yet another duty of an agent. It states that an agent is bound to pay all sums received on account of his principal subject to certain deductions. In BholaNath v Mulchand, it was held that in case an agent is receiving money on behalf of his principal under a contract that is void or illegal, he simply cannot use the illegality of the contract to withhold the payment to his principal which illegality has been removed by the other party by paying the amount.

7. Duty to maintain accounts- An agent is required to render true and complete accounts to his principal as and when demanded. This is important because it helps the agent to perform his other duties well; for instance this helps him to remit proper sums to his principal. It is pertinent to note that although there is no such provision in this Act which enables an agent to institute a suit against the principal for accounts, the Supreme Court in Narandas Morardas Gajiwala v S.P.A.M Papammal, that the provisions of the Contract Act are not exhaustive in such regard and it is an equitable remedy available with an agent to sue the principal under certain circumstances.

In a Madras High Court Case, a mill which was being run by an agent was taken over by the owners and it was claimed by the agent that he lost the accounts in the process of take-over and thus claimed accounts from the principal. However, since he was not able to prove that he had actually lost the accounts, the court did not grant him any relief.

In Yasuda Fire and Marine Insurance Co. v. Orion Marine Insurance Underwriting Agency Ltd. it was held that “the obligation to provide an accurate account in the fullest sense arises by reason of the fact that the agent has been entrusted with the authority to bind the principal to transactions with third parties and the principal is entitled to know what his personal contractual rights and duties are in relation to those third parties as well as what he is entitled to receive by way of payment from the agent.

8. Duty not to delegate- The well-known maxim of Delegatus non potest delegare is often used under the law of agency. This means that an agent who is appointed to do a particular work cannot further delegate it to another person. This is mainly because a particular person is chosen as an agent by the principal for the simple reason that he reposes trust and confidence in such a person.

In the English case of John McCain and Co. , it was clearly laid down that unless the principal specifically authorizes the estate agent to delegate the work to another person or to appoint a sub-agent, he has no right to do so.

Section 190 clearly explains the conditions under which an agent is not allowed to delegate his work to another. However, the same section puts forward a few exceptions to this general principle. Some of these exceptions can be enumerated as below:-
a) Nature of work- Sometimes the nature of the work is such that it is important for the agent to appoint a sub-agent. For instance, in a particular case, a banker who was authorised to let out a house and collect rents was allowed to delegate this duty to a sub-agent.

b) Trade custom- In cases where there exists a trade custom to the effect that a sub-agent may be appointed, in such cases he can be appointed and the work can be delegated to him.

c) Ministerial action- An agent can delegate such acts to a sub-agent which are purely ministerial in nature. For instance, the authority to sign.

d) Principals Consent- Yet another exception where an agent can delegate his duty to a sub-agent is with the principals consent. The principal may give such a consent expressly or impliedly.