Agency CA CFA - adithya kiran

A appoints M, a minor, as his agent to sell his watch for cash at a price not less
than ₹ 700. M sells it to D for ₹ 350. Is the sale valid? Explain the legal position
of M and D, referring to the provisions of the Indian Contract Act, 1872.
Validity of Sale
• Section 184 provides that any person may become an agent. In other words, even
a minor can become an agent and the principal can be bound by his acts.
• Therefore, in the given case, sale of watch by M is valid though he is a minor.
Legal Position of M
• By virtue of Sec.184, if the agent is a minor, then the principal cannot hold the
agent liable for the negligence or misconduct of such minor agent.
• Therefore, in the given case, M is not liable to A even though he sold the watch at
a price less than the price instructed by A.
Legal Position of D
• As per Sec.226, contracts entered through agent, may be enforced in the same
manner, and will have the same legal consequences, as if the contracts entered by
the principal personally.
• Therefore, in the given case, D can enforce the contract entered through agent for
sale of watch.
CA CFA ADITHYA KIRAN - 8885814554

Creation of Agency - (How Authority is given to Agent)
• Modes of Authority - As per Sec.186, the authority given to an
agent may be express or implied.
• Express Authority - An authority is said to be express when it
given by words, spoken or written.
• Implied Authority - An authority is said to be implied, if its
inferred from the circumstances of the case. For this purpose:
a) The words spoken or written;
b) Ordinary Course of dealings,
are considered as part of the circumstances of the case.
• Authority by Ratification - As per Sec.196, if the agent performs
any act without the authority from principal, then the principal may
choose to ratify such acts. If the principal ratifies such acts, then it
will have the same effect as if such acts are performed with the
principal’s authority.

Extent of Agent’s Authority
(How much Authority is given to Agent)
• Authority in Normal Circumstances :
i. Doing an Act – An agent having the authority to do an act, can do
every thing which is lawfully necessary to accomplish the act
entrusted by the principal.
ii. Carrying on the business – An agent having an authority to carry
on a business can do every thing which is lawfully necessary to
carry on such business or which is usually done in the course of
such business.
• Authority in emergency
• In an emergency, an agent has the authority to do every thing which
is necessary to protect the principal from loss.
• In an emergency, the agent should act as a man of ordinary
prudence would act in his own case under similar circumstances.

Essential Conditions for valid Agency in Emergency
i. The agent must be in possession of the goods belonging to
principal.
ii. There is a commercial necessity to act promptly e.g., when the
goods are about to perish.
iii. The agent is not in a position to communicate with the principal.
iv. The agent should act for the benefit of the principal.
v. The agent should adopt most reasonable course appropriate to the
given circumstances.

Ramesh instructed Suresh, a transporter, to send a consignment of
apples to Mumbai. After covering half the distance, Suresh found that
the apples will perish before reaching Mumbai. He sold the same at half
the market price. Ramesh sued Suresh. Will he succeed?
• As per Sec.189, An agent has authority, in an emergency, to do all such
acts for the purpose of protecting his principal from loss as would be done
by a person of ordinary prudence, in his own case, under similar
circumstances.
• In the given case, Suresh found that apples will perish before reaching
Mumbai. Therefore, there is a necessity/emergency to sell the apples, with a
view to protect the principal.
• Suresh can claim authority u/s 189 to sell the apples, and as such Ramesh
cannot succeed in his claim against Suresh, if it is proved that:
a) Suresh is not in a position to communicate with Ramesh;
b) Suresh acted bonafide

Sub-Agent [Sec.190]
i. Sub-Agent is a person appointed by the original agent. Such
sub-agent acts under the control of agent.
ii. As a general rule, the agent cannot appoint another person as
a sub-agent, to perform the work delegated by principal to the
agent.
The above rule is based on the principle that “ a delegatee
cannot further delegate”. This is because, an agent is in a fiduciary
position and the contract of agency is created based on the
confidence reposed by the principal in the agent.
When the Agent can appoint a Sub-Agent
In the following cases, an agent can appoint a sub-agent:
1. When the terms of appointment between principal and agent
permits appointment of sub-agent.
2. When as per the ordinary customs of a particular trade, it is
appropriate to appoint a sub-agent.
3. When the unexpected emergency arises.

Relationship between Parties when the SA is properly appointed
i. The principal is bound to the third parties for the acts of the SA
ii. The agent is responsible to the principal for the acts of the SA.
iii. The sub-agent is responsible to the agent for his acts.
iv. The sub-agent is not responsible to the principal for his acts,
except when there is a fraud or willful wrong.
Relationship between Parties when the SA is not properly
appointed
a. The ‘A’ is responsible to both the ‘P’ & ‘TP’ for the acts of SA.
b. The ‘P’ is not responsible to the third parties for the acts of SA.
c. The SA is not responsible to the principal.

