How the contract Act regulates the relation between the principal and agent-explain & illustrate
Introduction:
A contract is an agreement between two or more persons to do, or to refrain from doing, a particular thing in exchange for something of value. Contracts can normally be written using formal or informal terms, or they can be entirely verbal. If one side fails to live up to his/her/its part of the contract, there’s a “breach” of contract and certain remedies for solving the differences are available. The terms of the contract, meaning, who, what, where, when, and how of the agreement, define the binding promises of each party to the contract. Contracts are considered valid the moment that the offer is accepted. For example, if you shake hands and agree to purchase someone’s old TV for $30, you have a valid contract. The contract is complete when you give them the money and they give you the TV. Contracts can be as informal or as formal as the occasion calls for. Although, if you are making a deal for anything that is worth more than $500, it is usually a good idea to have something in writing, just in case something goes wrong with the agreement
Agent: An agent is a person employed to do any act for another or to represent another in dealing with the third persons. Agent is a person who acts in place of another. For example, opu appoints shamim, a broker, to sell his Maruti Car on his behalf. opu is the Principal and shamim is his agent .Thus,. The relationship between opu and shamim is called Agency.
Who can be an Agent?
Any individual capable of comprehending the act to be undertaken is qualified to serve as an agent. Since agent is a mere connecting link or a ‘conduit pipe’ between the principal and the third party, it is immaterial[1] whether or not the agent is legally competent to contract. Thus, there is no bar to the appointment of a minor as agent. However, in considering the contract of agency itself (i.e., the relation between principal and agent), the contractual capacity of the agent becomes important. Thus, no person who is not of the age of majority and of sound mind can become agent, as to be responsible to his principal (Sec.184).
The person for whom such act is done, or who is so represented, is called the “principal”.
An agent’s primary duties are:
- act on behalf of and be subject to the control of the principal;
- act within the scope of authority or power delegated by the principal;
- discharge his/her duties with appropriate care and diligence; and
- avoid conflict between his/her personal interests
An agent is liable to a principal when he/she acts without actual authority, but with apparent authority. An agent is liable to indemnify a principal for loss or damage resulting from his/her act.
The duties of agent towards his principal are:
1. To conduct the business of agency according to the principal’s directions (Sec.211). The duty of the agent must be literally complied with, i.e., the agent is not supposed to deviate from the directions of the principal even for the principal’s benefit. If he does so, any loss occasioned thereby shall have to be borne by the agent, whereas any surplus must be accounted for to the principal.
2. The agent should conduct the business with the skill and diligence that is generally possessed by persons engaged in similar business, except where the principal knows that the agent is wanting in skill (Sec.212).
3. To render proper accounts (Sec.213). The agent has to render proper accounts. If the agent fails to keep proper accounts of the principal’s business, everything consistent with the proved facts will be presumed against him. Rendering of accounts does not mean showing the accounts, but maintaining proper accounts supported by vouchers.
Example: Pawn directs Amir, his agent, to buy a particular house for him. Amar tells Pawan that it cannot be bought, but buys the house for himself. Pawan may, on discovering that Amar has bought the house, compel him to sell it to Pawan at the price he bought.
7. Not entitled to remuneration for misconduct (Sec.220). Agent who is guilty of misconduct in the business of agency is not entitled to any remuneration in respect of that part of the business which he has miscomputed.
8. Not to disclose confidential information supplied to him by the principal.
9. To take all reasonable steps for the protection and preservation of the interests entrusted to him when the principal dies or becomes of unsound mind (Sec.209).
Rights of agent:
Agent has a number of rights these are:
1. Right to remuneration (Secs.219-220). Agent is entitled to his agreed commission or remuneration and if there is no agreement, to a reasonable remuneration. But the remuneration does not become payable unless he has carried out the object of agency, except where there is a contract to the contrary. When the object of agency is deemed to have been carried out or the act assigned to the agent is completed would depend on the terms of the contract.
