Contract of Agency Define pledge. Discuss the essential elements of a pledge. He is entitled to remuneration and other expenses properly incurred by him in the agency. But if he is guilty of misconduct, he is not entitled to receive the remuneration. Illustration: A employs B to recover Rs. 1000 from C. Through B’s misconduct, the money is not recovered. B is entitled to no remuneration for his services and must make good the loss.

Introduction:-

        The law of agency governs situations where one person (agent) is appointed to act as the representative of another (principal) in the context of contractual negotiations.  Generally, this system will be adopted for a number of reasons, for example it may not be practical for one person to personally enter into all the contracts he/she would wish.  Moreover, where a company enters into contractual negotiations, it is important that someone be appointed as an agent to act on behalf of that entity. Section 182 of the Indian Contract Act defines an agent as person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented is called the “principal”.

Essentials of a Contract of Agency :-

1. There should be an agreement between the principal and the agent:  

        It is an essential element of a valid agency. According to this element, the agency must be created by an agreement between the principal and the agent. Thus, there must be an agreement by which a person is appointed as an agent by the other. The agreement may be express (i.e., by words of mouth or of the case.

2. The agent must act in the representative capacity:  

        It is the most important essential element of a valid agency. The agent must act in the representative capacity, i.e., he must represent his relationship of his principal with the third persons. Thus the true nature of the relationship should be seen if the agent acts in representative capacity and had the power to bind his principal with the third persons, the relationship is that of ‘agency’.

3. The principal must be competent to contract (Sec 183)

         It is another important essential element of a valid agency. The principal must be competent to enter into a valid contract, i.e., he must be of sound mind, and have attained the age of majority (i.e., he should have completed 18 years of age). Thus, a minor or a person of unsound mind (i.e., insane person) cannot appoint an agent to act on his behalf [Section 183]. An appointment of an agent, made by an incompetent person is void. It may be noted that an agent acting on behalf of an incompetent principal will be personally liable, for his acts, to third persons with whom be contracts.

4. The agent need not be competent to contract (sec: - 184) 

        Generally, an agent incurs no personal liability while contracting on behalf of his principal. Therefore, it is not necessary that he should be competent to contract. Thus any person may become an agent and he need not be competent to contract [Section 184]. Even a minor can be appointed as agent, and the principal shall be bound by the acts of such an agent. It may, however, be noted that such an incompetent agent shall not be liable to the principal. Thus, the principal cannot recover any compensation from an incompetent agent for losses caused by misconduct or unauthorized acts of such agent. It is, therefore, in the interest of the principal to appoint a competent person as his agent.

5. The consideration is not necessary (sec: - 185) 

        An agency is valid even without consideration. Thus, no consideration is required for the creation of a valid agency relationship [Section 185]. Generally, an agent is remunerated by way of commission for the services rendered by him. However, no consideration is necessary for the validity of the appointment of the agent

Creation of Agency An agency may be created in the following ways:

By Express Authorit.The authority of any agency may be expressed in words spoken or written. For example, a contract of agency can be written by means of power of attorney.

By Implied Authority:

        The authority of an agent can be interred from the circumstances of the case. Illustration: A living in Bombay, owns a shop in Madras and he occasionally visits it. B is managing the shop and is in the habit of ordering goods from C in the name of A for the purpose of the shop and of paying to them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods from C in the name of A for the purpose of the shop.

By Necessity: 

        Sometimes, exigencies of circumstances require a man to act for another as an agent, though not appointed as such. Illustration: A horse was sent by rail. The owner had not taken delivery of the same at the destination. So, the station master had to feed it. It was held that the station master had become an agent by necessity and was therefore entitled to recover the charges incurred by him.

Agency by necessity (in case of husband and wife) According to S142 Contract Act 1950, 

        An agency may arise by necessity or in an emergency. Agency of necessity means a person may become the agent of another without being appointed as such under certain circumstances. For example, a deserted wife or a wife who is justified in leaving her husband and she has not working, can claim for the necessities of life from her husband according to the income and position of the husband even though her husband unwilling to fulfill this pledge. However, if she is has been given an adequate allowance and can support her own life either in money or in earning capacity, then there is no arise of agency by necessity as in case Biberfield v. Berens [1952] 2 All ER 237.

