Research ArticleContracts

Obligations of an Agent in a Contract of Agency: A Comparative Analysis to the English Laws


Author: Chandan Kumar, 2nd year student at Tamil Nadu National Law University.

Abstract

Agent plays a very crucial role in a contract. All current legal systems accept agency as a necessary component of the society. In order to make an agency contract efficient and smooth, the Indian Contract Act of 1872 establishes a complete list of structural terms to govern the agent’s rights, obligations, and responsibilities, as well as describing how the agent plays an important role in the contracting process. The legislation not only clarifies the relationship between the principal and the agent, but it also provides for it in particular provisions. This article tries to comparatively analyse the obligations or duties to be performed by an agent in agency contract under Indian law with the English laws. This article explores the scope and limits of an agent under the Indian Laws probing into the rulings of various landmark cases as well as perspectives regarding the subject matter in English Laws.

Introduction

In today’s society, there are many advances and changes in each sector consistently, and the legal sector has no exemption. The formation of an effective agency contract is the same as an ordinary contract, with many complexities. The Indian Contract Act, 1872[1] (hereinafter ICA, 1872) provides extensive provisions on the rights, obligations, and responsibilities of the agent, and clarifies how the agent plays a key role in the contract process. The act not only helps us to comprehend the principal-agent relationship but also has certain provisions to explain the relationship.

An agency is primarily separated into three main parts, namely the principal, the agent, and the third party. To make a contract successful, the agent must play its role correctly, because he plays a key role in performing the contract business. An agent is a person who conducts business on behalf of another person. This theory originated from the Costace v. Forteye case ruled in the City of London in 1389.[2]

The relationship between a principal and agent arises when one person i.e., the principal possesses a certain kind of power or authority over another person i.e., the agent. For specific or general purposes, the agent acts on behalf of the principal. In doing so, the agent is expected to fulfil the wishes of the principal. The principal is the party who authorizes others to act on his behalf, and the agent is the person who has the right to act on behalf of the principal.

The Hon’ble Supreme Court in the case of Syed Abdul Khader[3] observed the definition of the term as “the expression ‘agency’ is used to connote 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 relation of agency arises whenever one person called the agent has the authority to act on behalf of another called the principal and consents to act”.

Chapter 10 of the Indian Contract Act, 1872 talks about laws relating to the agency. The functions of an agent are essential for the operation of the contract and this project is an attempt to understand those functions i.e., rights and obligations.

In short, the definition of agent attempts to ingeniously reveal the difference between the legal status of an agent and the legal status of an ordinary person hired to perform a certain act. The essence of the problem is that in the case of an agent, the principal authorizes the agent to act on his behalf and for his benefit, and while doing such an act, he can empower the principal to establish a contractual relationship with the other party.[4]

Agent is often defined as a term where a person generally executes the task assigned by the principal after correctly understanding it. Hiring a contractor to execute house repairs, or hiring an advocate for legal advice and work, or engaging with investment advisors to diversify the stock portfolio are typical examples of the principal-agent relationship. In each instance, the person requesting professional services or advice is the principal, and the person engaged in professional work is an agent.

The term agency is used to describe a wide range of activities. Lord Herschell in a case observed that no word is more common and abused more often than an agent. In a popular sense, a person might be called to be an agent, even if it is essential to imply that he is an agent when attempting to create a circumstance with further legal requirements. As far as the agent is concerned, the use of this term is only misleading.[5] Usually, in the business world, the use of the term “agent” is complementary, not the legal meaning of the term.

The agency is divided into a general agency or special agency in terms of authority. General agency includes brokers, elements, partners, and any person involved in the process of fulfilling generally recognized positions. From the perspective of the nature of the job or position, the scope of power is obvious; The latter refers to the person who has been assigned to a specific task or occasion. Special agents are only authorised to perform a specific act for a certain occasion or purpose that is outside of their normal business or professional responsibilities.[6]

This division is developed in Jacob v. Morris[7] to ascertain the agent’s competence because the general agent possesses full superficial power due to the role assigned. Although the principal may impose special restrictions that the other party does not know about, the principal is still bound by his conduct under that power. The principal is not obligated by the special agent’s conduct since he has no apparent authority outside the extent of his appointment, notwithstanding as to whether the main party to contract is aware that the agent’s conduct does not surpass its bounds.