Example: Pawar appoints Amar, a broker. Amar is entitled to his commission when he has procured a party who is willing to negotiate on reasonable terms and to desirous of entering into a contract with Pawar.
2. Right of retainer (Sec.217). Agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business and also such remuneration as may be payable to him for acting as agent. This is known as agent’s right of retainer.
3. Right of lien (Sec.221). In the absence of any contract to the contrary, agent is entitled to retain goods, papers and other property, whether movable[2] or immovable of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him. This lien of the agent is a particular lien confined to all claims arising in respect of the particular goods and property. By a special contract, however, agent may get a general lien extending to all claims arising out of the agency. Since, the word ‘lien’ means retaining possession; it can be enjoyed by the agent only where the goods or papers are in actual or constructive possession of the agent. The right of lien will, therefore, is lost where he parts with the possession of goods or papers. But if the possession is obtained from the agent by fraud or unlawful means, his lien is not affected by the loss of possession.
Who can be a Principal?
Any person who has the legal capacity (meaning that they are not insane, or in certain circumstances a minor) to perform an act may be a principal and empower an agent to carry out that act. Persons, corporations, partnerships, not-for-profit organizations, and government agencies may all be principals and appoint agents.
Duties of a principal:
The rights of agent are in fact the duties of the principal. Thus a principal is (i) bound to indemnify the agent against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him (Sec.222); (ii) liable to indemnify agent against the consequences of an act done in good faith, though it causes an injury to the rights of third persons (Sec.223); (iii) bound to compensate his agent in respect of injury caused to such agent by the principal’s neglect or want of skill (Sec.225).
Liability of principal to third parties
1. Agent being a mere connecting link binds the principal for all his acts done within the scope of his authority (Sec.226).
2. The principal is liable for the acts of the agent falling not only within the actual authority but also within the scope of his apparent or ostensible authority.
3. Where agent exceeds his authority and the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority, is binding as between him and the principal (Sec.227).
What is the purpose of this relationship (called “Agency”)?
A contract to be made by an agent on behalf of a principal is considered to be the contract of the principal and not that of the agent. It allows the principal to authorize somebody to carry out her duties, either for a specific purpose (i.e., purchasing a house) or generally (i.e., to conduct many transactions). The agency relationship is usually entered into by informal agreement, but also can occur by formal agreement (in certain cases, the agency relationship must be specified in writing). The acts must be legal (i.e., principal cannot hire agent to kill the professor).
What is the basis of the Agency relationship?
Inherent in the Principal-Agent (P-A) relationship is the understanding that the agent will act for and on behalf of the principal. The agent assumes an obligation of loyalty to the principal that she will follow the principal’s instructions and will neither intentionally nor negligently act improperly in the performance of the act. An agent cannot take personal advantage of the business opportunities the agency position uncovers. A principal, in turn, reposes trust and confidence in the agent. These obligations bring forth a fiduciary relationship of trust and confidence between P and A.
It is good communication between agent and principal which ensures that an agency agreement operates without difficulties and to the mutual advantage of both parties. Many legal agency disputes arise because of lack of communication — either the agent not voicing concerns or the principal failing to respond to queries from the agent. In some cases agents do not visit customers as often as they should nor complete necessary paperwork or find it hard to tackle new electronic methods of reporting. The typical agent is good at talking and good at selling and sometimes not so good at paperwork. That may not matter but the principal clearly has to assess each agent on an individual basis in order to obtain the best performance they can from the agent. The principal will need to monitor the performance of the agent. The relationship between a Principal and an Agent is fiduciary which requires the Agent to be loyal to the Principal
A commission agent is agent who is employed to buy or sell goods or transact business. The remuneration that he gets for the purpose is called the commission. A commission agent is not liable in case the third party fails to carry out the agreed obligation. A commission agent may have possession of the goods or not. His lien in case of goods in his possession is a particular lien. A Del credere agent is one who, in consideration of an extra remuneration, called a del credere commission, guarantees the performance of the contract by the other party.