By Holding Out: 

        Where a master usually sends his servant to pledge his credit for certain mangdfgfd he is bound by the acts of the servant for similar purposes though done without his consent.

By Estoppel: 

         When one man by words or conduct causes another to believe that some other person is his agent and that another person had acted on that belief, he would be stopped from denying the authority of that another person to act on his behalf. Illustration: a tells B in the presence and within the hearing of P that he (A) is P’s agent and P does not contradict this statement B, on the faith of this statement, subsequently enters into a contract with A, taking him to be P’s agent. P is bound by that contract.

By Ratification or Expost Eacto Agency: 

        Section 196 of the Indian Contract Act lays down that where acts are done by one person on behalf of another, but without his knowledge of authority, he may elect to ratify or to disown such acts. If he ratifies them the same effects will follow as if they had been performed by his authority. Thus ratification relates back to the date of the original contract and binds the principal as if he has expressly authorized it.

Termination of Contract of Agency:-

        Termination of agency may take place in two ways either by the operation of law or by the act of parties.

A. By operation of Law

B. By act of parties

Termination of agency by the operation of law. The following are the situations where the agency is terminated by the operation of law.

Expiry of time: 

        At times contract of agency may get formed for a particular period. In such a case after expiry of that agreed period, termination of agency takes place.

Fulfillment of object: 

        At times the contract of agency may be found for a particular objective or to do a particular venture. In such a case termination of agency takes place after completion of that venture.

Death or lunacy of either party (sec:-209)

         whenever principal or agent come across death or lunacy, agency contract gets terminated.

Insolvency of Principal: 

        Principal should have capacity to contract. When principal becomes insolvent, He foregoes capacity to contract and termination of agency takes place. But the act is silent with regard to insolvency of agent. As minor also can act as agent, it can be conformed that insolvent person may act as agent.

Destruction of subject matter:  

When subject matter of contract gets destructed, agency contract comes to an end.

Principal – Alien Enemy: When principal is alien and war breaks out between the countries, then principal becomes alien enemy and agency contract gets terminated.

Liquidation of company: On account of legal entity company may act either as principal or agent. Whatever the status may be, if company enters into liquidation, termination of agency takes place.

Termination of Sub-agency (sec:-210) When ever man agency gets terminated on account of any reason, sub-agency also goes off. 

Termination of agency by the act of Parties. 

The following are the situations where the agency is terminated by the act of parties.

Termination of agency by the Principal: 

        Principal can terminate the contract of agency by giving notice to agent. By doing so if agent comes across any suffering. Principal has to compensate the agent.

Termination of agency by the Agent:     

    Agent also can terminate the agency contract by giving notice to principal but by doing so if principal comes across any suffering, agent has to compensate.

Termination of agency by both the parties to the contract: 

        By means of mutual understanding between principal and agent, the contract of agency may come to an end.

Rights of an Agent :-

He is entitled to remuneration and other expenses properly incurred by him in the agency. But if he is guilty of misconduct, he is not entitled to receive the remuneration. Illustration: A employs B to recover Rs. 1000 from C. Through B’s misconduct, the money is not recovered. B is entitled to no remuneration for his services and must make good the loss.

He is entitled to retain the goods, papers and other property, movable on immovable, of the principal for his claims.

The agent has a right to be indemnified by the principal for all lawful acts. Illustration: B at Singapore under instructions from A of Calcutta, contracts with C to deliver goods. A does not send the goods to B and C sues B breach of contract. B informs A of the suit and A authorizes him to defend the suit. B defends and is compelled to pay damages etc. A is liable to B for such damages etc.

Duties of an Agent

He should act according to the directions of the principal and in default, indemnify the principal for the loss, if any

In the absence of instructions, he must act according to the trade custom. Illustration: 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 monies which may be in hand, omits to make such investment. A, must make good to B the interest usually obtained by such investment.

