Introduction
An agency is a relationship between two parties in business dealings in which one person acts as a representative to the other. The purpose is to create contractual relations between the other and the third person.
An agency can be created to perform any act which the creator of the agency himself could lawfully do.
Relevant Provisions
Sections 182-185, 187, 196, 201-219, 221-223, 225, and 273 of the Contract Act 1872.
Definition of Agency
It is a type of fiduciary relationship that is created by express or implied contract or by law. However, Section 182 of the Contract Act 1872 defines these terms as follows;
Agent: An agent is a person employed to do any act for another or to represent another in dealings with third persons.
Principal: The person for whom such an act is done, or who is so represented, is called the Principal.
Agency: The contract which creates the relationship between the principal and agent is called Agency.
Essentials of an Agency
The following are the essentials of an agency;
1. Agreement
The relationship of an agency is always created between the principal and the agent only because of an agreement(express or implied). So, an agreement is the first essential to create an agency.
2. Contractual Capacity U/s 183, 184
Section 183 says that the principal must be competent to contract and must have attained the age of majority. It means that a minor cannot appoint an agent.
Section 184 is about the appointment of an agent and it says that the agent need not be competent to contract because he holds no personal liability while making a contract on behalf of the principal. So, a person may contract through a minor agent.
3. Consideration not Necessary U/S 185
Section 185 says that consideration is not necessary to create an agency. The reason is that it may or may not exist in the agency.
4. Intention to act on behalf of the Principal
For the creation of an agency, the agent must have the intention to act on behalf of the principal. However, when the agent performs a contract for himself, then the principal will not be liable for any act of the agent. The principal shall be liable only when the agent contracts with the intention to act on behalf of the principal.
Formation of Agency
The modes of formation of an agency are discussed below.
A) By Express Agreement
The agency may be created by word of mouth or by an agreement in writing. The most used form of a written contract of agency is the power of attorney on stamped paper that gives the authority to the agent to act on behalf of the principal.
Example: ‘Ali’ appoints ‘Bahadur’ as his agent to sell his shop. It is an express agency.
B) By Implied Agreement U/s 187
An implied agency arises from the conduct or relationship of parties. Such type of agency does not arise due to express agreement. An implied agency may be of the following forms:
1) Agency by Estoppel U/s 273
When an agent has, without any authority, done acts to a third person on behalf of his principal, the principal is bound by such acts or any obligation. It is then if he has, by his words or conduct, induced such third persons to believe that such acts and obligations were within the scope of the authority of the agent.
Example: A tells ‘B’ in the presence and within the hearing of ‘Q’ that he (A) is Q’s agent and ‘Q’ does not object to this statement and keeps quiet. Later on, B enters into a contract with ‘A’ believing that ‘A’ is ‘Q’s agent. ‘O’ is bound by the contract.
2) Agency by Holding Out
This type of agency comes into existence due to some prior positive act on the part of the principal. Simply, the principal is bound by the acts of the agent if, on an earlier occasion, he has induced other persons to believe that such acts are done with his authority
Example: ‘A’ gives authority to ‘B’, his servant, to purchase goods on credit for him from ‘C’ who is a shopkeeper. ‘A’ had been paying for all goods bought by ‘B’ for him (A). One day, ‘A’ gives cash to ‘B’ to purchase goods from ‘C’. ‘B’ misappropriates the money and buys the goods on credit. ‘A’ is liable to ‘C’ for the purchase made by ‘B’
3) Agency by Necessity
The law gives authority to a person to act as an agent for another without any consent of the principal. Such an agency is called the agency of necessity. Mostly, Agency by necessity arises in the following cases;
(i) Where the agent exceeds his authority (bona fide in an emergency.
(ii) Where the carrier of goods, does anything to protect the goods in an emergency.
C) By Ratification
Ratification means to approve an act after it has been done.
Legal Effect: The particular act is recognized as binding retroactively.
AGENT
Duties of Agent
The following are the duties of an agent. They are discussed here briefly.
1. To execute the mandate
The agent must perform the duty for which he has been appointed. He must do his duty fairly.
2. To follow the principal’s directions
To conduct the business of the agency according to the directions of the principal is the duty of the agent. If the principal does not give any directions, then he should follow the custom of trade.
3. To work with reasonable care
Every agent has the duty to carry on the business of the agency with the reasonable care of a man of ordinary prudence. If he does not work with due care and diligence, he must compensate the principal for the direct consequences of his own neglect.
4. To render accounts
An agent is bound to render proper accounts to his principal on demand.
Example: ‘A’ sends goods to his agent ‘B’ to sell on credit. ‘B’ must keep proper accounts of sale and render to ‘A’ on his demand.
5. To communicate in Crisis
During any difficulty, it is the duty of the agent to inform the principal and get instructions from him before taking any steps.
Example: ‘A’ sends some goods to his agent, ‘B’ at Karachi to export. ‘B’ finds that some goods are damaged. ‘B’ must inform ‘A’ and get instructions in this case.
6. Duty on termination of agency
At the termination of an agency due to the death or insanity of the principal, the agent must take reasonable steps for the protection of the interests of the representation of a late principal.
Example: ‘B’ an agent sells the goods of his principal ‘A’ to ‘C’ on credit. ‘A’ dies. The agency terminates. ‘B’ must collect and remit the amount to the heirs of ‘A’.
7. Not to make any secret profit
An agent must not deal on his own account. In case, an agent deals with his own account in the business of the agency, without obtaining proper permission from his principal, the principal has the right to reject the transaction.
Example: ‘A’ directs ‘B’, his agent to buy a certain shop for him. ‘B’ tells ‘A’ that it cannot be bought and buys the shop for himself. ‘A’ may, on discovering that ‘B’ has bought the shop, compel him to sell it to ‘A’ at the price he gave for it.
8. Duty to remit Sums
The agent is bound to pay his principal all sums received on his account.
9. Not to set up adverse title
When the agent has obtained goods or property from the principal, he is precluded from setting up his own title or the title of the third party to the property.
10. Not to delegate authority
An agent must not delegate his authority to another person, but perform the work of the agency himself.
Rights of Agent
1. Right to retain
An agent has the right to retain, on account of his principal, all amounts of money in respect of his remuneration, advances, or reasonable expenses incurred by him in conducting the business. The money received is not included.
2. Right to receive remuneration
In the execution of the tasks of an Agency, every agent is entitled to receive agreed remuneration, or if there is reasonable remuneration.
3. Right to Lien
An agent has the right to retain the goods or any other property: whether movable or immovable of the principal, until the amount has been paid to him that is due to him for the commission, services, and expenses.
4. Right to be indemnified
An agent has the right to be indemnified against the consequences of all lawful acts done by him in the exercise of the authority conferred upon him. However, an agent cannot claim indemnity in lieu of criminal or unlawful acts.
5. Right to get compensation
The agent must be compensated for injuries sustained by him due to the principal’s neglect or wants of skill because he has an inherent right to that. Thus where the principal keeps any dangerous premises and the agent gets into an accident, the principal is liable to pay compensation to the agent.
6. Right to stoppage of goods
An agent has a right to stop the goods in transit to the principal same as an unpaid seller if he has bought goods with his own money and the principal has become insolvent. This right is acquired by the agent in the following two cases:
(i) If he has bought goods on behalf of his principal either with his own money or by incurring personal liability for the price.
(ii) Where he is personally liable to his principal for the price of the goods sold.
PRINCIPAL
Duties of Principal
The following are the duties of the principal:
1. To indemnify for lawful acts
It is the duty of the principal to indemnify the agent against the consequences of lawful acts done by such agent in the exercise of the authority conferred upon him.
2. To indemnify for acts, done in good faith
When one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of the act though it causes an injury to the right of the third person.
3. To compensate for injury caused by his neglect
It is the duty of the principal to make compensation to his agent in respect of injury caused to such agent by the principal’s neglect or wants of skill.
Rights of Principal
The following are the rights of the principal:
1. Right to recover the damage
If the principal suffers any loss due to the mistake of the agent, he has a right to recover from his agent. The agent is liable for the loss if it occurs due to the following reason:
(i) When the agent does not act according to the directions of his principal
(ii) When the agent does not follow the customs of trade in the absence of directions
(iii) When the agent does not perform his duties with skill, care, or diligence
2. Right to obtain secret profit
If the agent makes any secret profits from the agency without the knowledge and consent of the principal, the principal has a right to recover them from the agent. Also, the agent loses his right of commission.
3. Right to refuse to indemnify the agent
If the principal shows that the agent has acted as a principal himself and not merely as an agent, he has a right to refuse to indemnify the agent against loss suffered by that particular transaction.
Revocation of Agency
According to the provisions of Sections 201 to 211 of the Contract Act, of 1872, an agency can be revoked in any of the following ways:
i) By agreement
An agency can be terminated at any time by a mutual agreement between the principal and the agent. Therefore, the authority of an agent terminates when the principal and the agent agree to terminate it.
ii) By the principal
The principal can revoke the authority of the agent at any time before the agent has exercised his authority.
iii) By the agent
An agency can be terminated by the agent himself compelled to work as an agent. But, the agent must give reasonable notice of revocation to the principal; otherwise, he will be liable to compensate the principal for any loss resulting thereby.
iv) On completion of business
An agency comes to an end automatically when the business of the agency is completed. When an agency is for the sale of a particular property, the agency terminates on the completion of the sale and does not continue until payment of the price.
v) Expiry of time
If the agent is appointed for a fixed period, the agency comes to an end on the expiry of the fixed period, even though the business may not have been completed.
vi) Death of either principal or agent
An agency terminates automatically on the death of the principal or the agent. Because a person cannot act on behalf of a non-existent person.
vii) Insanity of principal or agent
An agency terminates automatically, where the principal or the agent becomes of an unsound mind. When the principal becomes insane, the agent cannot act for a person of unsound mind.
vii) Insolvency
An agency is also terminated by the insolvency of the principal. But since an agent is merely connecting links with third parties, his insolvency may not terminate the agency in some cases.
ix) Destruction of subject matter
An agency terminates on the destruction of the subject matter of the contract of the agency.
x) Principal or agent Become Alien or enemy
If the principal and agent are citizens of two different countries and a war breaks out between the two countries, the contract is terminated.
Final Note
The agency is merely a connecting link between the principal and the third party and is based upon consent. The agent is a connecting link between the principal and the third party. The acts of the agent bind the principal to the third person or give the principal rights against the third person.
The rights of an agent are the duties of the principal and the duties of an agent are the rights of the principal. No consideration is necessary to create an agency. In the same way, an agency can be terminated at any time within particular circumstances by giving reasonable notice.
FREQUENTLY ASKED QUESTIONS
How Contract of the agency created and terminated?
(2019-A)
Define agency. What are the rights and duties of an agent?
2018-A, 2017-S, 2016-A, 2014-A, 2012-8, 2012-A)
How contract of an agency is created and terminated?
(2017-A)
Define the Contract of the Agency. What are the rights and duties of an agent?
(2015-S, 2011-A)
What are the different modes of creation and termination of an agency?
(2009-A)
REFERENCES
- The Contract Act, 1872
- N-Series by M.A. Chaudhary
- Law of Contract by Avtar Singh