TERMINATION OF AGENCY:
By revocation by the principal 2.
On the expiry of fixed period of time 2. on the performance of the specific purpose. 4. Insanity or Death of the principal or Agent. 5. An agency shall also terminate in case subject matter is either destroyed or rendered unlawful. 6. Insolvency of the Principal. Insolvency of the principal, not of the agent, terminates the agency. 7. By renunciation of agency by the Agent. LECTURES BY PROF. S N GHOSH 17
Termination
An agent’s authority can be terminated at any time. If the trust between the agent and principal has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that the agent might conclude during a period of notice.
As per sections 201 to 210 of the Indian contract act 1872, an agency may come to an end in a variety of ways:
- Withdrawal by the agent – however, the principal cannot revoke an agency coupled with interest to the prejudice of such interest. An agency is coupled with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity (illustrations to section 201);
- By the agent renouncing the business of agency;
- By the business of agency being completed;
- By the principal being adjudicated insolvent (section 201).
The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (section 204), though he can always do so, before such authority has been so exercised (section 203).
This has become a more difficult area as states are not consistent on the nature of a partnership. Some states opt for the partnership as no more than an aggregate of the natural person who have joined the firm. Others treat the partnership as a business entity and, like a corporation, vest the partnership with a separate legal personality. Hence, for example, in English law, a partner is the agent of the other partners whereas, in Scots law where there is a separate personality, a partner is the agent of the partnership. This form of agency is inherent in the status of a partner and does not arise out of a contract of agency with a principal. The English partnership act 1890 provides that a partner who acts within the scope of his actual authority (express or implied) will bind the partnership when he does anything in the ordinary course of carrying on partnership business. Even if that implied authority has been revoked or limited, the partner will have apparent authority unless the third party knows that the authority has been compromised. Hence, if the partnership wishes to limit any partner’s authority, it must give express notice of the limitation to the world. However, there would be little substantive difference if English law was amended: partners will bind the partnership rather than their fellow partners individually. For these purposes, the knowledge of the partner acting will be imputed to the other partners or the firm if a separate personality. The other partners or the firm are the principal and third parties are entitled to assume that the principal has been informed of all relevant information. This causes problems when one partner acts fraudulently or carelessly and causes loss to clients of the firm. In most states, a distinction is drawn between knowledge of the firm’s general business activities and the confidential affairs as they affect one client. Thus, there is no imputation if the partner is acting against the interests of the firm as a fraud. There is more likely to be liability in tort if the partnership benefited by receiving fee income for the work negligently performed, even if only as an aspect of the standard provisions of vicarious liability. Whether the injured party wishes to sue the partnership or the individual partners is usually a matter for the plaintiff since, in most jurisdictions, their liability is joint and several. The Principal can terminate an Agent’s authority at any time without having to give notice. If the trust between the Agent and Principal has broken down, it is not reasonable to allow the Principal to remain at risk in any transactions that the Agent might conclude during a period of notice.
The relation of principal and agent can only be terminated by the act or agreement of the parties to the agency or by operation of law. “An agency, when shown to have existed, will be presumed to have continued, in the absence of anything to show its termination, unless such a length of time has elapsed as destroys the presumption”[i].
The agent’s duty to act on behalf of the principal comes to an end on the termination of agency. The timeframe for termination of an agency can be stipulated by a particular statute or instrument. In such a case, if the instrument specifies in plain and unambiguous terms that an agency will terminate without action on the part of the principal or agent upon the expiration of the time specified in the instrument, the agency will in fact, terminate [ii].
An agency contract may be cancelled on the basis of an express stipulation in the contract. In such a case, the parties will have a right of cancellation at the will of either party or upon the happening of a contingency or the nonperformance of some expressed condition. However, the principal can cancel the agency contract for any justifiable cause.