In the Polestar Electronics Private Limited v. Additional Commissioner[8], it has been established that perhaps the agent’s actions inside the realm of its authority obligate the principal. The agent’s contract and the duties stemming from the agent’s actions can be carried out in such a way and have the same legal implications as the principal’s contract and actions.[9] There are some disputes about the authority of the agent, especially its scope.[10] The agent must accomplish the act within its own power in order for this consequence to occur.[11]

Obligations of Agent Towards Principal Under Indian Law

Section 182[12] of the ICA, 1872 defines the term “Agent” as a person who is hired to do any act for others or to deal with third parties on behalf of others and “Principal” as the person for whom the act is performed. It provides us with brief information about who the agent is and what the relationship between him and the principal is. It is worth noting that even if the agency depends on the true nature of the relationship, it is necessary to consider the issue of establishing an agency.

In Babulal Swarupchand Shah v. South Satara Merchant Association[13], the Bombay High Court observed that no formal contract is required to form an agency. As stipulated in section 183 of the Indian Contract Act, 1872 the important thing is that the principal should have reached the age of majority and is of sound mind.

The principal and agent may decide their mutual rights and responsibilities once an agency contract is established. Their common cause may be expressed or implied and could be more or less inferred from a specific institution’s nature and circumstances. Obligations specific to some types of agents are specified by their use, such as brokers. However, unless a special contract excludes or modifies it, the law usually imposes certain general obligations on each agent. We will now deal with some of these obligations in detail.

  1. Duty to execute mandate – The agent’s primary responsibility is to perform the tasks assigned to him by the principal. He should undertake those responsibilities entrusted to him in the best possible way, and he will be entirely liable for the loss of the principal in case of any mistake.

In the case of Pannalal Jankidas v. Mohanlal[14], this very same stand was repeated by the Hon’ble Supreme Court wherein the agent was obliged to compensate the principal because the goods were destroyed as a result of explosion for which the principal had commanded the agent to insure, however, the agent billed the premium charge to the principal but didn’t receive the insurance.

  1. Duty to follow Instructions or Customs – As enshrined in Section 211 of the ICA, 1872 the overreaching duty of the agent is to follow the principal’s instructions and control or perform his actions in a very sense whereby his powers are not exceeded.
  2. Duty of Reasonable Care and Skill – Section 212 of the ICA, 1872 stipulates that in an agency contract, the agent is expected to conduct business with the skills and devotion as those who usually engage in the same type of business. He must carry out his duties promptly and conscientiously, and if he fails to do so, he is responsible for compensating the principal for his negligence, lack of skills, or the direct consequences of misbehaviour.[15]

In all such cases, the agent mistakenly informed the principal and caused losses as a result of misconduct, and he shall be accountable to the principal.[16] However, he shall not be liable for any loss or damage caused indirectly or remotely due to such negligence, insufficient skills, or improper behaviour. Similarly, if the agent meets the requirements needed by the business in which he is involved, he shall not be responsible for compensating the principal.

  1. Duty to Avoid Conflict of Interest – There are two aspects of this obligation regulated by sections 215 and 216 of the ICA, 1872. To begin with, as stated in Section 215, in the following cases, the agent operates on his own without obtaining approval from the principal or sometimes without understanding the exact state of the principal, or the principal knows that certain material facts are unfairly obscured, that the agent handles the business in a manner that is detrimental to the principal, the principal seems to have all the authority to refuse the transaction.[17] However, within a reasonable period after the fact is found, the denial must be made.

Section 216 stipulates the other aspect of this obligation as long as the agent conducts transactions in his own account instead of in the name of the principal without knowledge of the principal, and profit from such transactions, the principal has the right to demand such benefit.

