Agent and Servant

41

Agency Service

41.1 Introduction

You have already learnt that goods and services are made available to

consumers by the producers either directly, or through retail stores, or through

some intermediaries such as wholesalers and retailers. You have studied about

the services provided by these intermediaries — wholesalers and retailers in

one of your previous lessons. Besides these intermediaries, you may also

utilize the services of some other intermediaries in your day to day life. For

example, when you want to raise a loan, you seek the advice of someone

who knows the procedure to be followed for raising loan; when you want to

buy a house, you take the help of some property agent. In the same way,

when you want to invest your savings, you take the advice of a person who

knows the pros and cons of different avenues of investment. These

intermediaries from whom you may seek specialized services are known as

agents and their business as agency.

In this lesson, you will study about agents and their activities.

41.2 Objectives

After studying this lesson, you will be able to :

• define the terms ‘agent’ and ‘agency’;

• state the importance of agents and agency in to-day’s business world;

• differentiate between an agent and servant/contractor;

• identify the legal maxims that form the basis of law relating to agents;

• indicate the person who can appoint an agent and who can be appointed

as an agent;

Business Studies :: 336

• identify the key activities involved in rendering various agency services;

and

• discuss the rights and duties of an agent.

41.3 Definition of agent and agency

An agent is a person employed to do any act for another, or to represent

another in dealings with any third person. The person for whom such act is

done, or who is so represented is called the principal. The relationship between

the agent and the principal is called ‘agency’. In simple words, we can say

that an agent is a person who is engaged to act on behalf of another

person and deals with other parties as a representative of some person

or persons. Thus, for example, when Shrey asks Sameer to represent him in

dealing with Sanjay, then Shrey is the principal, Sameer, the agent and Sanjay,

the third party.

All such activities done on behalf of others are included in agency service.

Under Agency Service, an agent works as a link between the principal and

other parties. An agent is fully authorized to work on behalf of the principal.

The work done by an agent for his principal will be legally deemed to have

been done by the principal himself who is responsible for all his actions. For

example, a person engages a servant and asks the shopkeeper to supply him

goods. The servant continues to purchase goods from the shopkeeper. After

some time, the person discharges the servant but does not inform the

shopkeeper of this. If later on, the servant continues to purchase goods from

the shopkeeper, the shopkeeper is entitled to claim money from the person.

Remember that a principal is liable only for the lawful acts of his agent. If

for example, an agent, on directions of his principal, beats up a person and

is fined as a result, then he cannot make his principal liable to reimburse the

amount of fine. We have now known about the principal and the agent.

Test of Agency:

Agency exists whenever a person (the agent) can bind another (the principal)

by acts done on his behalf. Where this power does not exist, the relationship

is not one of agency. Thus, a wife is not an agent of the husband except

under special circumstances and for special purposes. But, if a person appoints

a broker to sell his car on his behalf, the broker is an agent. Now let us see

who can appoint an agent and who can be an agent.

Who can appoint an agent?

Any person who is an adult, of sound mind, having an ability to enter into

a contract, can appoint a representative or an agent. Only a capable adult can

appoint a representative or an agent.

Agency Service :: 337

Who can be an Agent?

Under the law, no qualifications have been prescribed for an agent; any

person who has the full confidence of the principal can work as an agent. A

minor or a person of unsound mind may also be appointed as an agent, but

he cannot be held liable by the principal for any negligence in performing the

work. Thus, if a person appoints a minor to sell his old car for not less than

Rs.40,000, and the car is sold for Rs.35,000, the owner of the car will be

bound by the transaction, and he will have no right against the agent for

compensation.

Difference between an Agent and a Servant

After studying the definition of an agent, you may be under the wrong

impression that an agent is a servant of the principal. This is, however, not

true. The difference between an agent and a servant may be clearly understood

from the following table:

Basis of Difference Agent Servant

1. Legal relationship An agent binds the The servant cannot bind the

principal and the third principal or the third party

party by his actions. by his actions.

