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Nirma University

Institute of Law

CONTRACT II PROJECT WORK

SUBMITTED BY- SUBMITTED TO-

Vijay kumar Roheria Hardik Parikh

B.A. LLB. (Sec. B) Asst. Prof. Contracts II

10BAL106

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ACKNOWLEDGEMENT

I, Vijay Kumar Roheria, 10bal106, would like to acknowledge all the articles, journals, reports

and the available sources which have helped and guided me in the completion of this project.

I would also like to acknowledge the faculties for their continuous efforts and guidance. It really

helped a lot. This project would not have been successful without the help of any one above.

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DECLARATION

I hereby declare that the work in this project does not have any unauthorized use of resources.

The text reported in the project is the outcome of my own efforts and no part of this report has

been copied in any unauthorized manner and no part in it has been incorporated without due

acknowledgement. The project has not been accepted for any degree and is not concurrently

submitted for award of other degree.

Vijay Kumar Roheria

B.A.LL.B. (Hons.)

10BAL106 SEC. B

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CERTIFICATE

This is to certify that Vijay Kumar Roheria (10BAL106) is a student of Semester IV pursuing

B.A.LL.B (hons.), from Institute Of Law, Nirma University and the research area mentioned

in the index have been performed by him with full sincerity and dedication under my

guidance and support.

Hardik Parikh

Asst. Prof. Contract

Institute Of Law, Nirma University

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Table of Contents

1. Introduction---------------------------------------------------------------------------------------------------6

2. Review of Literature-----------------------------------------------------------------------------------------9

3. Objectives----------------------------------------------------------------------------------------------------10

4. Hypothesis --------------------------------------------------------------------------------------------------10

5. Research Methodology-----------------------------------------------------------------------------------10

6. Relation between Principle and Agent----------------------------------------------------------------12

7. Rights, Duties, and Liabilities between Principal and Agent-------------------------------------14

8. Conclusion---------------------------------------------------------------------------------------------------38

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TITLE

Relation between Principle and Agent

INTRODUCTION

An arrangement in which one entity legally appoints another to act on its behalf. In a principal-

agent relationship, the agent acts on behalf of the principal and should not have a conflict of

interest in carrying out the act.1

The relationship between the principal and the agent is called the “agency,” and the law of

agency establishes guidelines for such a relationship. The formal terms of a specific principal-

agent relationship are often described in a contract.

For example, when an investor buys shares of an index fund, he is the principal, and the fund

manager becomes his agent. As an agent, the index fund manager must manage the fund,

which consists of many principals' assets, in a way that will maximize returns for a given level of

risk in accordance with the fund’s prospectus.

In the relationship between an agent and a principal, both parties consent to the agent having

the ability to act on behalf of the principal. This is known as a form of principal-agent

relationship called power of attorney. Such a relationship plays an important role in business,

whether it be in the workplace, a partnership, or a corporation.

There are three types of authority in a principal-agent relationship: express, implied, and

apparent authority2. Express authority is what the principal directly tells the agent his duties

and responsibilities are. This cannot cover every detail though, so the authority extends to what

1 http://www.investopedia.com/terms/p/principal-agent-relationship.asp#axzz1pg8rptJM visited on 10.55 PM

20/3/2012

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is necessary for the agent to carry out the principal’s instructions. Such authority is known as

implied authority. There is also apparent authority in which the principal leads another to

believe that a certain person is his agent. This is also known as agency by estoppel.

The relationship is said to be fiduciary, meaning that there is a degree of trust and obedience

on the agent’s part. The agent owes various duties to his principal. One of these is the duty of

loyalty; the agent must act for the principal’s benefit and not his own. He cannot be on both

sides of a transaction unless both parties are aware of it and agree to it. The agent also cannot

disclose trade secrets about the principal’s business after the term of employment is up. He

must obey all of the principal’s orders, provided they are reasonable. If any of the instructions

go against the law, he will be held responsible for performing illegal actions. He is also required

to carry out the actions of his principal as if he were doing it for himself.3 Within the workplace,

this relationship plays a very important role. The association between employer and employee

can be described as being principal-agent. This is also a master-servant relationship since the

principal has a good amount of control over the agent. The employer controls the activities of

the employee and is responsible for any injuries that might be caused by the employee’s

activities, provided the employee is acting within the scope of employment. The principal-agent

relationship can also be seen with independent contractors. These people are hired to perform

a certain task; however, the person who hires them is not the one who controls them. The

principal does not have as much control over the independent contractor as he would in a

master-servant relationship.4

The agent-principal relationship is very important in a business partnership as well. A

partnership is created when two parties consent to be “co-owners of a business for profit." The

business becomes an extension of the partners’ personal liability, and the profits or losses are

passed through to the partners’ tax return. The partners are said to be agents of each other;

3 http://www.knowledgesutra.com/discuss/tpcttd-agent-principal-relationships-info-subject.html visited on 10.55

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therefore, they owe the duties mentioned above to each other. In addition to this, the partners

must both work to manage the partnership. They can appoint these duties to specific partners,

in accordance with the agency rules of express, implied, and apparent authority. Other times

they may vote on certain matters and let the majority rule. Larger decisions in which no

apparent authority can be claimed, such as settling a lawsuit or selling the partnership’s assets

or goodwill require a unanimous vote.

