The agency relationship is fiduciary. Because the agent exercises power over the principal's affairs, the law imposes duties of obedience, skill, disclosure and loyalty. Against these duties the agent has corresponding rights to remuneration, reimbursement, indemnity and a lien.
Legal Framework
| Provision | Subject | Key Rule |
|---|---|---|
| S.211 | Agent's duty in conducting the business | Conduct the business according to the principal's directions, or in their absence according to the custom of the trade |
| S.212 | Skill and diligence required | Act with the skill and diligence generally possessed by persons engaged in similar business |
| S.213 | Agent's accounts | Render proper accounts to the principal on demand |
| S.214 | Duty to communicate | Use reasonable diligence in communicating with the principal and seeking instructions |
| S.215 | Right of principal where agent deals on his own account without consent | The principal may repudiate the transaction if a material fact was concealed or the dealing was disadvantageous |
| S.216 | Principal's right to benefit gained by agent dealing on his own account | The principal may claim any benefit resulting from the transaction |
| S.217 | Agent's right of retainer out of sums received | May retain advances, expenses and remuneration out of sums received on the principal's account |
| S.219 | When agent's remuneration becomes due | In the absence of a special contract, remuneration becomes due when the act is completed |
| S.220 | Agent not entitled to remuneration for misconduct | No remuneration for business misconducted |
| S.221 | Agent's lien on principal's property | May retain the principal's goods, papers and property until amounts due are paid |
| S.222 | Agent to be indemnified against consequences of lawful acts | Principal must indemnify the agent against consequences of lawful acts done in exercise of authority |
| S.223 | Agent to be indemnified against consequences of acts done in good faith | Indemnity extends to acts done in good faith which cause injury to third parties' rights |
Duties of the Agent
1. Duty to Follow Instructions (S.211)
The agent must conduct the business of the agency according to the directions given by the principal. Where no directions are given, he must follow the custom prevailing in similar business at the place where the agent conducts it. Departure makes the agent liable to make good any resulting loss and to account for any resulting profit.
Why the agent must account for profit as well as bear loss: If deviation produced a gain the agent kept, agents would be tempted to gamble with the principal's affairs, keeping the upside and shifting only losses. Requiring the profit to be surrendered removes the incentive to disobey and reinforces that the agent acts for the principal's account, not his own.
2. Duty of Skill and Diligence (S.212)
The agent must conduct the business with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of the agent's want of skill. He must compensate the principal for the direct consequences of his neglect, want of skill or misconduct.
Facts: A commission agent bought goods for his principal and was instructed to insure them. He failed to do so. The goods were destroyed in an explosion in the Bombay docks. Under a government ordinance the principal received partial compensation.
Issue: Was the agent liable for the uninsured loss, and was the government compensation to be set off?
Held: The agent was liable for the loss caused by his failure to insure, which was a breach of the S.212 duty. The compensation received under the ordinance was a matter between the principal and the government and did not reduce the agent's liability.
Relevance: The leading Indian authority on the agent's liability for neglect of express instructions. Cite where an agent omits a protective step he was told to take.
3. Duty to Render Accounts (S.213)
The agent must render proper accounts to the principal on demand. This flows from the fiduciary character of the relationship: the principal is entitled to know what has been done with his property and money.
4. Duty to Communicate (S.214)
The agent must use all reasonable diligence in communicating with the principal and in seeking to obtain his instructions in cases of difficulty.
5. Duty Not to Deal on His Own Account (S.215, S.216)
An agent must not deal on his own account in the business of the agency without the principal's consent after full disclosure.
| Breach | Consequence |
|---|---|
| Concealment of a material fact, or dealing disadvantageous to the principal | The principal may repudiate the transaction (S.215) |
| Agent deals on his own account without consent | The principal may claim any benefit resulting from the transaction (S.216) |
Why disclosure and consent are both required: The agent's judgement is engaged on the principal's behalf. Once the agent has a personal interest, his judgement is compromised, and the principal cannot assess the advice he is receiving. Requiring disclosure allows the principal to decide whether to accept a conflicted agent. Requiring consent ensures that the choice is the principal's, not the agent's.
6. Duty Not to Make a Secret Profit
An agent must not use his position to obtain a benefit for himself beyond his agreed remuneration. Any secret commission, bribe or undisclosed gain belongs to the principal. The principal may recover the profit, dismiss the agent, refuse remuneration under S.220, and repudiate the transaction.
7. Duty Not to Delegate
An agent must ordinarily perform the duties personally, on the maxim delegatus non potest delegare, subject to the exceptions in S.190 to S.195.
8. Duty on Termination
On termination of the agency the agent must account for and deliver up the principal's property, subject to his lien.
Rights of the Agent
1. Right to Remuneration (S.219, S.220)
In the absence of a special contract, remuneration becomes due when the act the agent was engaged to do is completed. An agent guilty of misconduct in the business is entitled to no remuneration in respect of that part of the business which he has misconducted (S.220).
