Contract of Agency notes — Unit 3

Modern commerce is impossible without agents. A corporation cannot physically sign a contract; it must do so through human agents. The law of agency allows a person to expand their legal personality through others.

⇒1.1 Statutory Definition

• Agent: A person employed to do any act for another, or to represent another in dealings with third persons.
• Principal: The person for whom such act is done, or who is so represented.

⇒1.2 The Underlying Maxims

Agency is founded on two fundamental pillars of Latin jurisprudence:

• Qui facit per alium, facit per se: 'He who acts through another, acts himself.' (When the agent signs a contract, in the eyes of the law, the principal's own hand signed it).
• Respondeat Superior: 'Let the master answer.' (The principal is liable for the agent's authorized acts).

No consideration is necessary to create an agency (Section 185). A person can be an agent for free. An agency can be created in several ways:

⇒1. Express Agency (Sec 187)

By words spoken or written. (e.g., A Power of Attorney deed).

⇒2. Implied Agency (Sec 187)

Inferred from the circumstances, things spoken/written, or the ordinary course of dealing.

• Agency by Estoppel (Sec 237): If a principal, by his words or conduct, induces a third party to believe that a person is his agent, the principal is 'estopped' (legally prevented) from later denying it.
• Agency of Necessity (Sec 189): In an emergency, an agent has the authority to do all acts to protect the principal from loss, as a person of ordinary prudence would do. (e.g., A truck driver carrying a cargo of tomatoes gets stranded in a flood. He sells the tomatoes locally before they rot. He becomes an agent of necessity).

What happens if a person acts on your behalf WITHOUT your authority? You have two choices: Disown the act, or 'Ratify' (approve) it.

⇒The Effect of Ratification

If a principal ratifies an unauthorized act, the same legal consequences follow as if the act had been performed with his authority from the beginning. Ratification relates back to the date of the act, not the date of ratification.

⇒Strict Conditions for Valid Ratification

• Must be done for the Principal: The agent must have told the third party he was acting for a principal. You cannot ratify an act someone did in their own name.
• Full Knowledge: Ratification is void if made by a person whose knowledge of the facts is materially defective (Sec 198).
• Cannot injure 3rd Party: Ratification cannot be done if it would subject a third person to damages or terminate a right (Sec 200). (e.g., If A, without authority from landlord B, gives a tenant a notice to quit. B cannot ratify it later to make the notice valid, because it injures the tenant's rights).

Agency is a Fiduciary Relationship (a relationship of absolute trust and good faith). The law imposes draconian duties on the agent.

⇒1. Duty to execute mandate (Sec 211)

The agent must conduct business according to the principal's directions. If he deviates and incurs a loss, he must make it good. If he deviates and makes a profit, he must account for it to the principal.

⇒2. Duty of Care and Skill (Sec 212)

The agent must act with the skill generally possessed by persons engaged in similar business. (If you hire an accountant as an agent, he must show the skill of a standard accountant).

⇒3. Duty to render Accounts (Sec 213)

The agent is bound to render proper accounts to the principal on demand.

⇒4. Prohibition on dealing on own account (Sec 215)

This is the strictest rule. An agent cannot deal in the business of agency on his own account without the principal's consent.

Example: A directs his agent B to buy a specific estate. B tells A 'the estate cannot be bought', but B secretly buys it himself under a fake name. A can legally compel B to hand over the estate at the price B bought it for.

⇒5. Prohibition on Secret Profits (Sec 216)

An agent cannot make any secret profit out of the agency. If he does, the principal can demand the entire profit.

Example: Principal A tells Agent B to sell a car for Rs. 1 Lakh. B finds a buyer willing to pay Rs. 1.2 Lakh. B sells it, gives A Rs. 1 Lakh, and pockets the 20k. A can sue B and recover the 20k secret profit.

The law also arms the agent with powerful rights against the principal.

⇒1. Right of Retainer (Sec 217)

The agent may retain, out of any sums received on account of the principal, all moneys due to himself in respect of advances made, or his legitimate remuneration.

⇒2. Right of Lien (Sec 221)

Unless the contract says otherwise, an agent has a lien on the principal's goods, papers, and property in his possession, until the amount due to him for commission/services is paid.

⇒3. Right to Indemnity (Sec 222-224)

• The principal must indemnify the agent against the consequences of all lawful acts done in the exercise of authority.
• The principal must also indemnify the agent against civil wrongs (torts) committed in good faith on the principal's orders.
• Exception (Criminal Acts): The principal is NEVER liable to indemnify the agent for a criminal act, even if the principal expressly ordered it.

An agency is terminated by:

• 1. The principal revoking his authority.
• 2. The agent renouncing the business.
• 3. The business of the agency being completed.
• 4. Either party dying or becoming of unsound mind.
• 5. The principal being adjudicated an insolvent.

⇒The Exception: Irrevocable Agency (Sec 202)

This is the most heavily tested concept. Where the agent has himself an interest in the property which forms the subject matter of the agency, the agency CANNOT be terminated to the prejudice of such interest.

Example: A owes B Rs. 1 Lakh. A gives B the authority to sell A's land and pay himself (B) out of the proceeds. A cannot revoke this authority, nor is it terminated by A's death, because B (the agent) has a direct financial interest in the subject matter.

⇒Summary of Master Concepts

• Agency: Built on Qui facit per alium facit per se. No consideration required.
• Ratification: Approving unauthorized acts. It relates back to the original date of the act.
• Duties (Fiduciary): Absolute ban on dealing on own account or making secret profits. The principal can seize all secret profits.
• Rights: Retainer, Lien, and Indemnity (but never for criminal acts).
• Irrevocable Agency (Sec 202): An agency 'coupled with interest' cannot be revoked, not even by death.

⇒University Exam Tips for this Unit (Premium Advice)

• The Secret Profit Problem: Examiners love framing problems where an agent sells property at a higher price and keeps the difference. Always cite Sections 215 & 216 and conclude that the Principal is entitled to recover every single rupee of the secret profit.
• Agency Coupled with Interest: If a question asks 'When can an agency not be revoked?', dedicate the entire answer to Section 202. Use the exact phrase 'Agency Coupled with Interest' as your main heading.
• Ratification Limits: Remember the exception in Sec 200. You cannot ratify an act if it hurts a third party's vested rights (like ratifying an unauthorized notice to quit after the notice period has started).