2. Risk The principal is The principal is responsible

responsible for risks only for risks involved in

resulting from his action. those actions which were

done by a servant when

he was in the service

of principal.

3. Ownership The agent or broker The servant always acts in

can sell the goods in the name of his master.

his own name.

4. Consideration No remuneration is The basis of service is

necessary for any always an income

contract of agency. (wages/salary).

5. Field of activity An agent can do agency A servant can serve only

work for several persons, one person or an

i.e., can act on behalf organisation. He generally

of several persons. works for only one master.

6. Working system Agent is completely free The servant can work only

to work for the principal. under the directions of his

master.


7. Purpose An agent is employed A servant is employed to

for the purpose of work under direct and

establishing contractual immediate control,

relationship between guidance and supervision

the principal and of his employer and third

third parties. parties.

..

Difference between a Contractor and an Agent

Perhaps you might have heard about contractors. The contractors work on

contracts to construct buildings, dams, roads, bridges etc; and work according

to the plans and maps of the architects and engineers. They also arrange for

labour and materials. The contractor’s remuneration is either a fixed amount

or a certain percentage of the total construction cost. Work must be completed

within a fixed period.

Although the contractor works for the principal, he is not the representative

of the principal. As such he is different from an agent. He works independently

and runs the risks involved in the contract work.

41.4 Importance of Agents and Agency

Human necessities were limited in ancient times. Production was limited and

it was only for satisfaction of individual requirements. As the requirements

increased, producers started producing goods keeping future demand in view.

There was development of specialization in each area of production; trade

crossed the local boundaries and became international. Situations such as

these gave birth to agents. In modern times, agents play an important role.

On account of their special ability and experience, they work as an important

link between the producer and consumer, buyer and seller, creditor and debtor

and employer and employee. Their business is called Agency Business. In

modern times, agency business is an important means of providing employment.

Unparalelled development may be seen in the role played by the agents in

various areas of industry, purchase and sale, investment, employment and

even in life. Now a days the agency work is looked at with respect and

pride. It is on account of this reason that more and more people are adopting

agency work as a profession.

The Government, having realized the importance of agents, gave them legal

recognition and regularized their activities. The relation between the Principal

and the Agent is recognised in law under the Indian Contract Act.


Intext Question 41.1

A. Fill in the blanks with suitable words.

(i) The link between two parties is called an __________.

(ii) The person who is responsible for all legal actions of an agent

is the __________.

(iii) The basis of the relationship between an agent and the principal

is __________.

B. Point out which of the following statements are ‘True’ or ‘False’?

(i) Any person can be a Principal.

(ii) No special qualification is required for an Agent.

(iii) A servant can serve only one person or one organization at a

time.

(iv) An Agent can work for many principals at a time.

(v) The servant establishes a legal relationship between his principal

and the third party.

C. Ajay is an agent who was appointed by Alok to collect money. Ajay

collects some money from Sanjay and deposits it in Alok’s account.

State whether in the above example an agency has been established.

41.5 Characteristics of Agency Service.

You have already studied the relationship between an agent and a principal.

You also know that an agent is not a servant. Let us now learn about the

main characteristics of an Agency. These are given below:-

1. Basis : Mutual relations between the principal and the agent are based

on good behaviour and full faith. By good behaviour we mean that

the agent should work honestly and diligently. By full faith we mean

that the principal must have full faith in the agent. A person cannot

be said to be another person’s agent simply because he is working as

an agent. It is essential that the principal must be fully responsible for

the activities of the agent with regard to the Agency.

2. Consideration: Unlike other contracts, it is not necessary to have a

clause for consideration in the contract of agency. But on completion

of the contracted work, remuneration is paid under the terms of the

contract.


3. Liability: The main characteristic of the relation between the principal

and the agent is that the principal is liable for each lawful activity

performed by the agent. Agent is not personally liable for anything.

Even if an agent while performing any act carefully and honestly,

takes any wrong decision in ignorance which results in some loss,

only the principal will be liable for that wrong decision and the loss.