Why completion is the default trigger: The principal engaged the agent for a result, not for effort. Making payment depend on completion aligns the agent's interest with the outcome the principal wanted. The parties may of course contract for interim or effort-based payment.
2. Right of Retainer (S.217)
The agent may retain, out of any sums received on account of the principal, all moneys due to himself in respect of advances made or expenses properly incurred, and any remuneration payable.
3. Right of Lien (S.221)
In the absence of a contract to the contrary, the agent is entitled to retain goods, papers and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services has been paid.
Nature of the agent's lien: It is a particular lien, confined to property received in the course of the agency, and it is possessory, so it is lost if possession is given up. It may be enlarged to a general lien by express contract or established trade usage.
4. Right to Indemnity for Lawful Acts (S.222)
The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by the agent in exercise of the authority conferred.
5. Right to Indemnity for Acts Done in Good Faith (S.223)
Where an agent does an act in good faith, the employer is liable to indemnify him against the consequences of that act, though it causes injury to the rights of third persons.
Facts: An auctioneer sold cattle on the instructions of a person who was not the owner. The true owner sued the auctioneer and recovered. The auctioneer claimed indemnity from his principal.
Held: The auctioneer, having acted in good faith on the principal's instructions and without knowledge of the want of title, was entitled to be indemnified for the damages and costs.
Relevance: The classic authority underlying S.223. The agent's good faith is the condition of the indemnity.
Limit on the indemnity (S.224): Where the act is criminal, the principal is not liable to indemnify the agent, whether or not the agent knew it was criminal.
6. Right to Compensation for Injury (S.225)
The principal must make compensation to the agent for injury caused to the agent by the principal's own neglect or want of skill.
Illustrations
-
Departure from instructions: A instructs his agent B to sell goods only for cash. B sells on credit and the buyer becomes insolvent. Under S.211 B must make good the loss, because he departed from express directions.
-
Neglect of instructions to insure: A commission agent is told to insure goods and fails to do so. The goods are destroyed. Applying Pannalal Jankidas v Mohanlal (1951), the agent is liable for the loss, and compensation the principal receives from another source does not reduce that liability.
-
Agent dealing on his own account: A instructs B to buy a plot of land. B owns a suitable plot and sells it to A without disclosing that he is the owner, at a price above market. Under S.215 A may repudiate the sale, and under S.216 claim any benefit B derived.
-
Secret commission: An agent engaged to purchase machinery takes an undisclosed commission from the supplier. The principal may recover that commission, refuse the agent's remuneration under S.220, and repudiate the purchase.
-
Remuneration on completion: A broker is engaged to find a buyer for A's property on commission. He introduces a buyer who signs an agreement to sell. Under S.219 the commission becomes due on completion of the act he was engaged to do, that is procuring a binding buyer, unless the contract provides otherwise.
-
Agent's lien: An agent holds title deeds of the principal's property received in the course of the agency, and commission is unpaid. Under S.221 he may retain the deeds until paid. If he hands them back on a promise of payment, the lien is lost.
-
Indemnity for good faith act: An agent, acting on the principal's instructions and believing the goods to be the principal's, sells goods that in fact belong to a third party. Applying S.223 and Adamson v Jarvis (1827), the principal must indemnify the agent for the damages and costs.
-
No indemnity for criminal acts: A principal instructs an agent to remove a competitor's signage by force. The agent is prosecuted. Under S.224 the principal is not liable to indemnify him, even if the agent did not know the act was criminal.
Recall Check
- What must an agent do where the principal has given no directions about how to conduct the business?
- Distinguish the principal's remedy under S.215 from that under S.216 where an agent deals on his own account.
- Is a principal bound to indemnify an agent against the consequences of a criminal act done on his instructions?
Key Cases
Pannalal Jankidas v Mohanlal (1951) Pannalal Jankidas v Mohanlal 1951
Issue: Liability of an agent who failed to insure goods as instructed, and the effect of compensation received from another source.
Rule: An agent must act with the skill and diligence of persons in similar business (S.212) and is liable for the direct consequences of neglect.
Held: The agent was liable for the uninsured loss. Government compensation to the principal did not reduce the agent's liability.
Adamson v Jarvis (1827) Adamson v Jarvis 1827
Issue: Whether an agent who innocently sold another's goods on the principal's instructions could claim indemnity.
Rule: A principal must indemnify an agent for acts done in good faith in exercise of authority.
Held: The auctioneer recovered the damages and costs from his principal.
