DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY,

LUCKNOW.

Law of Contracts

Final Draft:

“Agent, sub-agent, substituted-agent:

Judicial Interpretation”

Submitted for the project work undertaken in the partial fulfillment of B.A. LL.B (Hons.) 5 years integrated course at

Dr. RMLNLU, Lucknow.

Under the guidance of: Submitted by:

Dr. Visalakshi Vegesne Saurabh Raman (113)

Associate Prof. (Law) Saurabh Sharma (114)

Dr. RMLNLU, Lko.

ACKNOWLEDGEMENT

This project has been presented in a simple and lucid manner for better

understanding and appreciation of the study. However, it would not have been

possible without the kind support and help of many individuals. We would like

to extend our sincere thanks to all of them.

We are highly indebted to our teacher, Dr. Visalakshi Vegesne, Associate

Professor (Law), Dr. R.M.L. National Law University for her guidance and

constant supervision as well as for providing necessary information regarding

the project & also for her support in completing the project.

Last but not the least, a sincere word of appreciation to our family and friends

and thanks to people who have willingly helped us out with their abilities.

Helpful suggestions from the readers are always welcome.

AGENT

In India, the relationship between Agent and Principal is primarily contractual in nature and

is governed by the terms of contract entered into between them ("Agency Contract"). The law

of agency derives its statutory base from Chapter X of the Indian Contract Act, 1872 ("Act"),

which provides the framework of rules and regulations that govern formation and

performance of any contract including the Agency Contract. Section 182 of the Act defines

‘Agent’ as ‘person employed to do any act for another or to represent another in dealings with

third person’.

Any person, who is of the age of majority according to the law to which he is subject, and

who is of sound mind, can employ an Agent1. As between Principal and third person a person

may become an Agent, so as to be responsible to his Principal according to the provisions

contained in the Act2. No consideration is necessary to create an agency3. The authority of an

Agent may be express or implied4. An authority is said to be express when it is given by

words, spoken or written5. An authority is said to be implied when it is to be inferred from the

circumstances of the case and things spoken or written or in the ordinary course of dealing

may account for the circumstances of the case6. An Agent having an authority to do an act

has authority to do every lawful thing, which is necessary in order to do such act7. The Agent

in doing that act must neither do anything that is illegal, not beyond the limits of his own

authority, nor beyond the powers of his Principal. An Agent has authority in an emergency to

do all such acts for the purpose of protecting his Principal from loss as would be done by a

person of ordinary prudence, in his own case under similar circumstance8. Several types of

commercial agents have been recognized under Indian law, which includes inter alia brokers,

auctioneers, del credere agents, persons entrusted with money for obtaining sales and

insurance agents.

Test of determining existence of agency of relationship1 Section 1832 Section 1843 Section 1854 Section 1865 Section 1876 Section 1877 Section 1888 Section 189

“Agency depends on the true nature of relationship.”9 The American jurisprudence refers to

the case in which it was held the use of words ‘agency agreement’ and ‘agent’ by the parties

in a contract does not necessarily establish a relationship of agency in legal sense.10The law in

India is same. It has been held in several decisions that the fact that the parties have called

their relationship an agency is not conclusive, if the incidence of this relationship, as

disclosed by the evidence does not justify a finding of a agency, and that the court must

examine the true nature of relationship and the functions and responsibilities of the alleged

agent.11

Scope of an Agent's Authority:

Ultimately, this depends on the agreement made between the principal and the agent. In

general, there are two ways to determine the scope of an agent's authority:

Express:  An agent's authority can be expressly determined. If an agreement specifies an

agent's duties, an agent does not have authority to represent the principal beyond those duties.

Implied: An agent's authority can be implied by custom. Custom is determined by the express

duties of other agents in the same position. For example, a realty company hires a real estate

agent. It is implied that the agent has authority to help third parties buy and sell homes since

it is the custom among real estate agents.

Are There Other Ways to Determine an Agent's Authority?

There are situations where an agent's authority is created even if the person is not an agent.

Here are examples of these different situations:

Apparent Authority : A principal has a duty not to misrepresent another as his/her agent.

When a principal (accidentally or purposefully) causes a third party to believe that someone

is an agent, the principal is bound by the agent's actions even if the person was not an agent.