4. Qualification: A capable adult person may appoint any other person

as an agent. No qualification is prescribed for an agent. A minor can

make the principal liable for his legal activities but he is himself not

liable.

Whether an individual or an organization is an Agent or not can be verified

from the answer to the question whether or not the agent can make the

principal liable for his action. If the answer is in the affirmative, the person

or organization is an agent, otherwise not. The relation between the agent

and the principal is based on either oral or written agreement or it may be

based on implied agreement. We shall study about this later.

41.6 Legal Maxims forming the basis of law relating to agency

There are a number of legal maxims which form the basis of law relating to

agency. These are mentioned below:

1) What an agent does within the scope of instructions given to him

binds the principal as if he had done it himself. Thus, a basic maxim

or principle of agency is “He, who does through another does by

himself”. (Qui facit per alium facit per se)

2) When a person has by his conduct or statements induced others to

believe that a certain person is his agent, he cannot subsequently deny

it. This is the rule of agency by estoppel.

3) Where an agent does an act for his principal but without his knowledge

or authority, or where he exceeds the given authority, the principal is

not bound by the transaction. But if he so desires he may later on

agree to abide by the act of the agent. This is known as agency by

ratification. After ratification, agency is taken to have come into

existence from the point of time when the agent first acted, not from

the date of principal’s ratification.

4) The general rule of law is that an agent cannot appoint an agent,

(Delegatus non-protest delegare). The principle underlying this rule is

that an agent is normally engaged by the principal on the basis of his

confidence in the agent and he may not have the same confidence in

the person appointed by the agent. However, an agent may appoint an


agent (or sub-agent) under certain circumstances, for instance, where

the principal permits it, or it is customary in any trade, or the work

of the agent cannot be performed otherwise.

Intext Questions 41.2

A. Are the following statements True or False?

(i) Only an adult can be an agent. ( )

(ii) Consideration is essential for an agency contract. ( )

(iii) The Principal is liable for every action of the agent. ( )

B. Answer the following questions in a word or two:

(i) What is the basis of the mutual relationships between the

principal and the representative?

(ii) What is the person fully liable to the third party called?

(iii) What is the basis of the agency?

(iv) What do you understand by good conduct of the agent?

41.7 Key Activities involved in agency services

Any person or firm rendering agency services is required to undertake certain

key activities, which depend upon the nature of services. Let us list the key

activities involved in the case of different agency services.

(1) Insurance agency: It involves educating people about the benefit of

insurance and informing them about the terms and conditions of

insurance like premium payable, etc.; helping people (Clients) to fill

up the form of application for insurance; collecting premium on behalf

of the insurance company; help the insured people to settle any claim

that they may have to realize from the insurance company.

2) Saving and investment agency: It involves educating people about

the benefits of saving; inform them about alternative channels of

investment with safe and stable income; collecting the savings at

intervals on behalf of the organization; helping the investors in getting

loans against the investment, if needed.

3) Advertising agency: It involves preparing advertisement copies;

selecting the most suitable medium of advertisement for the client;

securing space for printed advertisement and time for radio and TV

advertising.


4) Tours and Travel agency: It involves selecting places of tourist

attraction; drawing up itinerary of tours; getting reservation for travel;

booking hotel accommodation; ensuring that the date, time and place

of departure and arrival on return are decided in advance and intimated

to the tourists concerned.

5) Property agency: It involves keeping the people informed about land

and house property on sale or available on rent; arranging the clients’

visit to the site of property; acting as a link between the property

owner and the client when the sale or hiring is finalized.

6) Courier Service: It involves keeping users (clients) informed about

the availability of service; collecting letters, parcels or other articles

from the senders; arranging despatch of the articles by messenger,

roadways, railways or air transport; sending proof of delivery to the

senders concerned.

41.8 Duties and Rights of an Agent

You are aware that the principal is liable for the acts of the agent. You have

studied about the meaning and importance of agent and his activities; about

the characteristics of agency and about the methods of establishment of agency.

