Notes on Agency in Contracts

In the realm of contracts, the concept of agency plays a significant role. An agency relationship occurs when one party, known as the agent, is appointed to act on behalf of another party, referred to as the principal. 

What is a ‘Contract of Agency’?

A contract of agency involves a person appointed to perform acts or represent another party in dealings with third persons. The person appointed as an agent acts on behalf of the principal, who is the individual being represented. It is essential to note that contracts entered into through an agent and obligations arising from acts performed by an agent hold the same legal consequences as if the principal had conducted the contracts or acts personally.

For instance, if A appoints B as their general agent and B enters into a contract for the sale of A’s car, A is bound by the terms of that contract. However, if B, as A’s agent to sell crops, enters into a contract to sell A’s house, A is not bound by this contract as B exceeds the scope of their agency.

How is an Agent Appointed?

An agent can be appointed through various means, including

Express Appointment

An express appointment occurs when the principal explicitly appoints the agent. This can be done by direct communication between the principal and the agent. The appointment can be for a specific purpose or as a general agent.

Necessity

Sometimes, an agency relationship arises out of necessity. 

For example, suppose A, who is B’s employee, is asked by B to transport a consignment of fruits to Chennai and gets stuck in Lucknow without means of transportation or communication. In that case, A may assume the powers of an agent to preserve the fruits.

Conduct of the Parties (Implied Agency/Estoppel)

Implied agency occurs when the conduct of the parties leads to the reasonable belief that an agency relationship exists. 

For example, if X claims to be A’s agent in the presence of Y, and A does not refute this claim, Y may presume that X is indeed A’s agent. 

Similarly, in a partnership, if X represents themselves as an agent in the presence of P, and P does not refute it, third parties may assume X is an agent in the firm.

Duties of an Agent

Agents have certain duties they must fulfil while acting on behalf of the principal

Duty to Follow Instructions and Custom

An agent is obligated to follow the instructions given by the principal. If no specific instructions are provided, the agent must act in accordance with the customs and practices of the relevant industry or trade. 

For example, if A is appointed as an agent to sell diamonds on behalf of B, A must adhere to B’s instructions or follow the customary practices of the diamond trade.

Duty of Reasonable Care and Skill

An agent is expected to exercise reasonable care and skill in performing their duties. They must possess the necessary expertise and take reasonable precautions to ensure the principal’s best interests. Failure to exercise reasonable care and skill may result in liability for the agent. 

For instance, if A, appointed as an agent to execute a corporate contract, fails to include standard clauses in the contract, they have breached their duty of reasonable care and skill.

Duty to Avoid Conflict of Interest

An agent has a duty to avoid situations where their personal interests conflict with those of the principal. They should act solely in the principal’s best interests and not engage in any activities that may undermine or compromise their loyalty to the principal. 

For example, if A is appointed as an agent to sell B’s land, A must not purchase the land for themselves under the name of a third party.

Duty Not to Make Secret Profit

Agents are prohibited from making secret profits from their agency relationship. They must act transparently and disclose any benefits or profits they receive in connection with their agency. 

For instance, if B invites open tenders for selling their property and appoints A as their agent, A accepting a bribe from a potential buyer and accepting their tender would constitute a breach of the duty not to make secret profit.

Rights of an Agent

Along with their duties, agents also have certain rights within the agency relationship. These may include

Right to Compensation

Agents have the right to receive reasonable compensation for their services unless agreed otherwise in the contract. The principal is obligated to compensate the agent for their efforts and expenses incurred while performing their agency duties.

Right to Indemnity

Agents have the right to be indemnified by the principal for any losses or expenses incurred in the ordinary course of their agency. This includes expenses necessary for the performance of their duties, such as travel expenses or costs associated with executing contracts.

Right to Lien

Agents possess a right of lien over the principal’s property or goods in their possession until they receive full payment or satisfaction for the obligations owed to them by the principal.

Summary

Agency in contracts involves appointing an agent to act on behalf of a principal. The agent has duties to follow instructions, exercise reasonable care, avoid conflicts of interest, and not make secret profits while possessing rights such as compensation, indemnity, and lien.