Contract of Agency : Meaning, Characteristics, Methods and Types

An Agency agreement establishes the legal relationship between the agent and its principal. It ensures that both parties understand their roles and responsibilities in a contract, which helps to create mutual awareness that the agent shall bind the principal for his acts done within his ambit of authority. The Contract of Agency also establishes the rights and obligations of an agent in a contract of agency, and it also defines the circumstances under which the agent shall be personally liable for his acts on behalf of the principal along with the legal position of the agent, the principal and any other third parties involved.

Geeky Takeaways:

• Contract of Agency can be observed very easily in business as business houses use the services of agencies to expand their operations and also to focus on their key operations.
• Some examples include appointing a human resource professional to hire individuals or attorneys for legal representation or using the services of a stockbroker.
• The provisions regarding the Contract of Agency are contained in Sections 182 to 238 of the Indian Contract Act, 1872.

What is Agency?

Agency is used to describe the relationship between two people, where two people come into a contract with each other where the first person brings the second person into legal relation with others. The Indian Contract Act does not define the term Agency. However, by referring to the definition of Agent and Principal, which is provided under Section 182 of the Indian Contract Act, we can infer that an Agent is a person who is appointed by the Principal, to do any act for the principal or to represent the principal in dealing with the third person. Agent acts like a connecting link between the principal and the third party. All the acts of the agent shall bind the principal if the acts are done within the authority. The law of agency can be summarized as “What a person does by another, he does by himself”.

Contract of Agency is made on the saying “Qui facit per alium, facit per se”. In other words, he who acts through another person called agent in the act is himself acting.

Characteristics of an Agency

1. Test of Agency: In order to test whether a contract of agency exists or not between two parties, there is a test of agency where two things are tested. Firstly, whether the person is in the capacity to bind the principal and the principal is answerable to the third party for his acts. And secondly, whether he can establish a Privity of Contract between the principal and third party. If the above two conditions are fulfilled, only then, a Contract of Agency is established between the Agent and the Principal.

2. Mutual Trust: To maintain any relationship, good faith among parties to a contract shall exist between each other. The foundation of a good agency relationship between the agent and the principal lies in the foundation of good faith and mutual trust. The agent shall work in accordance with its authority and shall work for the benefit of the principal.

3. Capacity of Principal: For the purpose of the Contract of Agency, the principal is required to be competent to enter a contract; i.e., he must be of the age of majority, must be of sound mind, and shall not be disqualified by law. Since in a contract of agency, the agent builds a contractual relationship between the principal and the third person, it is necessary for the two parties to be competent to contract.

4. Capacity of Agent: The capacity of an agent in the contract of agency is immaterial as any person can become an agent between the principal and the third person. Any person, either minor or otherwise incompetent to contract, is eligible to create a valid contract between his principal and the third person. However, an agent is not responsible to the principal if he is not competent to contract but the principal shall be bound by the acts of the agent.

5. Legally Binding: The principal is legally bound by all the acts done by the agent in the same manner as he would have done that act by himself. However, only those acts which are within the scope of authority of the agent shall bind the principal, he might be held liable for acts done outside the authority.

6. Consent: The relationship of the principal and the agent can only be established by the consent of both the principal and the agent. The consent must have been given by each of them, either expressly or by implication from their words or act.

Methods of Creating Agency

1. Agency by Express Agreement: An agency is said to be “Express” when the agency is given by either word, spoken, or written. When the agent is selected either by the words expressed or composed or direct of activities, in such cases an agency shall be “Express”.

For example, Anil resides in London, who also owns property in Jaipur, and is looking to sell his property in Jaipur. He authorizes Vimal, a property dealer under a power of attorney to sell the house and take decisions accordingly.

2. Agency by Implied Agreement: An authority can be said to be implied when from certain circumstances of the cases, it can be inferred from the conduct of the parties and things spoken or written or during the ordinary course of dealing. These arrangements/agencies can emerge from the direct circumstance or relationship of the gatherings. Therefore, the implied agency is created by the way of conduct or the situation of the parties; i.e., the principal and the agent, or necessity of the particular case.

For example, Yogesh and Manoj are brothers. Yogesh lives in Mumbai, and Manoj lives in Kanpur, Yogesh has a flat in Kanpur. Manoj with Yogesh’s knowledge let out his flat. Manoj used to realize the rent and remit the same to Yogesh, who was accepting the same. Here, Manoj is the implied agent of Yogesh, though he has not been expressly appointed.

3. Agency by Necessity: Agency by Necessity arises in certain circumstances which require immediate action or act due to some emergent circumstances. As discussed earlier, an agent must perform his act within his authority. But in emergencies, the agent is authorized to do what he cannot do in ordinary circumstances. So when an emergency arises, the agent by nature acquires an extraordinary or special authority to perform all acts, which can prevent his principal from loss. However, certain conditions shall be satisfied to infer whether the agency is turned out by necessity or not, such as:

• There should be an actual necessity for acting on behalf of the principal.
• Within the given available time, it should be impossible to obtain the principal’s instructions.
• The person acting as an agent must have acted bonafide.

For example, Rahul is a dealer of vegetables. He supplies vegetables from Bhopal to Delhi by his truck. One day the truck containing tomatoes and onions broke down in transit. Aman (the truck driver) tried to inform Rahul but was unable to establish communication. Due to the perishable nature of vegetables, the truck driver sold them in the nearby market. This act was done in an emergency, and the situation required Aman to act immediately. Hence, this act of Aman shall bind Rahul because the agent has acted for the benefit of the principal.