The third party must be reasonable in believing that the person was an agent.

Emergency Powers : In an emergency situation, an agent may act beyond his/her authority

even if the principal did not give the agent permission. For example, an agent might use

company funds to provide medical attention to an injured employee. The agent may not have

authority to do so, but the emergency situation would excuse the agent's actions.

9 Halsbury’s Law of England, 3rd edn, Vol I, p 146 10 McCarty v King County Medical Service Corporation, 26 Wash 2d 660; 17511 Banaras Bank v. Ram Prasad, AIR 1930 All 573

Ratification : There are times when a principal will authorize the agent to act beyond his/her

authority. As long as the principal ratifies the action ahead of time, the agent has authority to

act.

Duties Of Agent In Contract

a) Execution of Instructions

One of the primary duties of an agent is to execute the instructions of the principal. This duty

is the basis of any agency. The scope of the instructions to be executed would however

depend on the terms of the agency agreement. Importantly though, an agent should only

execute lawful instructions.12

(b) Exercise of skill and care

Skill and care are prerequisites to the efficient exercise of duties by agents. It is therefore a

cardinal requirement of law that agents must exercise a reasonable degree of skill and care in

executing the principal’s instructions. Where there is apparent lapses in executing the agent’s

responsibilities, the agent is considered to have breached the terms of the agency.13

(c) Act in good faith

An agent must in all respects, and within the bounds of reasonableness, act in good faith in

the discharge of the agency responsibilities. This means, in the performance of the

obligations, the interest of the principal is of paramount consideration. The agent should

therefore avoid conflict of interests between his/her personal business with that of the

principal.14 But, this duty also extends to the production of the agency accounts when asked

to do so by the principal.15

12 Bonsor v Musicians’ Union [1956] AC 10413 New Zealand Farmers Cooperative Ltd v National Mortgage & Agency of NZ [1961] NZLR 96914 Chaudhry v Prabhakar [1989] 1 WLR 29

15 Yasuda v Fire & Marine Ltd v Orion Marine Insurance Ltd [1995] 2 WLR 49.Kelly v Cooper [1993] AC 205

Liability and Duties of an Agent To The Principal By An Agent:

If an agent expressly claims to have authority or by his acts indicates that he has authority, he

warrants his authority but if the third person knows the facts as well as the agent, there is no

warranty.

An agent may expressly state that he has authority. He may do this because he thinks he has

authority or because he intends to deceive. In either case he is liable to the person who thus

deals with him and who on account of lack of authority, apparent or real, could not hold the

principal, and therefore suffers damages.16 Thus suppose that A states to C that he has been

sent by P, to purchase C's cattle. C thereupon delivers his cattle to A, to deliver to P. The

cattle die on the way through no fault of A. In this case if A had had actual or apparent

authority, he could not be held, as the contract would be between C and P, with A as a mere

representative of P. P would be responsible as delivery to his agent would be delivery to him.

But if A lacks authority C is not without remedy. He can hold A upon his statement that he

has authority, on the strength of which he parted with the cattle.

If, however, in this case, C was in possession of all the facts, and in common with A,

misconstrued them, he could not hold A. Thus if A had said: "I have here a letter which P has

sent me, in respect to the purchase of cattle, and I think from it that I have authority to buy

cattle," and C, upon reading the letter, had assented to that view, yet the legal effect of the

letter was not to give A authority to buy cattle, but merely, say, to make inquiries concerning

their purchase, here there would be no warranty by A of his authority, for there would be no

reliance upon A's assertions that he had authority.

It is not necessary that the agent expressly state that he has authority. An implication to that

effect may arise from the facts, and this would, perhaps, be the more usual case. Indeed, the

agent by acting as agent and by purporting to bind another person as principal, holds himself

out as having the authority to so act and thereby warrants himself to have authority.17

The P bank by A, as vice president, guaranteed a commercial account. The bank being sued

on the guaranty defended that it had no power as a bank to make such an engagement, not

being proper banking business. The court sustained the defence. The plaintiff then sued the

Vice President upon the ground that he warranted his authority. But the court held that 16 Section 237 and Section 186 of I.C.A, 187217 Bryant, Powis and Bryant Ltd v La Banque du Peuple Cunnigham & Co. Ltd (1891-92) All ER Rep 1253 (PC)

inasmuch as the third person was chargeable as a matter of law with the power of a bank and

therefore must be taken to have known that the Vice President had no powers to bind the

bank upon this guaranty, there was no warranty of authority.18

When Agent having authority to bind principal may instead bind himself?