Now we shall study about the duties of an agent towards his principal and

about the rights of the agent. The main duties of an agent towards his

principal are given below.

Duties of an Agent.

(i) To act according to principal’s directions: It is the duty of the

agent to act in accordance with the order and directions of the principal.

In the absence of clear cut directions, the agent should follow the

prevalent trade practices. If the agent does not act according to the

directions of the principal, he has to compensate the principal for the

losses, if any, incurred by him. For example, if the principal directs

the agent to insure the goods, but the agent forgets to do so and the

goods are destroyed by fire, the agent will have to compensate the

principal for his loss.

(ii) To act with reasonable diligence: The agent should carry out the

work of the principal with due diligence. If some work is not done

efficiently and with reasonable diligence, the agent has to compensate

for the losses. For example, A an agent, sells goods on credit to C

without making proper enquiries about C’s solvency. At the time of

sale, C was bankrupt. In this case A will have to compensate the

principal for the loss.


(iii) To render accounts: It is the duty of the agent to render correct

account of all the transactions to the principal from time to time.

(iv) To communicate with the Principal during emergency: In case of

difficulty while doing some work, the agent should contact his principal

and get instructions from him.

v) No delegation of authority: No agent can appoint a sub-agent to

complete the work assigned by the principal. But in certain

circumstances sub-agents can be appointed. For example in emergency,

when the work is clerical or according to prevalent market practices,

a sub-agent can be appointed. The nature of business may also

necessitate appointment of sub-agents, for example, travel agents of

Indian Airlines carry on business through their sub-agents in different

areas.

vi) Not to misuse authority: It is the duty of the agent not to misuse

the information obtained by him from his principal and from other

sources and he should not try to make any personal gain, for example,

purchasing goods of his principal at low prices himself and earning

profits.

vii) Payment of dues: It is the duty of the agent to deduct expenses

incurred and the fixed amount of commission from the total sale

proceeds and to pay the balance to the principal immediately.

viii) Not to deal in his own name: It is the duty of the agent to ensure

that no competitor makes personal money out of the agency work. If

an agent does some such work and earns profit out of it, it is his duty

to submit its accounts to the principal. For example, an agent sells 25

sacks of his own sugar alongwith 50 sacks of his principal and earns

personal gains. Under this situation, the agent is required to render

full accounts to his principal.

ix) To protect the interest of his principal: In case of untimely death

of the principal, or in case he becomes insane or is insolvent, it is the

duty of the agent to safeguard the interest of the principal.

x) Not to set up an adverse title: It is the duty of the agent not to set

up an adverse title to the goods received by him as an agent from the

principal. Whatever he does should be in accordance with the directions

of the principal and in the interest of the principal.


Rights of the Agent

Rights and duties are supplementary to each other. We have discussed above

the various duties of the agent. Let us now study the various rights of the

agent. The rights of the agent are given below:

i) Right to receive remuneration: The agent has the right to receive

from the principal reasonable remuneration for the work done by him

in accordance with the agreement. As soon as the agent finishes his

work, he has the right to receive remuneration. For example, a producer

appoints an agent to procure orders for his goods. He is eligible to

receive remuneration after he procures orders. It does not matter

whether the producer fulfils those orders or not.

ii) Right to adjust his dues: The agent can deduct advances given by

him to the principal, the expenses incurred by him and the remuneration

to be received from the sale proceeds of goods.

iii) Right of lien: If the principal does not clear the account of the agent,

the latter has the right of lien on the goods of the principal, that is,

the agent can keep the goods in his possession for realizing his dues.

iv) Right of indemnification: If an agent suffers any loss on account of

the carelessness or inefficiency of the principal, the agent has the right

to receive compensation. The principal can be made responsible for all

legal actions taken by the agent to protect the interests of the principal.

