Detailed Study Notes for Unit II

Unit-II: Contract of Agency

1. Meaning and Definition of Agency (Sections 182 & 183)

A. Statutory Definitions and Essentials

• Agent (Section 182): 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 act is done, or who is so represented, is called the principal.
• Capacity to Employ an Agent (Section 183): Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. (Principle: “He who acts through another acts through himself” — qui facit per alium facit per se).
• Capacity to be an Agent (Section 184): Any person can become an agent (even a minor or a person of unsound mind). However, a minor or an unsound person cannot be held accountable to the principal for their acts, protecting principals against incompetent subordinates while allowing agents to bind principals to third parties.

2. Modes of Creation of Agency (Sections 186 & 187)

An agency can be created through several recognized legal modes:

1. Express Agency (Section 187): Created by spoken or written words (e.g., executing a formal Power of Attorney or appointment letter).
2. Implied Agency (Section 187): Inferred from the conduct of the parties, their relationship, or the circumstances of the case.
   1. Illustration: If A allows B to habitually purchase goods on credit from C and pays for them, an implied agency is created, making A liable for subsequent purchases made by B.
3. Agency by Estoppel (Section 237): When a principal, by their conduct, words, or representation, leads third parties to believe that a person is their authorized agent, the principal is estopped from denying the agent’s authority later.
4. Agency by Necessity: Arises in emergency situations where an agent takes prompt, reasonable action to protect the principal’s property or interests without prior express authority.
   1. Illustration: A railway carrier carrying perishable fruits discovers during transit that they are beginning to rot. If the carrier sells them promptly to save whatever value remains, an agency of necessity is created.
5. Agency by Ratification (Sections 196 to 200): When acts are done by a person on behalf of another without knowledge or authorization, the principal can ratify those acts retrospectively, making the agency effective from the date of the original act.

3. Rights and Duties of an Agent

A. Duties of an Agent

1. Conduct business according to principal’s directions (Section 211).
2. Exercise reasonable skill and diligence (Section 212).
3. Render proper accounts to the principal on demand (Section 213).
4. Communicate with principal in cases of difficulty to obtain instructions (Section 214).
5. Not deal on their own account in agency business without the principal’s consent (Section 215).
6. Not make secret profits; must pay over all secret commissions or extra profits received (Section 216).

B. Rights of an Agent

1. Right of Retainer (Section 217): Retain out of sums received on account of the principal all moneys due for remuneration and advances.
2. Right to Remuneration (Section 219): Entitled to agreed remuneration upon completion of the assigned act, subject to absence of misconduct.
3. Right of Lien (Section 221): Right to detain goods, papers, and movable/immovable property of the principal until the amount due for commission and disbursement is paid.
4. Right to Indemnity (Sections 222 & 223): Indemnified against consequences of all lawful acts done in exercise of authority, and consequences of acts done in good faith believing the agent had authority.

4. Delegation of Authority (Delegatus Non Potest Delegare)

• General Rule (Section 190): An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally (delegatus non potest delegare — a delegate cannot delegate).
• Exceptions (When Sub-Agents may be appointed):
  1. Where the ordinary custom of trade permits delegation.
  2. Where the nature of the agency requires delegation.
  3. Where the principal expressly or impliedly consents to delegation.
• Sub-Agent vs. Substituted Agent:
  • Sub-Agent (Section 191): Appointed by the original agent under delegation; responsible to the original agent (except in fraud or willful wrong).
  • Substituted Agent (Section 194): A person named by the agent to act for the principal under express or implied authority; creates a direct privity of contract between the principal and the substituted agent.

5. Personal Liability of an Agent (Section 230)

A. General Rule

• An agent cannot personally enforce contracts entered into by them on behalf of their principal, nor can they be personally bound by them. The principal alone is liable.

B. Exceptions (When Agent is Personally Liable)

An agent is personally liable in the following circumstances:

1. Where the contract expressly provides for personal liability.
2. Where the agent acts for a foreign principal residing abroad.
3. Where the principal is undisclosed or unnamed.
4. Where the principal cannot be sued or possesses legal immunity.
5. Where the agent exceeds their authority or commits fraud/misrepresentation.

6. Termination of Agency (Sections 201 to 210)

An agency is terminated by:

1. Revocation of authority by the principal.
2. Renunciation of business by the agent.
3. Completion of the agency business.
4. Death or insanity of either the principal or the agent.
5. Adjudication of the principal as an insolvent under insolvency laws.

• Irrevocable Agency (Section 202): Where the agent has an interest in the property which forms the subject-matter of the agency, the agency cannot be terminated to the prejudice of such interest.

7. In-Depth Landmark Case Studies

Case Study 1: Agency by Ratification and Retrospective Effect

• Case Title: Bolton Partners v. Lambert
• Citation & Court: (1889) 41 Ch. D. 295 (Court of Appeal, England)
• Related Statutory Sections: Sections 196 and 197 of the Indian Contract Act, 1872 (Ratification).
• The Story & Real-Life Background: An agent without prior authority accepted an offer to purchase property from the defendant on behalf of a principal company. Later, the defendant attempted to withdraw his offer before the principal formally ratified the agent’s acceptance. The defendant argued that an offer can be withdrawn anytime before ratification.
• Legal Issues Involved: Whether subsequent ratification by the principal relates back to the date of the agent’s original unauthorized act, preventing third-party withdrawal.
• Final Judgement & Ratio Decidendi:
  • Ruling: The court held that subsequent ratification relates back to the date of the original contract made by the agent. Once ratified, the contract is treated as if it were authorized from inception, making the third party’s withdrawal ineffective.
  • Ratio: Ratification is retroactive; a valid subsequent ratification validates unauthorized acts from the beginning.

Case Study 2: Personal Liability of Agents Acting for Foreign Principals

• Case Title: Sadasiv Pattnaik v. Secy. of State
• Citation & Court: ILR (1923) 2 Pat 887 (Patna High Court)
• Related Statutory Sections: Section 230(2) of the Indian Contract Act, 1872.
• The Story & Real-Life Background: An agent entered into a commercial transaction within India on behalf of a foreign principal residing abroad. Disputes arose over performance, and the third party filed a suit against the local agent personally, invoking presumptions under agency trade customs.
• Legal Issues Involved: Whether an agent contracting on behalf of a foreign principal is personally liable under trade presumptions.
• Final Judgement & Ratio Decidendi:
  • Ruling: The court reaffirmed that under Section 230(2), an agent who contracts on behalf of a foreign principal is presumed to incur personal liability unless a contrary intention appears clearly from the contract terms.
  • Ratio: Unless explicitly exempted, agents contracting for foreign principals bear personal liability due to the practical difficulty of suing foreign entities abroad.

Quick Reference Guide: Unit-II Law of Contract–II

Unit Number	Topic / Concept Name	Relevant Sections Range	Core Description / Subject Matter
Unit-II	Definition & Creation of Agency	Sections 182 to 200	Principal-agent relationship, express/implied creation, estoppel, necessity, and ratification.
Unit-II	Rights, Duties & Delegation	Sections 201 to 216	Agent’s duties, right of lien/remuneration, and sub-agents (delegatus non potest delegare).
Unit-II	Personal Liability & Termination	Sections 217 to 238	Personal liability of agent (foreign principal), and termination by death, revocation, or insanity.