Principal Agent Relationships & Respective Liabilities

INTRODUCTION

Chapter 10 of the Indian Contract Act talks about the relationship between principal and agent. An agent, as per Section 182 of the aforementioned act, is a person hired to work on behalf of the individual known as a principal and represent him in dealings with third parties. This article demonstrates the rights, obligations, and responsibilities of a principal and the agent in general.   

WHAT IS MEANT BY AGENCY? 

The term "agency" refers to a situation in which one party, the principle, delegated certain responsibility in form of authority to some other party, the agent, to conduct on his account in dealings with a third party, resulting in a legally enforceable relationship between the two. The most important aspect of an agent's job is his ability to make the principal liable to third parties. The principal is obligated by the agent's act in the very same way as he would be if he performed it personally. A principal is a person who gives authority to the agent to represent him in different matters. The consent of the principal to delegate his authority to the agent is an important factor in determining the rightful authority of the agent. 

COMPETENCE OF THE PRINCIPAL IN CONTRACT

The ability of the persons to enter into a contract is one of the requirements of a legal contract, as per Section 11 of the Indian Contract Act. The agent establishes a valid agreement involving his principal and a potential third party in an agency. When both the parties enter into a valid contract, they only do so when they are competent to contract. Hence, while agreeing with an agent, both the principal and the third party must be competent to contract. 

Even though a child who is a minor cannot select an agent for himself, there is nothing about Section 183 that prevents a juvenile's guardian from doing so. Whenever a client authorises his counsel to represent him when he is in good psychological form, but later develops health issues and mental impairments as a result of old age, authorisation given is rendered useless.

THE NECESSITY OF AN AGENT TO BE COMPETENT TO CONTRACT 

An agent's capability as an agent can be viewed from two perspectives: 

• To begin, an agent's ability to operate on account of his principal to commit his principal and a potential third party — In terms of the agent's ability to bind the principal to the obligations that he owes to a third party, anyone could become an agent. It indicates that an agent can create a legitimate agreement involving his principal and a third party even if he is a minor or otherwise incapable of contracting. The agent serves merely as a bridge between both the principal and the third party in this case.

• Capability of agents to tie themselves to their principals through a contract - It is just not essential for an agent to be qualified to contract to bind himself to his principal. However, in such instances, the agent would not be held liable for the principal's actions.

IS CONSIDERATION NECESSARY IN A PRINCIPAL-AGENT RELATIONSHIP? 

The law of agency does not mandate any such criterion for determining the legitimacy of an agency contract. The principal intends to be legally bound by the activities performed on his account by the agent, and this is sufficient harm to the principal. In most cases, an agent is compensated in the form of a fee for services done, but no payment is required at the outset of his engagement.

RESPONSIBILITY OF PRINCIPAL THAT HE OWES TO THIRD PARTIES

The effect that the contract will have depends on the situation in which the contract was entered into by the agent on behalf of the principal. The agent can contract under the following situation- 

• When the principal's name is revealed and an agent agrees on his behalf, the agent normally has no privileges or obligations under the said contract. He cancels the agreement as quickly as it is signed. As a result, the contract is solely between both the principal and the third party, and their responsibilities and privileges are limited to them. Such a contract will have the same legal force as if the principal had directly contracted with the third person.

All of the agent's actions within the genuine or apparent power obligate the principal, according to the legal force. It's worth noting that actions performed beyond the boundaries of an overall agent's real power but within his ostensible power bind the principal. As a result, any hidden constraints on the agent's abilities do not affect the third party.

• In this particular instance, the agent is not personally responsible because he reveals that he is just an agent but conceals the authenticity and identity of his principal. As a result, if the principal is identified, he is responsible for the contract signed by his agent as well as the agent's actions.

• An agent gets personally accountable if he appears to be negotiating with his name before indicating that he is a representative. In this instance, the third party may claim compensation after he sues either the agent or the principal, or both, if he is discovered. If, on the other hand, the third party decides to sue the principal rather than the agent, the third party must give the principal the advantage of all payments made to the agent. He is also entitled to take all the money he gives to the agency as part of the contract. If the principal reveals himself before the contract is completed, the third party might stop performing the contract if he demonstrates that:

1. He wouldn't even have committed himself to the deal if he had known the principal. 

2. He would never have signed the contract if he had known the agent was not the principal.

• The principle is accountable for the activities of an agent who conducts a crime, tort, or deceit while operating within his real or apparent power. In this instance, an agent is also individually responsible and can be sued. Even if the agent performs the scam for his profit and against the principal's interests, the principal is held accountable.

CIRCUMSTANCES UNDER WHICH THE AGENT IS PERSONALLY LIABLE 

• When the agent explicitly accepts to be individually responsible for the agreement: If an agent explicitly happens to agree to be individually accountable for the deal while making a contract with a third party, he can indeed be held individually responsible for any violation of the contract. 

• When an agent works on behalf of an overseas principal: When an agent engages in the buying or selling of commodities on account of a trader who is based outside the United States, he is deemed to be personally responsible. 

• When an agent operates for an unknown principle, he is individually responsible if he does not divulge the principal's name.

• Whenever the agent is acting on behalf of a client who cannot be sued: When such an agent engages on behalf of the individual who, despite being revealed, cannot be prosecuted, he assumes legal responsibility. 

• Whenever a representative enters into a contract on behalf of a fictional or non-existent principal, the agent becomes individually accountable for the agreement. A non-existent principle cannot be bound by any agency.

CONCLUSION

The contracting agency plays a significant part in the delegation of power from the principal to the agent in contemporary days, as the company organisation grows. The Indian Contract Act, Chapter X, explains the numerous complexities of an agency contract, including the powers, obligations, and duties of the third party, the principal, and the agent. It further indicates that the use of an agency is not required; this might be deduced from the parties' implicit behaviour. Furthermore, this contract outlines the many methods through which the principal and agent might revoke the agency contract.

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Written by Tarushi Goel, a fifth-year law student of O.P Jindal Global University. She is currently pursuing BA LLB and is inclined toward legal research.