  1. Duty not to Make Secret Profit – Secret profit refers to any benefits and benefits obtained by an agent whose value far exceeds the agreed remuneration, and if he is not the agent, he will never get it. The principal has the right to require the agent to earn an interest in illegal profits.[18]

In addition, in the case of Jaiswal Coal Co., the court decided that if the agent hides the exact essence of the agreement, he would be unable to perform his obligations, and the principal will be entitled to reclaim all of the profit made by the agent.[19]

  1. Duty to Remit Sums – According to section 218 of the Indian Contract Act 1872, the agent is obliged to repay the principal all the money he receives, subject to deductions in accordance with section 217 of the Indian Contract Act 1872. In all aspects of the agency, the agent must ensure that it pays all the money received to the principal immediately. Regardless of whether the money received is from an invalid transaction or an illegal transaction, the agent must perform this duty.

The agent did not account for the money he obtained from a transaction considered null and unlawful in Bhola Nath v. Mul Chand[20] and used this illegality of the contract as a shield. It was ruled that if an agent collects money on behalf of the principal under an invalid or illegal contract, he cannot use the illegality of the contract to retain payment to the principal whose illegality has been eliminated by the other party by paying the sum.

This part just permits the agent to get any sort of financial payment owing to the principal and has no authority over the transaction, he just goes about as an impetus and in situations where the principal couldn’t have upheld the payment additionally doesn’t empower the agent to save it for his own utilization.[21]

Likewise as expressed over that the agent additionally needs to play out this obligation regardless of whether the payment emerges from a void or illicit exchange, in the case of National Shipping Company of Saudi Arabia v. Sentrans Industries Ltd, the Bombay High Court opined that performing such sort of function in the interest of the principal would not be right and the agent would be entitled to counterclaim, and would not be required to deposit money to protect his principal.[22]

  1. Duty to Maintain Accounts – Among different obligations of the agent, one of the most significant obligations is to keep up accounts from the principal. An agent is needed to deliver valid and complete records to the principal when requested. This is significant on the grounds that it causes the agent to play out his different obligations well; for example, this encourages him to transmit the appropriate amount to the principal. As an aspect of the obligation, the agent is responsible for presenting vouchers on the side of the expenses incurred. In Ganeshdas Lokuram v. Gangaram Dhingra[23], the court ruled that this obligation likewise reaches out to a worker who receives a salary whose nature of business is that of an agent.

It is appropriate to take note of that despite the fact that there is no such provision in this Act which empowers an agent to initiate a lawsuit against the principal for accounts, the Supreme Court in the case of Narandas Morardas Gaziwala v. S.P.A.M. Papammal[24] and Nagpur High Court in Haji Habib Haji Pir Mohamad v. Bhimakchand Jankilal Shop[25], observed that the caveat of the Indian Contract Act is not comprehensive in such regard. The agent can sue his principal under specific situations, and it really is a fair remedy accessible for an agent.

Obligations of Agent Towards Principal Under English Law

When it comes to English law, the subject of the agency is a very complex subject, an area that has not yet been explored. Unlike Indian law under British law, no one will act as another party’s agent according to the other party’s wishes.[26]

Each and every contract sets out the rights and duties of the agent as well as the principal to perform their part. However, obligations can be implicit in the agency, and they can also arise without a written agreement, each country has a different approach to this. Historically, British courts are unwilling to impose terms on commercial contracts unless they are fairly comprehensive in terms of expression, but if the agency is not commercial, it may imply a large number of implied terms. Some of those obligations of an agent are as stated below:

  1. The law of equity, which is followed in almost all cases, stipulates that if the principal sends an order to an agent and entrusts him to carry out insurance, and the agent does not perform his part, the agent will be regarded as the insurer himself.[27] In this case, the agent is usually liable to the principal for the losses suffered due to the negligence on the part of the agent in executing the mandate.[28] The same principle has been reiterated in Indian law in the case of Pannalal Jankidas.
  2. The agent must follow the principal’s reasonable instructions. If they fail to do so, the responsibility for any misconduct may be borne by the agent.[29] If the agent’s fees depend on specific instructions and they fail to implement it, the agent may not be entitled to any payment. Agents must do so with reasonable care and skill, otherwise, they may be partially responsible.

