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The Indian Contract Act, 1872 (ICA) is a legislation that exists to govern the sphere of contractual interactions between parties. An agent has been defined as “a person employed to do any act for another or to represent another in dealings with third persons”, and a principal as “the person for whom such act is done, or who is so represented”, u/S 182 of the ICA.
Being in effect for almost a century and a half, it is one of the oldest laws in India and has thus been outgrown and exceeded by the prevailing business environment that has grown and developed with time, as intentioned. Although these advancements are much valued, it is imperative to have laws to govern them in a cohesive, structured manner with provisions to cover any circumstance arising, which is, unfortunately, lacking currently with respect to certain sections. Agency, under Chapter X of the ICA, contains such sections that depict an ineffectiveness in dealing with issues falling within the purview of agency, such as provisions for addressing the issues of liability that may arise with regards to third party claims on a principal.
This Chapter in specific has been affirmed to be non-extensive and only laying down general broad principles. This is observed in Narandas Morardas Gajiwala v. SPAM Papammal[1], as given by The Supreme Court of India, which discussed the inefficiency of the ICA regarding provisions for rights of an agent against the principal. This sentiment was reiterated by the 13th Report of the Law Commission of India[2], which indicated that the statute is not exhaustive, by suggesting measures to improve Agency under the ICA. In order to investigate the effectiveness of the ICA at addressing questions of liability that may arise due to third-party claims on the principal, it is imperative to observe the general rules governing agency laws and relationships, to interpret if the ICA falls in line with the ideals prevalent.
Agency law exists to bridge the break between ‘Theory’ and the practicality demanded by legal problems, and it states and widely defines the aspects that fall under it. Primarily, it enables the principal to act through an agent by giving them the ability to make decisions regarding it, however, it falls short despite the pervasive existence of agents in the modern world. The Cost & Benefit theory depends on general principals of contracts as well as torts to create a foundation for the principal’s liability, and it operates on the basic premise that on choosing to conduct business through an agent, the principal must bear the foreseeable consequence, that is risks and liabilities arising from the choice. This is essentially rooted in the moral and economic standard, supplemented by justice and efficiency concerning it, that an individual cannot fairly collect only the benefits and forfeit the costs. Theories and laws on agency are essential to ascertain that the agent shouldn’t have to bear the consequences of their actions in the course of fulfilling the contract, it should be borne by the principal who initiated the sequence of events leading to the consequences.
Deviating from general laws, agency law seeks to mitigate the effects of operating via an agent and delineate responsibility to the principal, by considering the acts as well as ramifications of the agent as those of the principal. The cost-benefit theory is also subject to “causation”, which notes that the choice of an agent alone is an appropriate trigger for responsibility of the principal. Therefore, agency law grounded in theory has extensive material conferring liability to the right party, that is the principal, to ensure a just dispensation of justice in these cases, something that unfortunately cannot be said for the ICA.
The ICA defines who an agent and a principal is, talks about the agent’s authority, and the legal relationship that exists between them as well as the third party. The fundamental facet of an agent is his ability to make the principal liable and answerable to the third party by enabling the principal to be sued directly by them and vice versa. It mentions ratification, in sections 196- 200, which focuses on acts done by the agent without the knowledge or authority of the principal, the latter can choose to disown such acts or ratify them, which ratifies the whole transaction (u/S 199 of ICA) which will make its effects such that the acts had been performed by the principal himself (u/S 196 of ICA). S. 200 talks about ratification with respect to third parties and any damages or termination of their rights and interests, inflicted upon them by the agent's unauthorized acts, cannot be ratified by the principal to facilitate the effects arising from such an act.
The consequent sections discuss the termination and revocation of agents as well as the agent’s duty to the principal. It further discusses the principal's duty to the agent under S. 222, where it states that the agent is to be indemnified against the consequences of all the lawful acts performed in undertaking the principal's contract, as well as against acts done in good faith despite them causing injury to the right of third parties. S. 229 of the ICA affirms that as between the principal and third parties, any information or notice acquired by the agent in the course of business transacted for the principal, shall have the same legal consequence as it would, had it been given to or acquired by the principal himself. S. 233 of the ICA affirms the liability of the principal by stating the rights of third parties or any person dealing with an agent. That is, if the agent is personally liable, the person who has been injured can hold either the agent or the principal or both liable. S. 237 of the ICA establishes that when an agent performs an unauthorized act, which causes obligation to the third party if the principal by his words or conduct induces such persons to believe that these actions were within the purview of the agent’s authority, the principal is bound by such acts.
S. 233 expresses the third party may seek remedies against the principal or the agent or both. A question that is realized about this section is that it depicts a departure from the existing English law principle that the liability of the agent and the principal is alternative and joint. The section sought to recreate English Law and faltered confusing the wording. The 13th Report of the Law Commission of India[3] discussed these discrepancies and suggested a separate provision be created in this regard, where the plaintiff (third party) having acquired judgment against one of them, cannot sue the other in another suit. It also recommended the English principle of holding the principal jointly and severally liable with the agent for injury or loss caused to the third party due to the wrongful acts and/or omissions of the agent acting within the scope of the contract be included in a separate provision. Furthermore, giving the option of filing a suit against either the agent or the principal because of effects arising from actions for completion of the contract, goes against the general rule that holds the principal liable, except in cases where the agent is unauthorized or does something illegal. That is the very essence of agency and the legal connotation it imparts, and hence its absence from the ICA portrays the ineffectiveness of it to govern and rule cases regarding it.
The ICA doesn’t cover the general liability of only the principal in any of the sections and provision, there are provisions for specific instances of liability for third party claims on the principal such as that of S. 222, 233, and 237 as mentioned above that can be applied only contingent to the circumstances. Thus, it can be inferred that this Section, and moreover this Chapter of Agency is not comprehensive enough to successfully cover all the components and issues that exist within the realm of relations in agency. Agency law and theory distinctly lay down the liability of the principal substantiated by the rationale of foreseeable consequences of using an agent in the first place. The principal's liability does not exist due to the third party relying on the agent’s authority, rather because the third party’s dependence on the agent is a predictable ramification of the principal's actions and that is what leads to their liability.
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