Substituted Agent
i. When the agent, as per the authority given by the principal,
appoints another person, to act for the principal, then such another
person is not a sub-agent. Such person (Substituted Agent) is
treated as an agent of the principal.
ii. In selecting such person, the agent should exercise discretion as a
man of ordinary prudence would exercise in his own case.
If the agent exercises such careful discretion, then he is not
responsible to the principal for the acts of such another person
(Substituted Agent).

Sub-Agent Substituted Agent
1. He works under the control of Agent a. He works under the control of ‘P’
2. ‘A’ appoints sub-agent and also
delegates part of his work to SA.
b. ‘A’ only appoints SA but does not
delegate any part of his work to him
3. No Privity of contract between
principal and sub-agent
c. Privity of contract is established
between ‘P’ and SA
4. SA is not responsible to the ‘P’ except
in case of fraud or willful wrong. He
is responsible only to the agent.
d. Substituted agent is responsible to
the principal but not to the agent
5. Agent is responsible to the principal
for the acts of the sub-agent
e. Agent is not responsible to the
principal for the acts of the
substituted agent
6. Agents responsibility to the principal
continues so long as the sub-agency
continues
f. Agents responsibility to the principal
ends once he names (i.e., appoints)
the substituted agent.
7. SA has no right of action against P for
remuneration
g. He can sue the ‘P’ for remuneration
due to him
8. SA may be improperly appointed h. He can never be improperly
appointed

RATIFICATION
1. What is meant by Ratification
• In general terms, ratification mean approving any act done without
authority.
• As per Sec.197, where agent does any thing on behalf of the
principal, without the authority from the principal, then the
principle may choose to ratify such acts or may choose to reject
such acts.
2. Whether Ratification is optional or obligation
Ratification is the option available to the principal. It is not the
obligation. When the agent acts without the authority from the
principal, then the principal may or may not ratify such acts.
3. How Ratification can be done
• Ratification may be expressed or it may be implied from the
conduct of the principal.
4. When ratification can be done
Ratification must be made within reasonable period of time.

RATIFICATION
5. What can be ratified and what cannot be ratified
• Only valid and legal acts can be ratified. Illegal acts or void acts
cannot be ratified.
• Acts of the agent which results in damages to the third parties
cannot be ratified.
6. How much can be ratified
• If the principal chooses to ratify the transaction/contract entered
by agent, then he must ratify the whole contract. He cannot ratify
only a part of the contract which is beneficial to him.
7. When Ratification is invalid
If the knowledge of the principal, as regards the acts of the agent, at
the time of ratification, is defective, then the ratification is invalid.
8. What to do after Ratification
After ratification, principal must communicate such ratification to the
other party.

When the Agency gets terminated [Sec.201]
Contract of Agency gets terminated if the:
a) Principal revokes the authority given to the agent.
b) Agent renounces the business of agency.
c) Business of the agency gets completed.
d) Principal or Agent dies or becomes unsound mind.
e) Principal has been adjudicated as an insolvent.
When the Principal may revoke the authority given to the agent
Subject to Sec.202, Principal may revoke the authority given to the
agent, at any time before the authority has been exercised by the
agent.
When the Principal cannot revoke the authority given to the agent
The principal cannot revoke the authority given to his agent after the
authority has been partly exercised. This restriction applies to the
acts already done in the agency or obligations arising out of such
acts.

Termination of Fixed Period Contracts [Sec.205]
Where the contract of agency is entered for a fixed period of time, then
a) The principal must pay compensation to the agent to revoke the
agent’s authority before such period;
b) The agent must pay compensation to the principal to renounce the
agency before such period.
However such compensation need not be paid, if there is a sufficient
for such revocation or renunciation.
Termination of Continuous Agency [Sec.206]
If the contract of agency is not entered for a fixed period, then:
i. To revoke the authority, the principal must (a) give reasonable
notice to the agent; or (b) must pay damages to the agent.
ii. To renounce the agency, the agent must (a) give reasonable notice
to the principal ; or (b) must pay damages to the principal.

A, at Chennai, by letter directs B to sell for him some
cotton lying in a warehouse in Mumbai, and
afterwards, by letter, revokes his authority to sell, and
directs B to send the cotton to Chennai. B, after
receiving the second letter, enters into a contract with
C, who knows of the first letter, but not of the second,
for the sale to him of the cotton. C pays B the money,
with which B absconds. Based on the provisions of the
Indian Contract Act, 1872. whether Mr.C is
discharged towards Mr.A

• Among other things, Sec.208 of ICA, 1872 provides that, as
regards third persons, the termination of authority given to the
agent does not take effect until it becomes known to such third
persons.
• In the given case, Mr.C is not aware about the second letter issued
by Mr.A, which revokes the authority given to Mr.B.
• Therefore, as per the above provision, as regards C, the
termination of authority is not effective. In other words, so far as
Mr.C is concerned, the contract of agency between Mr.A & Mr.B
Continues.
• Accordingly, payment of money by Mr.C to Mr.B is good against
Mr.A. In other words, payment of money to Mr.B is treated as
payment to Mr.A.
• To conclude, Mr.C’s liability towards Mr.A is discharged.

