Chapter 2

Contract of Agency

Definition of Agent & Principal

An agent is a person employed to do any act for

another or to represent another in dealings with

third persons.

The person for whom such acts are done or who

is represented is called the principal.

The contract which creates relationship of

principal & agent is called an agency.

Essentials and legal rules

1. There should be an agreement between the principal

and the agent :Agreement may be: Express or implied

2. The agent must act in the representative capacity.

3. The principal must be competent to contract.

4. The agent need not be competent to contract. Why?

But in the interest of the principal?

5. The consideration is not necessary.

General rules of agency 1. Whatever a person can lawfully do himself, he

may also do the same through an agent

2. He who acts through another, does by himself

Distinction b/w agent & servant.

Conti…Who may employ an agent?

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.

Who may be an agent?As between the principal and third persons any

person may become an agent

Kinds of agentsI. From the point of view of the extent of their

authority :1.General Agent- Is one employed to do all the acts

connected with a particular business or employmentEg: manager of a firm.

2. Special Agent – employed to do some particular act or represent his principal in some particular transaction.

Eg: agent employed to sell a motor car.

3.Universal Agent – Whose authority is unlimited. He enjoys extensive powers to transact every kind of business on behalf of principal.

Conti…

II. From the point of view of the nature of work performed by them:

I. Mercantile agent-

An agent dealing in the buying and selling of the

goods

An agent who has the authority either to sell the

goods, or to consign the goods for the purpose of

sale, or to buy the goods or to raise the money on

the security of the goods on behalf of his principal

Types of Mercantile Agents

1. Factor: possession of the goods is given for the purpose of selling the same – sells in his own name – has general lien – usually sells in his own name

2. Broker: appointed to negotiate and make contracts for the sale and purchase on behalf of the principal – not given possession – not in his own name

3. Commission agent: buys and sells and receives commission

Conti…4.Del credere agent: One who in consideration of an

extra commission, guarantees his principal that the third persons with whom he enters into contracts on behalf of the principal shall perform their financial obligations i.e. if the buyer does not pay , he will pay.

II. Non- mercantile agents :Does not usually deal in the buying or selling of the

goods. They include Insurance agents ,Counsels or advocates, wife,etc.

Duties of an agent

1. Duty to follow the instructions of the principal – if

not..

2. Duty to carry out the work with care and skill

3. Duty to render accounts to the principal

4. Duty to communicate with principal – if no time

5. Duty not to deal on his own account

6. Duty not to make secret profits from agency

7. Duty to pay the amount received for the principal

Conti…

8. Duty not to use the information, received in the

course of agency, against the principal

9. Duty to protect the interest of the principal in

case of his death or insanity

10. Duty not to delegate authority

Rights of an agent

1. Rights to retain money due from the principal2. Right to receive remuneration3. Right of lien – The agent has the right to retain

goods, papers and other property- only particular lien

4. Right to be indemnified against consequences of lawful acts.

5. Right to compensation6. Right to be indemnified against consequences of

acts done in good faith7. Right of stoppage of goods in transit.(a) Principal becomes insolvent(b) Agent has bought goods out of his own money

Rights of principalRecover damages from agent if he disregards

directions of PrincipalObtain accounts from AgentRecover moneys collected by Agent on behalf

of PrincipalObtain details of secret profit made by agent

and recover it from himForfeit remuneration of Agent if he

misconducts the business

Duties of principalPay remuneration to agent as agreed

Indemnify agent for lawful acts done by him

as agent 

Indemnify Agent for all acts done by him in

good faith

Indemnify agent if he suffers loss due to

neglect or lack of skill of Principal.

Creation of agency

1. Agency by express agreement2. Agency by implied agreement3. Agency by ratification

A. Agency by express agreementAppointment in writing or by words of mouthUsual form of a written agreement : Power of attorney –

General power of attorney or Special PA

B. Agency by implied agreement

Due to the conduct of the parties or the course of

dealing between the parties or the situation of

a particular case.