The principal-agent relationship is also important in a corporation. Such a business is a legal

entity in itself and is treated as a person under the law. It is run by a board of directors whom

its shareholders elect. These directors make the policies of the corporation and look after it.

They are agents of the corporation and owe a fiduciary duty to it; they must look out for the

best interest of the corporation. They are held to the business judgment rule where they must

show that their actions were made after carefully studying the situation. To benefit the

corporation, they may choose to hire other agents, such as attorneys, accountants, or financial

analysts. Directors also may not take for themselves an opportunity that their corporation may

want.

The principal-agent relationship can end for several reasons; the contract might reach its end

date, the purpose for the agency may be accomplished, or the principal may die or become

incapacitated. Even if the agent is fired or if he quits, the agreement does not automatically

end. The agent can still have lingering apparent authority since various third parties may remain

unaware of the termination of the relationship. To ensure that the agent does not act beyond

his authority at the end of the relationship, the principal must be sure to give notice that the

person is no longer his agent. There are two kinds of notice. The first is actual notice in which

the principal informs everyone with whom the agent is dealt. He must also give constructive

notice to the general public to ensure that they are aware as well. He can do this through trade

magazines or newspapers.

The relationship between a principal and his agent is one which is vital in the workplace and to

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many businesses, especially partnerships or corporations. Such a relationship ensures that the

best interests of the business are looked out for and helps it to prosper in the long run.

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LITERATURE REVIEW

Books

1. Mulla: Indian Contract Act by Anirudh Wadhwa- In this book Rights, Duties and liabilities

of Principal and Agent and Limitation of this relationship is explained.

2. Contract and Specific Relief by Avatar Singh- In this book principle agent relationship

and laws related to this relationship is explained

Web

1. www.manupatra.com source of cases related to agency.

2. www.jstor.com source of articles related to principal agent relationship and agency

3. www.agency.uslegal.com

4. www.ruf.rice.edu

5. www.investopedia.com

6. www.knowledgesutra.com

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OBJECTIVE-

1. To know about Principal-Agent relationship, and Laws related to this relationship,

2. To know about Rights, Duties and liabilities of Principal and Agent and Limitation of such

relationship.

3. To understand the Creation of Agency.

HYPOTHESIS-

1. The relationship between the principal and the agent is called the “agency”.

2. In an agency principal employs another person to represent him in dealing with third

person.

3. Principal is vicariously liable for the act of agent.

RESEARCH METHODOLOGY

This project is based on study of topic Principal and Agent, Agency. This is a doctrinal research

project. The present study is a secondary data based study. Data have been collected from

various net resources, books and articles.

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Relation between Principle and Agent

INTRODUCTION

Sec 182 of Indian Contract Act Defines the term Principal and Agent- an Agent is a person

employed to do any act for another or represent another in dealing with third person. The

person to whom such act is done, or who is So represented, is called the Principal.

PRINCIPAL- Any person who has the legal capacity (meaning that they are not insane, or in

certain circumstances a minor) to perform an act may be a principal and empower an agent to

carry out that act. Persons, corporations, partnerships, not-for-profit organizations, and

government agencies may all be principals and appoint agents.

AGENT- Any individual capable of comprehending the act to be undertaken is qualified to serve

as an agent.

AGENCY- A contract to be made by an agent on behalf of a principal is considered to be the

contract of the principal and not that of the agent. It allows the principal to authorize

somebody to carry out her duties, either for a specific purpose (i.e., purchasing a house) or

generally (i.e., to conduct many transactions). The agency relationship is usually entered into by

informal agreement, but also can occur by formal agreement (in certain cases, the agency

relationship must be specified in writing). The acts must be legal (i.e., principal cannot hire

agent to kill any person).

Inherent in the Principal-Agent (P-A) relationship is the understanding that the agent will act for

and on behalf of the principal. The agent assumes an obligation of loyalty to the principal that

she will follow the principal’s instructions and will neither intentionally nor negligently act

improperly in the performance of the act. An agent cannot take personal advantage of the

business opportunities the agency position uncovers. A principal, in turn, reposes trust and

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confidence in the agent. These obligations bring forth a fiduciary relationship of trust and

confidence between P and A.5

An agent must obey reasonable instructions given by the P. The A must not do acts that have

not been expressly or impliedly authorized by the P. The A must use reasonable care and skill in

performing the duties. Most importantly, the A must be loyal to the P. The A must refrain from

putting herself in a position that would ordinarily encourage a conflict between the agent’s own

interests and those of the principal.

5 http://www.ruf.rice.edu/~schuler/principal-agent.html Accessed at 10.55 PM on 20/3/2012

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Rights, Duties, and Liabilities between Principal

and Agent

An agency is the creation of a contract entered into by mutual consent between a principal and

an agent. By agency, a principal grants authority to an agent to act on behalf of and under the

control of the principal. The relation between a principal and an agent is fiduciary and an

agent’s actions bind the principal. The law of agency thus governs the legal relationship in

which an agent deals with a third party for his/her principal.