In case of difficulty, he must be diligent in communicating with the principal and obtaining his instruction.

He must conduct the business of agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of want of skill. Illustration: A, having authority to sell on credit, sells goods to B without enquiring about his solvency, B at the time of sale, is bankrupt. A must make good the loss.

He must render proper accounts on demand.

He must not delegate his authority without the consent of the principal.

He must deliver all monies including secret commission, to the principal. He can deduct his remuneration and other lawful expenses spent by him.

He should not set up his own title or title of third parties to the goods of the principal in hi hands.

If, by the nature of profession, an agent is purported to have special skill, he must exercise that degree of skill ordinarily expected from the members of the profession. Illustration: A solicitor, who started the proceedings under a wrong section or filed a suit in a court having no jurisdiction, is liable.

He should not disclose confidential information. His interest should not conflict with his duty.

 Section 172 :

'The bailment of goods as security for payment of a debt or performance of a promise is called 'pledge'. The bailor in this case is called the 'pawnor'. The bailee is called the 'pawnee' (Sec. 172)

Essential Features of Valid Pledge :-

    The legal definition of pledge, discussed in the last article, reveals the essential features of pledge which are as under 

1. Delivery of possession :- 

        It is an essential and important element of a valid pledge that the Possession of the goods must be delivered by the pawnor to the Pawnee. It may be noted that only the possession of the goods passes from one person to the other and not the ownership. The ownership remains with the pawnor. If the possession is not delivered then there cannot be a valid pledge. 

        The delivery of possession to the Pawnee may be of two kinds (a) actual delivery, (b) constructive delivery. Actual delivery means the delivery of physical possession. And constructive delivery means when there is no change of physical possession. The delivery of keys of a go down where the goods are stored is the constructive delivery. Similarly, the delivery of documents of titles which enables the Pawnee to obtain the possession is the constructive delivery of goods.

2. Delivery should be upon a contract :-

        It is another essential element of a valid pledge that the delivery of possession should be made in pursuance of a contract of pledge. Thus, the delivery of goods should be made with an intention to create a pledge. It is, however, not necessary that the delivery of the goods and the advance of money (i.e., loan) should be simultaneous. Delivery may be made before or in contemplation of advance. In such cases, a valid pledge results as soon as the advance is made. The delivery may also be made after getting the advance. In such cases, a valid pledge results as soon as the goods are delivered. 

3. Delivery should be for the purpose of security :-

        The goods should be delivered by one person to another by way of a security. The pawnor should deliver the goods to the Pawnee as a security for the payment of a loan or for the fulfillment of an obligation. It may be noted that this particular essential element distinguishes the pledge from other similar, transactions. Thus, where the object of delivery of goods is to provide a security for the payment of a loan, the transaction is a pledge. And where the delivery is for some other purpose then it may be a bailment and not a pledge. 

4. Delivery should be upon a condition to return :-

        It is also an important element of a valid pledge. The goods should be delivered to the Pawnee as a security for some loan or for the fulfillment of the promise. When such loan is repaid or promise is fulfilled, the security should be returned to the pawner

Duties of Pawnee :-

        Pledge being a special kind of bailment, the duties of a Pawnee is just like a bailee. Thus a pawnee’s duties may be enumerated as follows:

1. To take reasonable care of the goods pledged.

2. Not to make any unauthorized use of the goods pledged.

3. Not to mix the goods pledged with his own goods.

        Not to do nay act in violation of the terms of the contract of pledge and of the provisions of the Contract Act. For example, he should not sell the goods pledged without a reasonable notice to the pawnor.

To return the goods pledged on the receipt of his full dues.

        To deliver any accretion to the goods pledge, e.g., bonus shares must also be delivered where shares from the subject-matter of pledge. The accretion remains the property of the pawnor (M.R. Dhawan vs Madan Mohan)

 Rights of Pawnor :-

Enforcement of Pawnee’s duties,

Defaulting pawnor's right to redeem(Sec. 177)