4. Agency by Estoppel: The Rule of Estoppel says when a person by his words or by his act has willfully led another person to believe that due to certain circumstances or facts, he has acted in such belief, then he is estopped from denying the truth of such statements. Although, such a state of thing did not exist in actuality. Thus, when a person, by his act or statement, willfully leads another person to believe that a person is his agent, then he is estopped or prevented from denying the truth of agency in such circumstances. The provisions of agency by Estoppel are provided under Section 237 of the Indian Contract Act. An agency by estoppel can be created when the following conditions are fulfilled:

• The principal must have made a valid representation.
• The representation can be express or implied.
• The representation must state that the agent has the authority to do certain conduct, although, in reality, he has no authority.
• The principal must have persuaded the third person by such representation.
• The third person must have believed such representation and made the contract on that belief made by such representation.

For example, A tells B in the presence and hearing of C that A is C’s agent. C keeps quiet and does not contradict this statement. Later on, B enters into a contract with A, honestly believing that A is C’s agent. C is bound by this contract, and in a suit between C and B, C cannot be permitted to say that A was not his agent, even though A was not his agent.

5. Agency by Ratification: When acts are done by one person on behalf of another, but the person has no knowledge nor has given the authority to the other, he may elect to ratify the acts or to disown such acts done by the other person. If he ratifies them, it will have the same effects as he would have performed by his authority. So, Ratification means approving a previous act or transaction which was earlier done without knowledge or authority. Ratification may be express or implied by the conduct of the person on whose behalf the act was done by other people.

For example, A who is B’s agent has on 1st January 2024 purchased goods from C on credit without B’s permission. After the purchase, on 5th January 2024, B tells A that he will accept responsibility to pay for the purchases. However, at the time of purchase, the agent had no authority to buy on credit. B’s subsequent statement on 5th January 2024 amounts to a Ratification of the agent’s (A’s) purchase of goods on 1st January 2024.

Types of Agent

A. Distinction based on Limit of Authority

1. Specific Agent: A specific agent is one who is designated to play out a specific act or to address some specific transactions. For instance, an agent is hired to purchase a specific house.
2. General Agent: An individual hired to carry on a series of transactions identifying with a specific business. He is the person who has the position to do all acts associated with a specific business or work. For instance, X is the chief of a firm.
3. Universal Agent: This agent is delegated to do all acts, and the authority of such agent is also limitless and can do everything that the principal legitimately does.

B. Distinction based on the Nature of the Act/Business

1. Factor: A person who is appointed to sell goods which are put in his possession or to buy goods for his principal. He is the evident owner of those goods in his custody and can thus sell them in his name and receive payment for those goods. Factor also has an insurable interest in these goods, which are in his custody, and a general lien regarding claims that he may have to arise out of the agency.
2. Brokers: A broker is a person whose business is to make contracts with other parties for the sale and purchase of goods or securities in exchange for brokerage. Brokers do not have possession of the goods and act in the name of their principal. Also, they have no lien over goods as they have no possession of goods. Realtors are one such example.
3. Commission Agent: Those agents who act for the benefit of the commission of their act. Here, the agent purchases or sells merchandise in the unfamiliar market in the interest of his principal.
4. Auctioneer: A salesperson who is an agent delegated by a principal to sell his merchandise by open closeout for commission. He makes the sale to the most elevated bidder in an open contest.
5. Del-Credence Agent: He is an agent who is given extra commission to ensure higher sales. In this case, the agent shall act on behalf of the principal but will also guarantee the sales to the principal, even if the agent makes sales less than the actual sales, he shall be liable to repay for the actual sales.
6. Financiers: Banks and Bankers are the agents of the clients because the connection between financier and client is for the most part bank and indebted individuals. The brokers gather cheques, drafts, and charges for purchasing and dealing in securities for the benefit and get commissions from the client.
7. Partners: As per the Indian Partnership Act, 1932 every partner is an agent as well as the principal of every other partner in a Partnership firm, and every partner is also the agent of the firm for the business of the firm

Conclusion

When a person employs another person to do any act for himself or to represent him in dealing with a third person, it is called a Contract of Agency. The person who is so represented is called the Principal, and the representative so employed is called the Agent. The agent has to enter into legal relations on behalf of the principal with third parties but also stay within its authority. Also, by doing so, he does not become a party to the contract nor does he incur any liability under that contract. In Agency, the principal shall be responsible for all the acts of his agents, provided they are not outside the scope of his authority. Indian Contract Act has established how an agency contract can be revoked, how an agency contract can be ratified, etc.

Frequently Asked Questions (FAQs)

1. What is the test of agency?

Answer:

(a) Whether the person is in the capacity to bind the principal and the principal is answerable to the third party for his acts.

(b) Whether he can establish a privity of contract between the principal and third party.

If answer to the above two statements is yes, only then contract of agency is established between the agent and the principal.

2. What is Agency by Estoppel?

Answer:

When a person, by his act or statement, willfully leads another person to believe that a person is his agent then he is estopped or prevented from denying the truth of agency in such circumstances. The provisions of agency by Estoppel is provided under section 237 of the Indian Contract Act.

3. What are the essentials of Agency by Necessity?

Answer:

• There should be an actual and definite necessity for acting on behalf of the principal;
• Within the available time it should be impossible to obtain the principal’s instructions;
• The person acting as agent must have acted banafide.

4. Can the agency be revoked?

Answer:

Yes, agency can be revoked in the following ways:

• Revocation
• Renunciation by Agent
• Completion of Business
• Death or Insanity
• Principal’s Insolvency
• On Expiry of Time

5. What is Sub-Agent?

Answer:

Sub agent is a person who is appointed by the original agent in the business of agency on his direction and control and being responsible to the principal for acts of a sub-agent.