Agencies by an implied agreement includes:

1. Agency by estoppel

2. Agency by holding out

3. Agency by necessity

Conti…

Agency by estoppel :

Where a person by his words or conduct has

willfully led another to believe that certain set of

circumstances or facts exist, and the other person

has acted on that belief, he is estopped from

denying the truth of such statements although

such a state of things did not in fact exist.

Conti…Agency by holding out:More than estoppel – positive or affirmative conduct

of the principal is required

Agency by necessity:Due to extraordinary circumstances, person may be

compelled to act without requiring the consent or authority

Conti…

Conditions:

• There must be real emergency to act on behalf of

the Principal.

• Agent not in a position to obtain instructions

• Acting honestly and in the interest of the Principal

• Adopting reasonable and practicable course of

action

Conti…Cases:1.Where the agent exceeds his authority bonafide

in an emergency2.Where the carrier of goods acting as a bailee,

does anything to protect or preserve the goods.3.Where husband improperly leaves his wife without

providing proper means for her sustenance.

Conti…

c. Agency by operation of lawe.g. The Partnership Act

d. Agency by ratificationA person does some acts on behalf of another

person without his knowledge or authorityAnother person subsequently accepts the acts

Then: Agency by ratificationAlso known as ex-post facto agency (agency

arising after the event)

1. The agent must act on behalf of the principal

2. The principal must be competent to contract and

in existence at the time of contract by the agent

3. There should be an act capable of ratification

4. The principal must have full knowledge of the

material facts.

5. Whole transaction must be ratified

6. Within a reasonable time.

7. Ratification must not injure a third party.

Conditions for valid ratification

Relations of principal with third parties

Scope and extent of agent’s authority Principal and the third party Personal liability of the agent

Agent’s authority Power or capacity to bind the principal with

the third partyTwo types of authority

1. Actual or real authority2. Ostensible or apparent authority

1.Actual or real authorityAuthority conferred upon the agent by his principal

Two kinds:1. Express authority2. Implied authority: conferred upon the agent by

the conduct of the principal

2.Ostensible or apparent authority The act is in excess of the actual authorityAuthority due to the appearance created by the

principal

3.Authority in necessity

Delegation of authority by an agent General rule:“ Delegatus non-protest delegare” i.e. a delegate cannot

further delegate But in exceptional cases sub-agent can be appointedCases:1. Express authority from the principal2. Where the principal has impliedly, by his conduct

allowed such delegation of authority.3. Ordinary Custom of a particular trade4. Nature of the work5. Acts which do not require personal or professional

skill6. Due to unforeseen emergencies

Relationship between principal and sub-agent

Discussed under two heads:1. Where the sub-agent is properly appointed2. Where the sub-agent is improperly appointed1.Where the sub-agent is properly appointed(a)The principal is bound and is liable to third

parties for the acts of the sub-agent(b) Where the agent is responsible to the principal

for the acts of sub-agent.(c )The Sub-agent is responsible for his acts to

original agent not to principal except in fraud or willful wrong

II. Where the sub-agent is improperly appointed

(a)The principal is not represented by sub-agent

and hence he is not liable for acts of the sub-

agent

(b)The agent is responsible for the acts of the sub-

agent to the principal as well as to the third

parties

(c)The sub-agent is not responsible to principal at

all.

Termination of agencyEnd of the relationship of a principal and his agentStudied under:1. Termination of agency by act of the parties2. Termination of agency by operation of law1.Termination of agency by act of the parties1. Agreement -between the principal and agent2. Revocation by the principal : Revocation may

be express or implied – There are conditions(i) In case of continuous agency(ii) Where an agency has been created for a fixed

period of time.3. Renunciation of agency by the agent

II.Termination of agency by operation of law

1. Completion of agency business2. Expiry of time3. Death of the principal or the agent4. Insanity of the principal or the agent 5. Insolvency of the principal6. Destruction of the subject-matter of the agency7. Dissolution of a company8. Principal or agent becomes alien enemy

Effectiveness of termination:As between the principal and agent, termination of

agency is effective only when it becomes known to the agent.

- Third parties- when it is known to them.

Irrevocable agency 1.Where the agency is coupled with interest- where

the agent has some interest over the subject matter

2.When revocation would cause the agent personal loss

3.When the authority has been partly exercised by the agent.

Bailment and PledgeBailment (derived from French word ‘bailler’) :

Delivering a thing under a contract for return at a specified time or specified conditions.

e.g. giving a TV to a mechanic for repair ( a contract of bailment)

Bailment

In which the personal property of one person, temporarily, goes into the possession of another person for some specific purpose.

Ownership with : one person who deliversPossession with: another person who receives for a

purposeSo, change of possession only

Definition:“ A bailment is the delivery of goods by one

person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them”

Two parties:Bailor: The person delivering the goods

Bailee: The person to whom the goods are delivered

Hiring a bicycle

Giving cloth to a tailor

Delivering watch for repair

Keeping valuables in locker of a bank.

Examples :

Essential features:1. The delivery of movable goods by one

person to another person. Delivery may be of two types:a. Actual delivery: Handing over physical

possession of the goodsb. Constructive delivery: Only effect of putting the

goods into the bailee’s possessionNote: Delivery of possession and custody of goods Bank and a customer- Goods stored at godown- Bill of lading

2. The delivery should be for some purposeNot necessary that the purpose should be expressly

stated

3. The delivery should be on the basis of some contract.

The contract may be express or impliedThe bailment may also arise sometimes even

without a contract ( Finder of the goods)

4. The delivery should be upon a condition to return – Goods may be returned in its original form or in its altered form

Note: The bailment can be made only of movable goods.

Classification of Bailment/Kinds 1. Bailment on the basis of rewards 2. Bailment on the basis of benefits

1. Bailment on the basis of rewards:

a. Gratuitous bailment : Bailment without any

charges or reward

b. Non-gratuitous bailment: bailment for reward

2. Bailment on the basis of benefits:

a. Bailment for the exclusive benefit of the bailor

b. Bailment for the exclusive benefit of the bailee

c. Bailment for the mutual benefit of both bailor

and bailee

Duties of a bailee1. Duty to take reasonable care of the goods

bailedIf required degree of care is taken then not liable

for lossStandard of care is same in all typesMeasure of care depends on nature, quality,

quantity, and value of the goodsBailee not liable, if events are beyond the control

of baileeIf stolen, reasonable steps otherwise liableBurden of proof on baileeLoss due to the negligence of the servant

2. Duty not to make unauthorised use of goods

entrusted to him.

3. Duty not to mix goods bailed with his own goodsa.Mixing the goods with bailor’s consentb.Mixing the goods without the bailor’s consent

and the goods are separablec.Mixing the goods without the bailor’s consent

and the goods are not separable

4.Duty to return the goods

5.Duty to deliver any accretion to the goods

1. Duty to disclose faults in the goods baileda. Duty of a gratuitous bailor : known and which are

material – Otherwise liable for damagesb. Duty of a non-gratuitous bailor: see that reasonably

safe – liable whether known or not known

2.Duty to repay necessary expenses in case of gratuitous bailment

3.Duty to repay any extraordinary expenses in case of non- gratuitous bailment

Duties of a bailor

4. Duty of indemnifying the bailee • Arises when bailor has no title to the goodsBailor title may be defective:At the time of bailmentAt the time of receiving back the goods from the

baileeAt the time of giving directions in respect of the

goods bailed• Premature termination of gratuitous bailment

5. Duty to receive back the goods

Rights of a bailee1.Enforcement of bailor’s duties

2.Right to deliver goods to one of several joint

bailor’s

3.Right to deliver goods in good faith to bailor

without title

4.Right of lien : Right to retain the possession until

charges are paid

– Two types:

Particular and General

Particular lien:Right to retain only those particular goods in respect of

which the charges are due.Generally, bailee has this lien only

Condtions:(a) Bailee must have rendered some service in relation to the thing

bailed , must be entitled to some remuneration- and must be unpaid(b) Service rendered by the bailee must be one involving the exercise

of labour or skill in respect of the goods bailed. (c ) Services must have been performed in full –directions of bailor(d) There must not be an agreement to perform the services on credit.(e) The goods must be in possession of the bailee. Bailee loses the

lien, if possession is lost(f) Must not be any contract to contrary.

General lien:Right to retain any goods bailed for any amount due

Bankers: Has general lien on all goods, cash, cheques

and securities deposited with him as banker by a customer, for any money due to him as a banker.

Factors: An agent entrusted with the possession of goods for the purpose of selling on behalf of his principal.

If goods are delivered for some other purpose, no GL

Wharfingers: A person who owns or keeps a wharf.Wharf: Place, adjoining to water, used for loading and

unloading goods from ships – not to store

Attorneys (solicitor) of a HC : A person who acts

legally for another – lien on all the papers and

documents of the client provided they are

delivered in professional capacity

Policy brokers: They can retain the policy of fire or

marine insurance for their brokerage.

Rights of the bailorDuties of the bailee = Rights of the bailor

1. Enforcement of bailee’s duties

2. Right to terminate the bailment if the bailee

uses the goods wrongfully

3. Right to demand return of goods at any time in

case of gratuitous bailment

Termination of bailment

1. Expiry of the specified period

2. Achievement of the object

3. Inconsistent use of goods

4. Death of the bailor or bailee

5. Termination by a bailor

Finder of goods:A person who finds the goods belonging to some

other person and takes them in his position.A person finding goods not bound to take – but if

picks up and takes its possession, he becomes bailee

Duties:1.Duty to find the true owner2.Duty to take reasonable care of the goods as a

bailee

Rights:1.Right to retain possession of the goods until the

true owner is found2.Right to lien over the goods for expenses3.Right to sue for reward4.Right of sale:(a)When the thing is in danger of perishing(b)When the lawful charges amount to two-third of

its value

Pledge

A special kind of bailmentGoods are delivered as a security for a loan or for

the fulfillment of an obligation

Definition:“The bailment of goods as security for

payment of a debt or for performance of a promise, is called pledge. The bailor in this case is called the pawnor (pledger). The bailee is called the pawnee (pledgee)”.

Essential features of a valid pledge

1. Delivery of possession2. Delivery should be upon a contract3. Delivery should be for the purpose of security4. Delivery should be upon a condition to return5. Only of movable goods

Distinction between bailment & Pledge

1. As to purpose

2. As to right to sale

3. As to right of using the goods.

Duties of a pawnor (similar to bailor)Additional1. To meet his obligation on stipulated date and

comply with terms of the contract (Duty to repay the loan)

2. To compensate the pawnee for any extraordinary expenses incurred by him(Duty to pay expenses in case of default)

Duties of a pawnee ( similar to bailee)

1. To take reasonable care of the goods pledged

2. Duty not to make any unauthorised use of the

goods pledged

3. Not to mix the goods pledged with his own goods

4. Not to do any act in violation of the terms of the

contract

5. Duty to return the goods pledged on receipt of his

full dues.

6. To deliver any accretion to the goods pledged.

Rights of a pawnorAdditional:1. Enforcement of pawnees duties2. Right to redeem the goods pledged

Rights of pawnee1. Right of retainer2. Right of retainer for subsequent advances3. Right to extra-ordinary expenses4. Right to sue the pawnor or sell the goods in case of

default of the pawnor: To file a suit for the recovery of the amount To retain the goods as security To sell the goods by reasonable notice ( statutory

requirement) (may sell before filing a suit)

Pledge by non-ownersPledge by non-owners may not be valid except

under:1. Pledge by a mercantile agent2. Pledge by a person in possession under a

voidable contract.3. Pledge by a person having a limited interest in

the goods4. Pledge by a seller in possession after sale5. Pledge by a buyer in possession after sale6. Co-owner in possession.