In various cases, it is clearly stated that any non-compliance or deviation from the instructions is sufficient to make the agent absolutely liable for the loss.[30] As long as these instructions are not clearly stated, the agent should follow the most common customs of the same type of business.[31]

The regulations regarding agency are somewhat similar in the USA as agents must abide by their terms of authority and strictly abide by the instructions of their principals. When the agent voluntarily violates the instructions provided, and shall bear the consequences, and, except for the exceptions described under law, the agent shall be liable for the losses caused thereby, unless the principal approves such behaviour with full knowledge of the facts.[32]

  1. The English law stipulates that an agent should have sufficient legal knowledge, skill, and reasonable care to fully protect the interests of the principal during the agency’s operation and these skills rely on the nature of the profession.[33]

US agency law states that while appointing an agent, he implicitly guarantees that he will exercise reasonable skill, caution, and diligence in the performance of the agency. It is generally stipulated that when an agent is paid for the services provided, it is required to have specific skills, a degree of caution and diligence, and sufficient, usually by a person with common talent and prudence to perform similar transactions.[34]

  1. The aspects enshrined in sections 215 & 216 of the Indian Contract Act, 1872 are widely followed in England which states that the principal can repudiate the transaction performed by an agent where certain were dishonestly concealed. However, some reasonable time restrictions are there for such repudiation.[35] The English laws explain that since the agent has established a fiduciary relationship with the principal[36], he is obliged to not perform such acts that may cause conflicts among personal interest and his duty.[37]

Moreover, in the USA, the law of agency stipulates that as long as the agent is supposed to deal with himself in a way that may deal with a third person, then, in this case, the interests of himself and his principal will inevitably become oppugnant, and the principal can veto this kind of transaction, regardless of whether the transaction caused a loss to him, also ignoring its authenticity.[38]

  1. Under the common law, an agent is obliged to be honest and trustworthy to the principal, and shall not obtain improper benefits using the position of the agent. In the case of Harrington v. Victoria Graving Dock Co.[39], it was given that accepting bribes falls within the scope of secret profits. If an agent earns a commission in addition to fixed remuneration, then the principal can ask for the commission and the agent is bound to give it.[40]

However, if the agent only uses the knowledge gained in the business process and profits from it, if he neither uses the principal’s property nor transfers any of his opportunities, he shall not be liable for the principal.[41]

The situation in the USA is that agents who are hired to make purchases on behalf of the principal are not allowed to purchase products from themselves.[42] Similarly, an agent designated for sale cannot be a buyer himself.[43] It also clearly pointed out that it is not allowed to accept any form of customary evidence and convert the broker that the employing employer purchased for his employer into the client who sold it to his client unless the employer understands the arrangement and agrees to the transaction. The basis of this custom. It also stipulates that the agent is not allowed to do indirectly what it is not allowed to do directly, without the knowledge of the employer; for example, by selling to a third person acting in his interest.[44]

  1. The agent must properly account for the property and money received for the principal. Otherwise, it may lead to theft and conversion compliance, or even breach of duty. In the case of Yasuda Fire and Marine Insurance Co.[45], the court ruled that since the agent has been entrusted with authority, it is obliged to provide the most comprehensive and accurate accounts for the principal to conduct transactions with third parties. The principal has the right to know the personal contractual rights and obligations between him and the third party, as well as the payment method he has the right to obtain from the agent.
  2. Agency laws often use the well-known principle of Delegata potestas non potest delegari, which implies an agent appointed to perform a specific job cannot further delegate it to someone else. This is mostly on the grounds that the principal chooses a specific person as the agent. The reason is simple because he has trust and confidence in this person.[46]

This obligation was dealt with in the case of John McCain and Co. v Pow[47], where the court clearly stipulated that the agent had no right to do so unless the principal specifically authorized the real estate agent to entrust the work to others or appoint a sub-agent.