Agents duty in conducting principal business [Sec.211]
• An agent is bound to conduct the business of his principal
according to the:
a) Directions given by the principal;
b) In the absence of such directions, then according to the customs
prevailing in agents business at that place of business.
• If the agent violates the above directions or customs of trade, and
if the:
i. Loss occurs in the business, then the agent must compensate that
loss to the principal;
ii. Profit accrues in the business, then the agent must account (i.e.,
surrender) that profit to the principal.

A, an agent engaged in carrying on for B a business, in which it is
the custom to invest from time to time, at interest, the moneys
which may be in hand, omits to make such investment.
Examining the provisions of Indian Contract Act, 1872,
determine the duty of A
•As per Sec.211, in the absence of any directions from the principal,
the agent has to conduct the business of the agency as per the
customs of trade prevalent in the business.
• In the given case, the custom of trade is to invest money at interest.
But A omits to invest the amount. Therefore, based on Sec.211, A
must compensate B the interest that would have been earned had the
money been invested.

B, a broker, in whose business it is not the custom to sell on credit,
sells goods of A on credit to C, whose credit at the time was very
high. C, before payment, becomes insolvent.
determine the duty of B
•As per Sec.211, in the absence of any directions from the principal,
the agent has to conduct the business of the agency as per the
customs of trade prevalent in the business.
• In the given case, the custom of trade is not to sell the goods on
credit. But B sold goods to C on credit in spite of the fact that the
credit of C was very high at the time of sale.
•Therefore, based on Sec.211, B must compensate A the loss incurred
by A due to insolvency of C.

Agents duty to exercise skill and diligence [Sec.212]
• An agent is bound to exercise the skill generally possessed by
persons engaged in similar business.
• The agent is bound to act with reasonable diligence.
• Any loss or damage occurred to the principal because of
negligence, lack of skill or misconduct of the agent, must be
compensated by the agent to the principal.
Such compensation is not required for indirect or remote
loss or damage.

A, an agent for the sale of goods, having authority to sell on
credit, sells to B on credit, without making the proper and usual
enquiries as to the solvency of B. B, at the time of such sale is
insolvent.
determine the duty of A
• As per Sec.212, an agent is bound the conduct the business of
agency with reasonable diligence. If the agent acts negligently, then
he must compensate any direct loss or damage occurred to the
principal.
• In the given case A sold goods on credit without making proper
enquiry regarding the solvency status of B. Therefore based on
Sec.212, A must compensate the loss incurred by principal.

Agent acting on his own account [Sec.215]
• In the business of agency, if the agent deals on his own account
instead of on account of his principal, then the principal may
repudiate such transaction, if:
a) Any material fact has been dishonestly concealed from the
principal; or
b) The dealings of the agent are disadvantageous to the principal.
If the principal accepts such transaction, then he is entitled to claim
from the agent, any benefit accrued to the agent from such
transaction. [Sec.216]

A employs B to recover ₹ 1,00,000 from C, and to lay it out on good
security. B recovers the ₹ 1,00,000 and lays out ₹ 90,000 on good
security, but lays out ₹ 10,000 on security which he ought to have
known to be bad, whereby A loses ₹ 2,000.
Examining the provisions of Indian Contract Act, 1872, Determine
B’s Right of Remuneration.
• Agent is entitled for remuneration as specified in the contract or as
permitted by the customs of business.
• As per Sec.220, An agent who is guilty of misconduct in the business of
the agency, is not entitled to remuneration in respect of that part of the
business which he has misconducted.
• In the given case, Mr.B is entitled to Remuneration for:
a) Recovering ₹ 1,00,000;
b) Lending ₹ 90,000.
But Mr.B is not entitled to Remuneration for Lending ₹ 10,000 u/s.220, as
he lends out on security which he ought to have known to be bad.
As per Sec.212, agent must compensate the principal for loss or damaged
occurred to the principal due to negligence of the agent. Therefore, Mr.B
must compensate the loss of ₹ 2,000 incurred by Mr.A .