An agency contract to be performed to the principal’s satisfaction can generally be canceled at will by the principal. Similarly, a power of attorney constituting a mere agency may be revoked at any time, with or without cause.
A change in value of the subject matter or a change in business conditions may terminate or suspend the agent’s authority if the agent should reasonably infer that the principal would not consent if aware of such facts. Similarly, a change in legal identity of, or merger by, the principal is a valid ground for termination of an agency contract.
Termination by One Party, As a general rule, principal can terminate the agency relationship.. The principal’s act is a revocation of authority although both parties may have the power to terminate? Because agency is consensual relationship, and thus neither party can be compelled to continue in the relationship
Termination by Operation of Law: Certain events will terminate agency authority automatically because their occurrence makes it impossible for the agent to perform or improbable that the principal would continue to want to performance. We look at these events here. Note that when an agency terminates by operation of law, there is not duty to notify third persons unless the agent’s authority is coupled with an interest.
Death or Insanity.The general rule is that the death of insanity of either the principal or the agent automatically and immediately terminates an ordinary agency relationship. Knowledge of the death or insanity is not required. Agent’s transactions that occur after the death of the principal are not binding on the principal’s estate.
Impossibility. When the specific subject matter of an agency is destroyed or lost, the agency terminates. Similarly, when it is impossible for the agent to perform the agency lawfully because of war or a change in the law, the agency terminates.
Changed Circumstances. When an event occurs that has such an unusual effect on the subject matter of the agency that the agent can reasonably infer that the principal will not want the agency to continue, the agency terminates.
Bankruptcy. If either the principal or the agent petitions for bankruptcy, the agency is usually terminated. In certain circumstances, as when the agents financial status is irrelevant to the purpose of the agency, the agency relationship may continue. Insolvency (defined as the inability to pay debts when they become due or when liabilities exceed assets), as distinguished from bankruptcy, does not necessarily terminate the relationship.
War. When the principal’s country and the agents country are at war with each other, the agency is terminated. In this situation, the agency is automatically suspended or terminated because there is no way to enforce the legal rights and obligations of the parties.
Circumstances under which agency terminates or comes to an end (SEC.201)
1. On revocation by the principal. The principal may, by notice, revoke the authority of the agent at any time. Where the agent is appointed to do a single act, agency may be revoked any time before the commencement of the act. In case of a continuous agency, notice of revocation is essential to the agent as well as to the third parties who have acted on the agency with the knowledge of the principal.
2. On the expiry of fixed period of time. When the agency is for a fixed period of time, it comes to an end on the expiry of that time.
3. On the performance of the specific purpose. Where agent is appointed to do a particular act, agency terminates when that act is done or when the performance becomes impossible.
4. Insanity or death of the principal or agent. Death or insanity of the principal or the agent, terminates the agency. But, agent, in such a case, should take all reasonable steps for the preservation of property, on behalf of the legal representatives of the principal (s.209)
5. An agency shall also terminate in case the subject matter is either destroyed or rendered unlawful.
6. Insolvency of the principal. Insolvency of the principal, not of the agent, terminates the agency.
7. By renunciation of agency by the agent. If principal can cause termination of agency by revocation, agent may renounce his agency by giving a sufficient notice to that effect. Where, however, agency is for a fixed period and the agency is renounced without a sufficient cause, the principal must be compensated (Sec.205).
When termination of agency takes effect?
1. The termination of the authority of agent does not, so far as regard the agent, takes effect before it becomes known to him (Sec.208).
2. As regards third parties, they can continue to deal with the agent till they come to know of the termination of the authority (Sec.208).
Example: A directs B to sell goods for him and agrees to give B 5% commission on the price fetched by the goods. A afterwards, by a letter revokes B’s authority. B, after the letter is sent, but before he receives it, sells the goods for Rs 100. The sale is binding on A and B is entitled to five rupees as his commission.