Personal Liabilities of the Agent

Though the principal is responsible for all legal actions taken by an agent,

the agent can be held responsible by other parties in the following

circumstances:

i) When the agreement itself provides for the personal liability of the

agent;

ii) When the agent acts for any foreign Principal;

ii) When the agent works for some secret or undeclared Principal;

iv) When the agent works for an incapable Principal (e.g. minor, person

of unsound mind, etc. against whom no case can be filed in the court);

v) When the agent enters into an agreement in his own name;

vi) When the agent works outside the limits of his rights;


vi) When the agent earns personal profit by fraudulent means;

viii) When the agent compromises with false statements or fraudulent

actions;

ix) When the agent is held personally responsible according to trade

practices;

x) When the interest of the agent is also included in the agency agreement.

Intext Questions 41.3

A. Are the following statements ‘true’ or ‘false’? Tick ( √ ) those statements

which are true:

i) Profit earned out of agency work is not the personal profit of

agent.( )

ii) Ordinarily, agent may appoint sub-agent to complete the work.( )

iii) In case of price rise, the agent can himself purchase the agency

goods without the permission of the Principal. ( )

iv) Agent is responsible for loss incurred on account of inefficiency

of the Principal.( )

B. What are the duties and responsibilities of the agent in the following

circumstances?

i) Sanjay gives Sameer a certain amount of money for investments

in other places. Sameer invests the stated amount in his own

business without information of Sanjay and gives interest to

Sanjay at the bank rate. The interest given is much less than

the profits earned by him from the business.

ii) Seema appoints Shrey to sell her property and agrees to pay

Rs.500 as commission to him. Shrey secretly obtains Rs.200

more from the buyer. Is Seema entitled to receive from Shrey

Rs.200 or Rs.300 or Rs.500 or nothing?

41.9 What You Have Learnt

A person who works on behalf of another person and represents that person

while dealing with others, is called an Agent. The person on whose behalf

the work is done is called Principal. Any person may become an agent.


Duties of the Agent

• To act according to the direction of the principal

• To act with diligence

• To render accounts

• To communicate with the Principal during emergency

• Not to misuse authority

• No delegation of authority

• Payment of dues

• No transaction for personal interest

• To protect the interest of Principal

• Not to set up adverse title

Rights of the agent

• Right to receive remuneration

• Right to adjust his dues from sale proceeds

• Right of lien

• Right of indemnification

• Right of compensation

41.10 Terminal Exercise

1. What is meant by 'Principal' and 'Agent'?

2. What are the main characteristics of an agency?

3. Under what circumstances can the agent be personally held responsible?

4. What are the rights and duties of an agent?

5. Vinod directs his representative Pramod to purchase house No.999.

Pramod likes that house and he purchases it for his own self. On the

other hand he tells Vinod that the house could not be purchased. In

the above circumstances, what are the rights and duties of Vinod and

Pramod?

6. Ajay purchases goods for Ram Narain without his authority and sells

the same to Sangeeta on the liability of Ram Narain. Can the above

actions of Ajay be ratified by Ram Narain?


7. What is the test of agency?

8. Is Agent a servant? Distinguish between a servant and an agent.

9. Discuss the following:

a) Agent is a special servant.

b) One who makes an agent work, acts himself.

41.11 Answers to Intext Questions

41.1 A. i) Agent ii) Principal iii) Good behaviour and good faith.

B) i) False ii) True iii) True iv) True v) False

C) Yes.

41.2 A) i) False ii) False iii) False

B) i) Good behaviour and good faith

ii) Principal

iii) Good behaviour and full faith faith

iv) Honest and diligent work by the Agent

41.3 A) i) False iii) False ii) False iv) False

B. i) Earned profit belongs to the principal, as such the agent

should return the profit to the principal.

ii) It is the duty of Shrey to return the full amount, i.e., Rs.500

to his Principal since he has earned that amount by fraudulent

means.

Answers to Terminal Exercise

5. Pramod has earned profits through fraudulent means. Therefore, Vinod

can force Pramod to transfer that house in his name or to pay damages.

6. Yes.

Documents

Agent and Servant