B, the proprietor of a newspaper, publishes, at A’s request, a libel
upon C in the paper, and A agrees to indemnify B against the
consequences of the publication, and all costs and damages of
any action in respect thereof. B is sued by C and has to pay
damages, and also incurs expenses.
Examining the Provisions of Indian Contract Act, 1872,
determine the legal position between B and A.
• As per Sec.224, where principal employs an agent to do a criminal
act, then the principle is not liable to indemnify the agent against the
consequences faced by the agent by doing such criminal act.
• In the given case, at the request of Mr.A (prinicipal), Mr.B (agent)
publishes a libel upon Mr.C, which can be considered as a criminal
act by virtue of Sec.499 of Indian Penal Code.
• Therefore, as per Sec.224 of ICA, 1872, Mr.A is not liable to
indemify Mr.B the damages paid by B to C or the expenses incurred
by B.

A is employed by B to buy from C certain goods of which C is the
apparent owner, and buys them accordingly. In the course of the treaty
for the sale, A learns that the goods really belonged to D, but B is
ignorant of that fact.
determine whether B is entitled to set off a debt owing to him from C
against the price of the goods.
• As per Sec.229, where any notice or information given to or obtained by
the agent during the course of business transacted for the principal,
then, as between the principal and third parties, the same legal
consequences shall apply as if such notice or information is given to or
obtained by principal.
• In the given case, during the course of treaty for the sale, A learns that
goods bought from C really belonged to D.
•By applying the provisions of Sec.229, such knowledge of A is treated as
Knowledge of B.
• Therefore, B cannot set off the amount owed by C to B against the price
of goods bought.

A is employed by B to buy from C certain goods of which C is the
apparent owner, and buys them accordingly. In the course of the treaty
for the sale, A learns that the goods really belonged to D, but B is
ignorant of that fact.
determine whether B is entitled to set off a debt owing to him from C
against the price of the goods.
• As per Sec.229, any information known to the agent is deemed to be
known to the principal, if agent knows such information while working
under the principal.
• In the given case, during the course of treaty for the sale, A came to
know that goods bought from C really belongs to D.
•By applying the provisions of Sec.229, such knowledge of A is treated
as Knowledge of B.
• Hence, the legal effect is that B contracted with D.
• Therefore, B cannot set off the amount owed by C against the price
of goods bought by D.

A is employed by B to buy from C goods of which C is the apparent
owner. A was, before he was so employed, a servant of C, and then
learnt that the goods really belonged to D, but B is ignorant of that
fact.
Examining the Provisions of Indian Contract Act, 1872, determine
whether B is entitled to set off a debt owing to him from C against the
price of the goods.
• As per Sec.229, where any notice or information given to or obtained by
the agent during the course of business transacted for the principal,
then, as between the principal and third parties, the same legal
consequences shall apply as if such notice or information is given to or
obtained by principal.
• In the given case, A learns that goods bought from C really belonged to
D while A serving as an employee of C but not learnt during the course of
business transacted for the principal.
•Therefore, the provisions of Sec.229, shall not apply to the given case.
• Accordingly, B may set off the amount owed by C to B against the price
of goods bought.

Personal Liability of the Agent [Sec.230]
•An Agent cannot personally enforce the contracts entered into by
him on behalf of the principle and he is also not personally liable on
such contracts, except in the following cases:
(1) where the contract is made by an agent for the sale or purchase
of goods for a merchant resident abroad;
(2) where the agent does not disclose the name of his principal;
(3) where the principal, though disclosed, cannot be sued.
In cases where the agent is personally liable, a person dealing with
him may hold either him or his principal, or both of them, liable.
[Sec.233]

Undisclosed Principal [Sec.231 & 232]
•If the TP enters into contract with agent, without knowing that he is
acting as agent, then the rights and obligations of the parties are as
follows:
Position of Principal
• The ‘P’may require the performance of the contract from such TP.
• If the ‘P’ requires the performance of the contract, then he is subject
to the rights and obligations subsisting between the agent and such TP.
Position of Third Party
• The third party may refuse to fulfill the contract, if the:
a) Principal discloses himself before the contract is completed; and
b) Third party can show that, had he known about the principal, he
would not have entered into the contract.
If the TP cannot refuse the contract and is required to fulfill the contract,
he may have the same rights against the principal, as he has against the
agent. CA CFA ADITHYA KIRAN - 8885814554

Practical Questions covered Topics
1. Effect of contracts entered by agent who is a minor.
2. Authority of Agent in an emergency.
3. Invalidity of Ratification which results in damage to third parties.
4. Agency coupled with interest not revokable.
5. Partly exercised agency not revokable.
6. Effect of revocation as regards third parties.
7. Agents duty to obey principal instructions or customs of trade.
8. Agents duty to exercise skill and diligence.
9. Repudiation of agency due to concealment of material facts.
10. Agent not entitled for remuneration when negligent.
11. Agent cannot claim indemnification against criminal acts.
12. Consequences of notice to agent.

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