3. The termination of the authority of agent causes the termination of authority of all sub-agents appointed by him.
A contract may terminate by mutual consent in any of the following ways: -q a. Novation (substitution) b. Recession (cancellation) c. Alteration C, by subsequent impossibility D, by operation of law E. By breach 2.12 REMEDIES FOR BREACH OF CONTRACT (SECTIONS 73-75) • As soon as either party commits a breach of the contract, the other party becomes entitled to any of the following reliefs: – a) Recession of the contract.
Under section 201 to 210 an agency may come to an end in a variety of ways:
(i) By the principal revoking the agency – However, principal cannot revoke an agency coupled with interest to the prejudice of such interest. Such Agency is coupled with interest. An agency is coupled with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity. (Illustrations to section 201)
(ii) By the agent renouncing the business of agency;
(iii) By the business of agency being completed;
(iv ) By the principal being adjudicated insolvent (Section 201 of The Indian Contract Act. 1872)
Bibliography:
. http://www.slideshare.net/MdFeroz/chapter-02-contract-act-1872-1229869798371959-1
i] Merchant v. Foreman, 182 Kan. 550, 555 (Kan. 1958)
[ii] Tabor v. Mason Dixon Lines, Inc., 196 Tenn. 198 (Tenn. 1953)
[iii] Cinefot International Corp. v. Hudson Photographic Industries, 13 N.Y.2d 249, 252 (N.Y. 1963)
[iv] Beaucar v. Bristol Federal Sav. & Loan Asso., 6 Conn. Cir. Ct. 148, 159 (Conn. Cir. Ct. 1969)
[v] Hotchkiss v. Nelson R. Thomas Agency, Inc., 96 Cal. App. 2d 154, 158 (Cal. App. 1950)
[vi] Renchie v. John Hancock Mut. Life Ins. Co., 174 S.W.2d 87 (Tex. Civ. App. 1943)
[vii] Preszler v. Dudley, 153 Cal. App. 2d 120, 124 (Cal. App. 2d Dist. 1957)
[viii] Wilson Sullivan Co. v. International Paper Makers Realty Corp., 307 N.Y. 20, 26 (N.Y. 1954)
[ix] Carleno Coal Sales, Inc. v. Ramsay Coal Co., 129 Colo. 393, 398 (Colo. 1954)
[x] Bronken’s Good Time Co. v. J.W. Brown & Assocs., 203 Mont. 427 (Mont. 1983)
[xi] Van Houten v. Trust Co. of Chicago, 413 Ill. 310 (Ill. 1952)
[xii] Morton Marks & Sons, Inc. v. Hill-Chase Steel Co., 196 Va. 268 (Va. 1954)
[xiii] Phoenix Title & Trust Co. v. Grimes, 101 Ariz. 182 (Ariz. 1966)
[i] Andrews v. Schram, 562 N.W.2d 50 (Neb. 1997)
[ii] E. S. Harper Co. v. General Ins. Co., 91 Idaho 767, 771 (Idaho 1967); Garl v. Mihuta, 50 Ohio App. 2d 142 (Ohio Ct. App., Lorain County 1975)
[viii] Western Smelting & Refining Co. v. First Nat’l Bank, 35 N.W.2d 116 (Neb. 1948)
[ix] Lawrence Warehouse Co. v. Twohig, 224 F.2d 493 (8th Cir. Iowa 1955)
http://www.ruf.rice.edu/~schuler/principal-agent.html
http://en.wikipedia.org/wiki/Agency_agreement
http://agency.uslegal.com/duration-and-termination-of-agency/
http://www.legalmatch.com/law-library/article/termination-of-an-agency-relationship.html
http://www.artslaw.com.au/info-sheets/info-sheet/agency-agreements/
http://www.4shared.com/linkError.jsp?nowww=197
Michigan Law Review, Vol. 55, No. 8 (Jun., 1957), pp. 1166-1168
Michigan Law Review, Vol. 46, No. 1 (Nov., 1947), pp. 112-114
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