Comparative Analysis

Agents mainly undertake two types of duties: fiduciary duties and general duties. A fiduciary duty is an obligation to always act in the interests of the principal; duties here include avoiding self-transactions and retaining confidential information. The general obligations assumed by an agent include various obligations that any employee may assume: skill and care, good behaviour, maintaining and providing accounts, to not endeavour impracticable or unrealistic obligations, obeying, and providing information.[48]

Both the countries, India and England, follow the common law system and in addition to relying too much on statutes and regulations, judicial decisions are also very important. For example, since there are limited laws or regulations to determine the obligations under the contract of an agency, it is necessary to rely on decided case law. Here, the precedents have an authoritative value and also serve as a guiding principle.

The obligations of an agent towards the principal are somewhat similar in Indian law as well as English laws. Both laws find the obligation of an agent as to:

  1. Execute Mandate – The primary duty of an agent to perform in the best way and he can be held liable if any loss is caused because of his fault.
  2. Follow Instructions or Customs – The agent must follow the principal’s instructions to proceed with work and comply with the principal’s authority.
  3. Reasonable Care and Skill – Agents must appropriately use reasonable skills and due diligence to perform their duties.
  4. Avoid Conflict of Interest – An agent must perform such acts that do not cause conflict between his personal interest and the principal’s interest. However, if he does so, he may be held liable.
  5. Not to make Secret Profit – An agent must not misuse his position to make a profit without the knowledge of the principal.
  6. Remit sums received for the principal – The agent is obliged to pay all the money received from its account to the principal and has the right to deduct his legal charges.
  7. Communicate to the principal – The duty of the agent is to make all reasonable efforts to communicate with the principal and seek instructions or orders in cases of difficulties.
  8. Maintain Accounts – Agents must provide appropriate accounts to their principals as required.

However, in the Indian Contract Act, 1872, the provisions related to the delegation of authority is not given as obligation of an agent instead it’s given in the view of the conditions when an agent cannot delegate and in English law, the provision of the delegation of authority is clearly established and dealt in various cases as an obligation.

Conclusion

In the agency process, all the above-mentioned rights, obligations, and powers of the agent are of great significance. An agent assumes a critical part in the agency, and subsequently, there lies an incredible level of obligations concerning the business. The Indian Contract Act of 1872 reasonably implemented a successful procedure of agency formulated to protect and maintain the interests of agents.

The agent shall perform his obligations most genuinely and conscientiously, and shall try to protect and safeguard the interests of the principal, as a result, he can enjoy his rights. Intermediary agents need to keep up their position and must not resort to illegal activities when conducting business activities. Agency is an essential and inescapable form of contract; it will continue to maintain its pertinence in the public arena. It is worth noting that agents usually have greater discretion, but are bound by law to adhere to the principal’s legal instructions and orders.

To a certain extent, the agent can be regarded as a kind of high-level servant who delivers his obligations for the principal as well as makes him responsible to the third party for his activities in the form of his obligations. The main purpose of the paper is to emphasize the responsibilities and basic rights of agents and explain how agents can evolve and execute their obligations in divergent circumstances. The article also emphasized the fact that, in the judicial interpretation, the provisions of the act do not compensate the agent for the loss caused by his mistake, but the third party. The agent cannot conduct or carry out his tasks beyond the scope of its powers, and if he violates the authority, the principal has the authority to sue him for compensation.


References

[1] The Indian Contract Act 1872, No. 09 of 1872.

[2] Awet Hailezgi & Addisu Damtie, Genesis and Development of the Law of Agency, Abyssinialaw (Mar. 02, 2012), https://www.abyssinialaw.com/online-resources/study-on-line/item/383-genesis-and-development-of-the-law-of-agency.

[3] Syed Abdul Khader v. Rami Reddy, (1979) 2 SCC 601.

[4] Mohesh Chandra Basu v Radha Kishore Bhattacharjee, (1907-08) 12 CWN 28, 32.

[5] Kennedy v. De Trafford, 1897 AC 180, 188(HL).

[6] Amrit Lal C Shah v. Ram Kumar, AIR 1962 Punj. 325.

[7] Jacobs v. Morris, [1902] 1 Ch 816.

[8] Polestar Electronics Private Limited v. Additional Commissioner, (1978) 1 SCC 636.

