- For other uses of the word Agent, see Agent (disambiguation). This is correct
An Agent in Commercial Law is a person who is authorised to act on behalf of another (called the Principal) to create a legal relationship with a Third Party. Section 182 of the [Indian] Contract Act, 1872 defines Agent as “a person employed to do any act for another or to represent another in dealings with third persons”. Agency law deals with the tripartite relationship between:
- Agents and Principals;
- Agents and the Third Parties with whom they deal on their Principals' behalf; and
- Principals and the Third Parties when the Agents deal on their behalf.
Brief statement of legal principles
There are three broad classes of Agent:
- Universal Agents hold broad authority to act on behalf of the Principal, e.g. they may hold a power of attorney (also known as a mandate in civil law jurisdictions) or have a professional relationship, say, as lawyer and client.
- General Agents hold a more limited authority to conduct a series of transactions over a continuous period of time; and
- Special Agents are authorised to conduct either only a single transaction or a specified series of transactions over a limited period of time.
For these purposes, the Principal must give, or be deemed to give, the Agent authority to act.
- Actual in term authority arises where the Principal's words or conduct reasonably cause the Agent to believe that he or she has been authorised to act. This may be express in the form of a contract or implied because what is said or done make it reasonably necessary for the person to assume the powers of an Agent.
- Apparent authority arises when the Principal's words or conduct reasonably cause Third Parties to believe that the Agent has been authorised to act. This may be called "ostensible authority" or involve the creation of Agency by Estoppel where the Principal will be estopped from denying the grant of authority if Third Parties have changed their positions to their detriment in reliance on representations made.
- Implied authority is that type of authority considered held by the agent by virtue of being reasonably necessary to carry out express authority. As such, it can be inferred by virtue of a position held by an agent, e.g. partners have authority to bind the other partners in the firm, their liability being joint and several, and in a corporation, all executives and senior employees with decision-making authority by virtue of their position have authority to bind the corporation.
- Inherent Authority is such authority held by the agent who exceeds the scope of express authority by a minimal amount and in a manner that is inherently similar to the action expressly authorized. For example, an agent empowered to rent a van for $500 who then, in fact, rents a van for his principal for $600, nonetheless binds the principal in relation to the third party because of inherent authority, though the agent may be liable to the principal for the excess.
Apparent authority and "'implied authority'' are examples of an implied lega fiction, i.e., that an agent is authorized to do that which, in fact, he is not. This is for the protection of "more innocent" third parties who may rely in good faith on the agent acting beyond the scope of his actual authority. This is so even though the only culpability on the part of the poor prinicpal may have been to send the agent out into the world on a mission on the principal's behalf.
Even if the Agent does act without authority, the Principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the Principal's behaviour, e.g. if the Agent has purported to act in a number of situations and the Principal has knowingly acquiesced, the failure to notify all concerned of the Agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.
Liability of Agent to Third Party
If the Agent has actual or apparent authority, the Agent will not have liability on any transactions agreed within the scope of that authority so long as the Principal was disclosed, i.e. the fact of the agency was revealed and the identity of the Principal revealed. But where the agency is undisclosed or partially disclosed, both the Agent and the Principal are bound. Where the Principal is not bound because the Agent had no authority, actual or apparent, the purported Agent is liable to the Third Party for breach of the implied warranty of authority.
Liability of Agent to Principal
If the Agent has acted without actual authority, but the Principal is nevertheless bound because the Agent had apparent authority, the Principal is liable to indemnify the Agent for any resulting loss or damage.
The Agent's primary fiduciary duty
is to be loyal to the Principal. This involves duties:
- not to accept any new obligations that are inconsistent with the duties owed to the Principal. Agents can represent the interests of more than one Principal, conflicting or potentially conflicting, only on the basis of full and timely disclosure or where the different agencies are based on a limited form of authority to prevent a situation where the Agent's loyalty to any one of the multiple Principals is compromised. For this purpose, express clauses in the agreement signed by each Principal with the Agent may identify specific types or categories of activities that will not breach the duty of loyalty and so long as these exceptions are not unreasonable, they will bind the Principals.
- not to make a private profit or unjustly enrich himself from the agency relationship.
In return, the Principal must make a full disclosure of all information relevant to the transactions so that the Agent is able to negotiate effectively and pay the Agent either the commission or fee as agreed, or a reasonable fee if none was agreed. If the Agent reasonably incurs expenses, he or she is also entitled to reimbursement.
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 Section 201 to 210 The Indian Contract Act, 1872, 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)
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 (Sec 203).
Further, as per section 205, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an agency for a fixed period. Notice in this connection that want of skill continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party to the other; otherwise, damage resulting from want of such notice, will have to be paid (Section 206). As per section 207, the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (Section 208).
When an agent’s authority is terminated, it operates as a termination of subagent also. (Section 210).
Pandia - Principles of Mercantile Law, 8th edition, by Ramkrishna R.Vyas,
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