Jurisprudence behind the duties of agent conferred under Indian Contract Act 1872
An agent in commercial law (also referred to as a manager) is a person who is authorized to act on behalf of another (called the principal or client) to create a legal relationship with a third party. There may be different kinds of Agents such as banker, factor, advocate, etc. According to the extent of authority, there may be general, special, universal agents. Various rights that are given to the agent and they can also be sued on certain grounds. There are various duties of agents such as the execution of instructions, the exercise of skill and care, act in good faith, etc.
Likewise principal also has certain duties such as payment of agent, indemnification of agent. The essence of the principal-agent relationship is that the principal for whatsoever reasons hires an agent to do the same work or manage some task on his behalf and consequently deals with the third person. This relationship is based on the maxim “Qui facit per alium per se” means ‘he who acts through another does the act himself.’
All agency relationships are fiduciary relationships. This means the relationship involves a high level of trust and confidence between the principal and the agent. Because the principal has trusted the agent to supervise or protect the principal’s property. The agent owes a fiduciary duty to the principal. This means the agent is obligated to act in the best interest of the principal and to make business decisions that are conducive to how the principal would act. Consider these common business relationships: attorney and client, broker and client, and trustee and beneficiary. Each of these is an example of a fiduciary relationship.
The agency relationship can only be established through consent. The principal must agree with the agent, and the agent must agree to represent the principal. When the agent agrees to the agency relationship, the agent is agreeing to uphold certain fiduciary duties. This means the agent must generally act to benefit of principal while upholding several particular obligations to the principal. The obligation can be remembered as five categories-
Thus, Agent and principal relationships are based on reliance. The duties, which are under the Indian Contract Act, 1872 [hereinafter referred to as ICA] are based also on these principles of trust and responsibility. If we see the provisions of Indian Contract Act, which established the agent’s duty, the above categories reflect in that. Hence, this paper will discuss the agent’s duty with the spirit of these fiduciary relationship categories.
AGENT’S DUTY TO PRINCIPAL
Under the spirit of the fiduciary relationship of principal and agent
The main and foremost duty of every agent is to show loyalty to his/her principal. ICA includes duties related to it under Section 215, 217, 218, 209.
- Section 215: Duty not to deal on his own account-
This section is based upon an assumption that an agent owes fiduciary duties to his principal viz. complete loyalty and hence an agent cannot be allowed to deals on his own account in the business of agency except with the previous consent of the principal obtained after a full disclosure of material facts. An agent having a duty to discharge duty to his principal cannot be permitted to enter into engagement wherein he has a personal interest which is likely to conflict with the interest of his principal. As observed by the House of Lords, “Nevertheless, even if the possibility of conflict is present between personal interest and the fiduciary position the rule of equity must be applied,”[i]
Where an agent employed to sell becomes himself the purchaser, he must show that this was with the knowledge and consent of his employer or that the price paid was full value of the property so purchased; and this must be shown with the utmost clearness and beyond all reasonable doubt.
Rights of Principal
Where an agent has dealt on his own account, the principal may either repudiate the transaction under these sections.
- Section 217, Section 218-Duty to pay sums received for principal
The agent has a duty to pay to his principal all sums received on principal’s account. But he has also a right to retain, out of any sums received on account of the principal in the business of the agency, all money 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 an agent. Similarly, when an agent sells his principal’s goods, he may detain money received, for his remuneration on account of the goods sold by him.
Payment in respect of illegal transaction-
If an agent receives money on his principal’s behalf under an illegal and void contract, the agent must account to the principal for the money so received and cannot set up the illegality of contract as a jurisdiction for with-holding payment, which illegality the other contracting party has waived by paying the amount.
- Section 209- Agent’s duty on termination of agency–
Where an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him.
In the case of Radhabhai v. Mangla[ii], it was held that when an agency stands terminated immediately on the death or insanity of the principal, the authority of the agent thereafter, would continue but only to the extent required for the protection and preservation of the interests entrusted to him. If the agent purports to exercise authority under the agency, he will be liable to third parties for breach of warranty of authority.
The most important part of agent duties is performance, principal appoints the agent to perform his/her act. So, it is also the foremost duty of every agent to conduct those acts very well. ICA makes provision regarding the performance as the part of agent’s duty.
Section 212, 219, 220, 190 relates to the performance of the agent as his/her duty.
- Section 212– Duty to use proper care and skill
An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make competition to his principal, in respect of the direct consequences of his own neglect, want of skill, or misconduct but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct.
In keepel v. wheeler [iii],it was held that when an agent did not communicate about the second offer to the principal, the agent did not show proper care and skill in the matter and, therefore, he was liable to pay damages to his principal for the loss suffered by him.
The Apex court of India in Pannalal Jankidas v. Mohanlal[iv], concluded that, when an agent does not show proper diligence in the care of goods of principal, and by his fault the goods destroyed, the agent will be liable for that, however, and principal gets some compensation.
- Section 190– Duty not to delegate
This section embodies a very important principle viz. one who has a bare power or authority from another to do an act must execute it himself and cannot delegate his authority to another.
The rule is contained in the maxim ‘Delegatus non potest delegare’ which means that an agent to whom some authority has been delegated cannot further delegate that authority to another person. The reason that no such power can be implied as an ordinary incident in the contract of agency is that confidence in the particular person employed is at the root of the contract.
Accordingly, auctioneers, factors, directors of companies, brokers and other agents in whom confidence is reposed have, generally speaking, no power to delegate their authority.
In some cases, the custom of trade justifies the delegation of special branches of work. Thus it has been found to be a usage of trade for architects and builders to have the quantities taken out from their design by surveyors, who are more expert in that work, for the purpose of enabling a proper estimate to be made, and the surveyors can see the architect’s employer for his charges.
The agent does the work for his/her principal, so, the agent must notify his/her principal about the act from time to time.
ICA enacts this duty under Section 214 and 216.
- Section 214- Duty to communicate with principal
This section lays down an important duty of the agent to communicate with the principal for the purpose of obtaining his instructions. In cases of difficulty, the agent must use all reasonable diligence in communicating with the principal and obtain his instructions. In an emergency, it may not be possible to communicate with the principal, and in such a case he should act in accordance with the rule contained in section 189 of ICA. (do with prudence)
Where the agent informed his principal that purchases have been affected on his behalf and subsequently confirmed it by reporting that the goods would be dispatched as soon as transport strike was over whereas he had done nothing in the matter, it was held by the Supreme Court that such neglect and misconduct of the agent misinforming the principal was squarely within the wide terms of section 212.
“He must bear the burnt to pay damages,” the court said[v]
- Section 216– Duty not to deal on his own account
An agent cannot take any personal gain out of the transaction of agency, nor can he make any secret profits while acting as an agent. An agent occupies a fiduciary position and, therefore, it is his duty not to do anything which would bring his personal interest and his duty to the principal in conflict with each other.
This conflict invariably arises when the agent is personally interested in the principal’s transaction. For example, In De Busshe v. Alt[vi], an agent was entrusted with the task of selling a ship at a stated price. He could not find a customer for the same and without the consent of the principal, he purchased that ship, at the settled price, himself. Later, he sold the ship on profit. It was held that the agent was bound to account to the principal for the profit made by him in the transaction.
Duty not to make secret profit
Another aspect of this principle is the duty of the agent not to make any secret profit in the business of the agency. His relationship with the principal is of fiduciary nature and this requires absolute good faith in the conduct of agency. A military officer who took bribe and allowed goods to pass under the authority of his uniform was held liable to account for the same to the crown.7
Similarly, where an auctioneer received from the buyer commission in addition to what his principal paid him, he was held bound to hand over the commission to the principal.[vii]
In means any advantage obtained by the agent over and above his agreed remuneration and which he would not have been able to make but for his position as agent.
Principal appoints agent to act on his behalf with third party as the principal. It becomes the duty of agent to obey his/her principal in his/her acts. After all, their acts will affect the principal. He may occur loss or benefit. Section 211 and 214 of Indian Contract Act, 1872 related to it.
- Section 211– Agent’s duty in conducting principal’s business
Section 211 provides that an agent is bound to conduct the business of his principal according to the directions given by the principal and to keep himself within the confines of his authority. For example, an estate agent cannot make a binding contract on behalf of his principal with a third party.[viii]
In the absence of directions, the agent has to follow the custom which prevails in businesses of the same kind and at the place where the agent act otherwise, if any loss is sustained, he must make it good to his principal, and if any profit accrues, he must account for it.
Thus, for example, in Lilly v. Doubleday[ix] an agent was instructed to warehouse his principal’s good at a particular place. He placed a part of them at a different warehouse which was equally safe. But the goods were destroyed without negligence. The agent was held liable for the loss. Any disobedience of, or departure from, the instructions makes the agent absolutely liable for the loss.11 Where a principal had given instructions of ambiguous nature which were capable of two manages, he was not permitted to argue against the agent that he should have read the instruction in the other sense than what he actually did.
An agent is also under a duty to maintain confidence, secrecy, and non-disclosure of any sensitive information about the affairs of principal.
The main work of an agent for which s/he appointed is accounting, to maintain the accounts of principal, to handle principal transaction and balance. Principal and law expect to him having Excellency in according and well performance with good faith and for the benefit of principal. Section 213 provides this duty.
- Section 213– Duty to maintain accounts
This section embodies a rule of rendering proper accounts to the principal. This rule, therefore, implies a duty on the part of an agent-
- To keep the property, effects, and money of his principal separate from his own and those of others and,
- To keep and maintains proper accounts of the dealings, transaction, property, and money of the principal. This may involve keeping special forms of accounts.
There is no provision in the Act enabling an agent to require the principal to render accounts or filing a suit for that purpose.
In Narandas v. Papammal[x]it has been held by the Supreme Court that although there is no statutory right under which an agent can sue his principal for the rendition of accounts, but he has an equitable right under which an agent can sue his principal for that under special circumstances.
Laws drive from precedent, customs, and usage of the society, these customs enriched the jurisprudence. When theses precedent, a custom established, then these customs become the part of statutory law. However, at present time, legislation and not custom the main source of law, and these laws also based on custom, because any government will not want to divert the tendencies of society at once. These duties of an agent, which provided in Indian Contract Act, and philosophy behind the principal-agent relationship also derived from customs and precedents, which has taken as instances in ICA also based on customs.
These customs derived from the behavior of people. So, if we want to understand the nature of the relationship between agent and principal. We should use common sense and tendencies.
Author: Arshi Hayat Gangohi, ll.b 2nd year, Department of Laws, Panjab University Chandigarh
[ii] AIR 1934 NAG 274
- The Indian contract Act, 1872 (9 of 1872)
- Anirudh wadhwa, MULLA The Indian Contract Act by Sir Dindhan Fardunji Mulla, (lexis Nexis Butterworth wadhwa, Nagpur, Thirteenth Edition, 2011)
- Avtar singh, Law of contract, (Eastern Book Company, Lacknow, Ninth Edition, 2005)
- R.K. Bangia, Indian Contract Act, (Allahabad Law Agency, Fourteenth Edition, 2008)
- Dr. jyoti Rattan, Law of Contract-2, (Bharat Law House Pvt. Ltd. New Delhi)