[9] The Indian Contract Act 1872 §226.

[10] Municipal Corporation, Delhi v. Jagdish Lal, (1969) 3 SCC 389.

[11] Sardar Gurucharan Singh v. Mahendra Singh, (2004) 2 MPHT 437.

[12] The Indian Contract Act 1872 § 182.

[13] Babulal Swarupchand Shah v. South Satara (Fixed Delivery) Merchant’s Association, AIR 1960 BOM 548.

[14] Pannalal Jankidas v. Mohanlal, AIR 1951 SC 144.

[15] Krishna Chandra Gajpati Narayan Deo v. K. Hanumantha Rao, AIR 1950 Ori 241.

[16] Jayabharathi Corpn. v. SV. P. N. SN. Rajesekara Nadar, AIR 1992 SC 596.

[17] Firm of Rameshardas Benarashidas v. Firm of Tansukhrai Basheharilal, AIR 1927 Sind 195.

[18] Tota Ram v. Kunwar Zalim Singh, AIR 1940 All 69.

[19] Jaiswal Coal Co. v. Fatehganj Co-operative Marketing Society Ltd., AIR 1975 Cal 303.

[20] Bhola Nath v. Mul Chand, [1903] 25 All. 639.

[21] Nagendra Bala Dasi v. Gurudoyal Mukhopadhya, 1903 SCC OnLine Cal 77.

[22] National Shipping Company of Saudi Arabia v. Sentrans Industries Limited, (2004) 2 Bom CR 1.

[23] Ganeshdas Lokuram v. Gangaram Dhingra, AIR 1930 Sind 142.

[24] Narandas Morardas Gaziwala v. S.P.A.M. Papammal, AIR 1967 SC 333.

[25] Haji Habib Haji Pir Mohamad v. Bhimakchand Jankilal Shop, AIR 1954 Nag 306.

[26] Pole v Leask, [1863] 33 LJ Ch 155.

[27] Tichel v. Short, 28 E.R. 154.

[28] Smith v. Lascelles, (1788) 2 TR 187.

[29] Bostock v. Jardine, (1865) 3 H&C 700.

[30] Lilley v. Doubleday, (1881) 7 QBD 510.

[31] Ferrer v. Robbins, (1835) 2 CM & R 152.

[32] Stimmel Law, Agency – The Basic Law, Law Offices of Stimmel, Stimmel & Roeser, https://www.stimmel-law.com/en/articles/agency-basic-law.

[33] Lee v. Walker, (1872) LR 7 CP 121.

[34] Heinemann v. Heard, 50 N.Y. 27.

[35] Armstrong v. Jackson, (1917) 2 KB 822.

[36] Paula J. Dalley, A Theory of Agency Law, 72(3) University Of Pittsburgh Law Review 495, 536 (2011).

[37] De Bussche v. Alt, (1878) 8 Ch. D 286.

[38] Michoud v. Girod, (1846) 45 U.S. 503.

[39] Harrington v. Victoria Graving Dock Co., (1878) 3 QBD 549.

[40] Andrew v. Ramsay, [1903] 2 KB 635.

[41] Nordisk Insulin-Laboratorium v. Bencard Klt, [1953] 1 All ER 986.

[42] Conkey v. Bond, 36 N.Y. 427.

[43] Bain v. Brown, 56 N.Y. 285.

[44] Butcher v. Krauth, 14 Bush (Ky.) 713.

[45] Yasuda Fire and Marine Insurance Company Europe Ltd. v. Orion Marine Insurance Underwriters Ltd., [1995] QB 174.

[46] Team, Delegata Potestas Non Potest Delegari, Law Times Journal (Oct. 31, 2019), http://lawtimesjournal.in/delegata-potestas-non-potest-delegari/.

[47] John McCain and Co. v. Pow, (1974) 1 WLR 1643 (CA).

[48] Warren A. Seavey, The Rationale of Agency, (29)8 The Yale Law Journal 859 (1920).

What's your reaction?

Excited
0
Happy
0
In Love
0
Not Sure
0
Silly
0

You may also like

4 2 votes
Article Rating
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments