Author: Arsheya Aashna Sagar, BBA LL.B., 2nd Year, National Law University, Jodhpur
Agency is a special type of contract which is slightly different from normal contracts, as it emphasizes more on vicarious liability. For vicarious liability to function, we have 3 parties in an agency contract; the principal, agent and the third party, where the principal is held accountable for the actions of the agent as per Section 182 of the Indian Contract Act, 1872, read with Sections 183, 184, and 185. While the principal must meet competence criteria like sound mind and majority, agents are exempt from these requirements, reflecting socio-economic considerations. Additionally, no consideration is necessary to create an agency contract, providing agents the ability to enforce such agreements, a significant exception under Section 185. In the case of Lakshmi Ginning and Oil Mills v. Amrit Banaspati Co. Ltd., the Punjab-Haryana High Court observed that: “According to the Halsbury Laws of England, agency in law connotes 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 third parties. The essential feature of an agent is his power of making the principal answerable to the third persons, i.e., enabling the principal to sue third parties directly or render him liable to be sued by the third party.”
Classification of Agency: Agency can be classified on many bases, the first basis being the scope of authority. On this basis it can be classified as general or particular. Blanket authority is given to the agent in case of general agency, where the agent has immense authority and there is no specification as to how a job is to be done, it is up to the agent to decide on these aspects. The opposite is true in case of particular agency where there is restrictive authority and specification of the work that the agent has to do hence limiting his authority. On the basis of formalization of the relationship, agency can also be express or implied. Express agency is formally executed through a formal document. Put down in writing, sometimes it can be orally and not left to any deductions. Usually, express agency is done in writing. If an agent does something not mentioned in the contract, then breach of agency. Second is implied agency which is circumstantial. In Chami Narayan v. Krishna Aiyyer, the Kerala High Court acknowledged implied agency, as actions beyond restrictive authority were justified by circumstances. Similarly, in Kuchwar Lime Co. v. Dehri Rohtas Light Railway & Co. Ltd., the Supreme Court held that agency may arise by operation of law, recognizing constructive ownership and agency. Formal requirements for agency contracts are avoided due to the informality of transactions in India, where agreements often arise through conduct. Strict formalization could unfairly advantage principals, allowing them to deny agency relationships. To ensure accountability, courts favour recognizing agency through implied or informal arrangements.
Extent of Agent’s Authority: Section 188 of the Indian Contract Act, 1872, defines the extent of an agent’s authority, distinguishing between express authority (granted explicitly through words, spoken or written) and implied authority (inferred from circumstances or the ordinary course of business). Ostensible authority, a subset of implied authority, arises when a principal’s representation leads a third party to reasonably believe the agent has authority, even if not expressly granted. In Harshad J. Shah v. LIC, the Supreme Court clarified that if explicit limitations on an agent’s authority are communicated, ostensible authority cannot be presumed. Here, the agent failed to submit premiums on time, but since LIC had explicitly stated that the agent was unauthorized to collect premiums, the principal was not held liable for the agent’s negligence. This case underscores the importance of clear communication in agency relationships.
Permissibility of Delegation by an Agent: Moving on to the issue of permissibility of delegation by the agent, this has been addressed in Section 150 of the Indian Contract Act. Normally, an agent cannot delegate his duties to a sub-agent without the principal’s consent. However, Section 191 and 192 provide exceptions to this rule, allowing delegation under specific conditions. First, if it is a custom of trade for the agent to appoint a sub-agent as part of his authority, delegation is permissible. Second, if the nature of the agency is too voluminous or complex for one person to handle, delegation may be allowed. In the case of Bell v. Balls, the court emphasized that unless the principal had expressly authorized the delegation, the agent could not delegate his duties to a sub-agent. For example, an auctioneer must personally conclude a sale unless explicitly directed otherwise. This ruling underscores that delegation is not allowed unless there is clear authorization from the principal. However, Section 192 clarifies that if the agent does appoint a sub-agent with the principal’s consent, the principal is liable for the actions of both the agent and the sub-agent. The agent remains liable to both the principal and the third party, while the sub-agent is only liable to the agent. There are exceptions where the principal can directly sue the sub-agent: in cases of fraud or wilful wrongdoing. This principle was illustrated in Anil & Co. v. Air India (1986), where the Delhi High Court held Air India liable for the negligent act of its sub-agent, TWA, in mishandling luggage. In contrast, in Suman Singh v. National City Bank of New York (1952), the Punjab High Court ruled that the sub-agent (Jalandhar bank) was not liable to the principal (A), as the identity of the principal was undisclosed to the sub-agent. Since the agent had not explicitly authorized the sub-agency, there was no privity of contract between the principal and the sub-agent. The ruling highlights the importance of clear authorization for sub-agency and the disclosure of the principal’s identity.