Distinctions
| Basis | S.215 (repudiation) | S.216 (claim to benefit) |
|---|---|---|
| Trigger | Agent dealt on his own account concealing a material fact, or the dealing was disadvantageous | Agent dealt on his own account without consent |
| Remedy | Repudiate the transaction | Claim the benefit resulting from the transaction |
| Requires disadvantage | Yes, or concealment of a material fact | No; absence of consent suffices |
| Basis | Agent's Lien (S.221) | Agent's Right of Retainer (S.217) |
|---|---|---|
| Subject | The principal's goods, papers and property in the agent's possession | Money received on the principal's account |
| Nature | Possessory right to retain property | Right to deduct from receipts |
| Loss on parting with possession | Lien extinguished | Not applicable |
| Basis | Indemnity under S.222 | Indemnity under S.223 |
|---|---|---|
| Character of the act | Lawful act within authority | Act done in good faith which injures a third party's rights |
| Condition | Act must be lawful and authorised | Agent must have acted in good faith |
| Excluded by | Unauthorised acts | Criminal acts (S.224) |
Flashcards
What must an agent do if the principal gives no directions?
Follow the custom which prevails in doing business of the same kind at the place where the agent conducts it (S.211).
What standard of skill does S.212 require?
The skill and diligence generally possessed by persons engaged in similar business, unless the principal had notice of the agent's want of skill.
When does an agent's remuneration become due?
On completion of the act he was engaged to do, in the absence of a special contract (S.219).
Can an agent claim remuneration for business he has misconducted?
No. S.220 denies remuneration for the part of the business misconducted.
What is the nature of an agent's lien under S.221?
A particular possessory lien over the principal's goods, papers and property received in the course of the agency, until sums due are paid.
What happens if an agent makes a secret profit?
The principal may recover the profit, refuse remuneration (S.220), repudiate the transaction, and dismiss the agent.
Must a principal indemnify an agent for acts done in good faith that injure third parties?
Yes, under S.223, as in Adamson v Jarvis (1827). But not for criminal acts (S.224).
What did Pannalal Jankidas v Mohanlal decide?
An agent who failed to insure goods as instructed was liable for the resulting loss, and compensation the principal received from the government did not reduce that liability.
Exam Scenario
Problem: Ishaan appoints Tara as his agent to purchase industrial fabric, instructing her to buy only from mills offering at least 90 days' credit and to insure all consignments in transit. Tara buys from a mill offering only 30 days' credit because it paid her an undisclosed commission of Rs. 50,000. She also omits to insure the consignment, which is damaged by water during transit, causing a loss of Rs. 3 lakhs. Tara holds Ishaan's original import licence documents and refuses to hand them over until her agreed commission of Rs. 40,000 is paid. Advise Ishaan.
Step 1: Match each act of Tara to the duty it breaches
| Act of Tara | Provision | Consequence |
|---|---|---|
| Bought on 30 days' credit against an express direction | S.211 | Must make good any loss flowing from the shorter credit period, such as additional finance cost |
| Took an undisclosed commission of Rs. 50,000 | S.215, S.216 | Ishaan may repudiate the purchase and claim the Rs. 50,000 |
| Omitted to insure the consignment | S.212 | Liable for the Rs. 3 lakh transit damage |
| Claims Rs. 40,000 commission and holds the licence documents | S.220, S.221 | No remuneration payable, and no lien to secure |
Step 2: Take the secret profit under S.215 and S.216
The undisclosed commission is a breach of the fiduciary duty not to make a secret profit, reinforced by S.215 and S.216.
Because Tara concealed a material fact, Ishaan may repudiate the purchase under S.215. Under S.216 he may claim the Rs. 50,000 secret commission as a benefit resulting from her dealing.
Step 3: Fix liability for the uninsured consignment
Apply S.212 with Pannalal Jankidas v Mohanlal (1951). The instruction to insure was express and the omission caused the Rs. 3 lakh loss directly.
Tara is liable for that sum.
Step 4: Defeat the remuneration claim, then the lien
Run these in order, because the lien depends on the remuneration:
- S.220: an agent is entitled to no remuneration for business he has misconducted. Taking a secret commission, disobeying express instructions and failing to insure are plainly misconduct in the very business she was engaged for, so the Rs. 40,000 is not payable.
- S.221: the lien secures only amounts due. No remuneration being due under S.220, and Tara being herself a debtor to Ishaan, there is nothing for the lien to secure.
- Her retention of the import licence documents is therefore wrongful, and Ishaan may sue for their delivery.
S.221 secures only what is due. The lien is not a general right to hold the principal's papers. Once S.220 strips out the remuneration, the lien has nothing left to attach to.
Misconduct must be in the business engaged for. S.220 bites here precisely because the secret commission, the disobedience and the failure to insure all arose in the very business Tara was engaged for.
Conclusion. Ishaan may recover Rs. 50,000 and Rs. 3 lakhs, resist the commission claim, compel delivery of his documents, and repudiate the fabric purchase.
See Also
- Contract of Agency: Definition and Creation : how the relationship giving rise to these duties comes into existence.
- Personal Liability of Agent : when the agent, rather than the principal, answers to the third party.
- Contract of Indemnity : the general law of indemnity underlying S.222 and S.223.