An agent owes certain duties towards his/her principal and a principal owes certain duties

towards his/her agent. These rights and duties are reciprocal in nature, Agent’s duties are

Principal’s rights and Principals duties are Agents rights. The scope of an agent’s duty to the

principal is determined by:

(i) The terms of the agreement between the parties,

(ii) Extent of the authority conferred and the obligations of loyalty to the interests of

the principal.

Duties of Agent:6

1) Duty not to delegate his Duties (Sec-190) - The rule is contained in the maxim ‘Delegatus

non potest delegare’, which mean that an agent to whom some authority has been

delegated cannot further delegate that authority to another person. An agent cannot

lawfully employ another to perform acts which he has expressly or impliedly undertaken

to perform personally, unless by the ordinary custom to trade a sub- agent may or form

the nature of the agency, a sub-agent must be employed.

6 http://agency.uslegal.com/rights-duties-and-liabilities-between-principal-and-agent/ accessed at 10 PM on

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Exceptions:-

a) When nature of agency so requires

b) When an act does not require personal skill, the same may be got done through

sub agents

c) When the principal expressly and impliedly agrees to the appointment of a sub-

agent for doing certain work.

2) Duty to follow Principal’s direction (Sec-211) – Agent is bound to conduct business of his

principal according to the directions given by principal, in absence of specific direction

he should carryout business according to custom

3) Duty to show proper skill and care (Sec-212) – the agent is supposed to take due care

and act with reasonable diligence in the matter of agency.

In Keppel v. Wheeler7 principal instructed agent to find buyer for his estate. Agent

communicated with on interested buyer who wanted to buy his estate for 6,150 euro,

after that communication one another offer is made by another buyer for 6750 euro.

Agent did not communicated second offer to the principal. It was held that agent did

not shown proper skill and care in matter and held liable to pay damages

4) Duty to render proper accounts (Sec-213) - Agent is bound to render proper accounts to

his principal on demand

5) Duty to communicate with Principal (Sec.214) - It is the duty of an agent, in cases of

difficulty, to use all reasonable diligence in communicating with his principal, and in

seeking to obtain his instructions.

6) Duty not to deal on his own account (Sec.215, 216) – An agent is under a duty not to

deal on his own account in the business of agency, unless the principal consent thereto.

In case of any transaction principal has following right

a) To repudiate the transaction for dishonest concealment by agent from him, and

dealing of agent have been disadvantageous to him.

b) To claim for any benefits which resulted to agent from the transaction.

7 (1927) 136 L.T. 203

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7) Duty to pay sums received for principal (Sec. 217, 218) - An agent may retain, out of any

sums received on account of the principal in the business of the agency, all moneys due

to himself in respect of advances made or expenses properly incurred by him in

conducting such business, and also such remuneration as may be payable to him for

acting as agent.8

Agent's duty to pay sums received for principal.-Subject to such deductions, the agent is

bound to pay to his principal all sums received on his account. 9

Right of Agent:

1) Right to remuneration (Sec. 119) - In the absence of any special contract, payment for

the performance of any act is not due to the agent until the completion of such act; but

an agent may detain moneys received by him on account of goods sold, although the

whole of the goods consigned to him for sale may not have been sold, Or although the

sale may not be actually complete.

2) Right to retain sums (Sec. 117, 118)- Above explained duties in explanation no. 7 are

reciprocally rights of agent also.

3) Right to lien on Principal’s property (Sec. 221) - In the absence of any contract to the

contrary, an 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 in respect of the same has been

paid or accounted for to him.

4) Right to be indemnified (Sec. 222-224) – The employer of an agent is bound to

indemnify him against the consequences of all lawful acts done by such agent in

exercise of the authority Conferred upon him.10

Where one person employs another to do an act, and the agent does the act in good

faith, the employer is liable to indemnify the agent against the consequences of that act,

though it cause an injury to the rights of third persons.11

8 Sec 117 of Indian Contract Act.

9 Sec 118 of Indian Contract Act.

10 Sec 222 of Indian Contract Ac 1872

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Where one person employs another to do an act which is criminal, the employer is not

liable to the agent, either upon an express or an implied promise, to indemnify him

against the consequences of that Act.112

5) Right to Compensation for damages due to Principal’s neglect (Sec. 225) - The principal

must make compensation to his agent in respect of injury caused to such agent by the

principal's neglect or want of skill.

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Sec 223 Indian Contract Ac 1872 12

Sec 224 of Indian Contract Ac 1872

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LIABILITIES

According to Sec 226 Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences, as if the contracts had been entered into and the acts done by the principal in person. Authorized and Unauthorized acts- Principal is liable for such acts of agents for which authority has been conferred upon him. Such authority may be express or implied. Principal’s liability also arises in for the acts done in a situation of emergency. Principal’s liability mainly arises:-

a) When agent exceeds authority; b) When agent receives notice on principal’s behalf; c) When agent commits a fraud or some other wrong against a third person.