Termination of Agency: The final sub-topic on agency is its termination. The termination of an agency refers to the conclusion of the connection between the principal and agent. This can happen in several ways. The two most common ways to terminate an agency are revocation by the principal and renunciation by the agent. However, termination must safeguard the agent’s interests in the subject matter. For example, in Byram Pestonji Gariwala v. Union Bank of India (1991), the Supreme Court declared that the principal must consider the agent’s interests prior to revocation. If the agent has a vested interest in the agency, such as a property right, it cannot be dissolved without preserving that interest. This is shown in instances involving an irreversible power of attorney, such as Akbarbhai Kesarbhai Sipai v. Mohanbhai Ambabhai Patel (2019), in which the Gujarat High Court declared that an agent’s interest in the subject matter must be recognized prior to revocation. Section 202 highlights the need of considering the agent’s interests, particularly those related to the agency’s subject matter, prior to termination.
Agency can also be terminated for cause or convenience. Termination for cause occurs when one party breaches the agreement, while termination for convenience there is a requirement of providing reasonable notice, as per Section 207 of ICA. If the principal terminates the agency without giving notice, they are required to compensate the agent. Lastly, a factor of utmost importance is the time of revocation. According to Section 204, revocation takes place when the third party is notified. Until the third party is aware, the principal remains liable for the agent’s actions under the doctrine of apparent authority, as held in Amarnath v. Gian Chand (2022), where the court held that the principal remains liable for the agent’s actions until the third party is notified of the termination by the principal.
In conclusion, termination of agency involves balancing the rights of the principal and the agent. The agent’s interests must be safeguarded, especially when they have invested in or created an interest in the subject matter of the agency.
FAQS
Can an agent be a minor?
Yes, under Section 184, an agent does not need to meet the competency criteria of sound mind and majority. This reflects socio-economic considerations, as agency contracts primarily bind the principal, not the agent.
What is ostensible authority?
Ostensible authority arises when a principal’s representation leads a third party to reasonably believe that the agent has authority, even if such authority is not explicitly granted.
Case Example: In Harshad J. Shah v. LIC, the Supreme Court held that ostensible authority cannot be presumed if explicit limitations on an agent’s authority are communicated.
Can the agent’s interest in the agency prevent termination?
Yes, under Section 202, if the agent has a vested interest in the subject matter of the agency, such as a property right, the agency cannot be revoked without safeguarding that interest.
Case Example: Akbarbhai Kesarbhai Sipai v. Mohanbhai Ambabhai Patel (2019) emphasized that an agent’s interest must be considered before revocation.
Is consideration required for an agency contract?
No, as per Section 185, no consideration is necessary to create an agency, making it an exception under the Indian Contract Act.
What is the agent’s liability when appointing a sub-agent?
If the sub-agent is appointed with the principal’s consent, the principal is liable for the actions of both the agent and the sub-agent.
If appointed without consent, the agent is solely liable for the sub-agent’s actions.
Case Example: Anil & Co. v. Air India (1986) held Air India liable for the negligent act of its sub-agent, as delegation was authorized.