One who is an agent and has full power to bind his principal may nevertheless binds himself.

There is nothing to prevent an agent from binding himself upon a contract made by him. He

may do this for a variety of reasons. He may be careless in the execution of his authority 19.

He may not disclose the principal, preferring for some reason to let only his own identity

appear. Or it may be that his principal has not sufficient credit with the person dealt with and

therefore the agent binds himself.

As per Sec. 73(Principal Undisclosed) If the principal is undisclosed by the agent the agent is

liable. So, if the agent does not disclose his principal, the agent is liable. In some such cases

the third person upon discovering the principal may elect to hold him, because he is the real

party in interest, as we note in another connection; but he may, if he chooses, in all cases,

hold the agent for it is with the agent that he has dealt as principal.

In the case of Thilmany v. Iowa Paper Bag Co. & William Daggett, W sold flour to R, R sues

for breach of warranty of merchantability of the flour. W defends that he was an agent. On

the deal W did not disclose the name of his principal, although he was known to be a broker.

The transaction was oral. Held, that W was liable.

Furthermore, when agent bound on sealed instruments by the form of his execution. It is a

long established rule that only those who are named or described in and sign a sealed

instrument are bound thereon. If the agent signs his own name only, though he describe

himself as agent, he will be bound and the principal will not be bound. By the law of sealed

instruments, only those can be sued thereon, who are parties thereto? An agent may, by

careless execution of a sealed instrument, bind himself when he intended only to bind his

principal. We may indicate here the proper form one should use and that will be about the

extent to which in this discussion we can go. The books are full of discussions of particular

sets of facts and courts are at some variance upon similar cases. But there are well established

forms of execution which everyone should have in mind when he executes such paper.

18 Ferguson v. Um Chand Boid (1906) ILR 33 Cal 34319 Mulukchand bin Gyanmal v. Shan Mohan Vardraj (1890) ILR 14 Bom 590

First, it must be noted that it is everywhere agreed that if one merely describes himself as

agent, that in itself is not sufficient to bind his principal.20 Thus if he signs "John Brown,

Agent," or "William Smith, President," or "Harry Jones, Trustee," etc., these descriptive

words are merely words of description and in no way qualify the liability of the party

signing.21 And it is also everywhere agreed that if one go further and say "John Brown, Agent

of Thomas Anderson," the deed is the deed of John Brown. So, one can go into a multitude of

form. It is not absolutely essential that the agent's name should appear. Yet it is highly

desirable, in order that the evidence may be the more surely preserved and other reasons of

convenience. It is therefore common and the better usage for the agent to set forth that the

execution is by him as agent. Even in those states where statutes have abolished the seal, the

above form of signature is the only safe one to use.

Lastly, agent is bound where no definite or responsible principal. So, if a person represents a

large, unorganized or irresponsible body, it will be presumed, unless the contrary appears,

that the representative was given the credit. If a committee representing a large public

gathering as a political party, an unincorporated club, etc., deals with others for supplies, it is

reasonable under the circumstances to presume that it is the committee to whom the credit is

given, and such committee will usually be personally responsible. Wherever there are

situations of that sort in which the credit appears to be given the agent and he must have

known it was so given, he will be responsible.

Duty Not To Delegate:

Delegatus non potest delegare is a well known maxim of the law of agency. The principal

chooses a particular agent because he has trust and confidence in his integrity and

competence. Ordinarily, therefore, the agent cannot further delegate the work which has been

delegated to him by principal.22 It was laid down in John McCain & Co. v. Pow23that unless

so authorised by the principal, an estate agent has no right to appoint s sub- agent and

delegate to him his powers which require special skill and care.

Moreover, a factor or other agent employed because of his skill and discretion must perform

all acts involving these qualities personally, in the absence of a contrary understanding.24. He

may, however, be given authority to hire another agent for the principal to co-operate with

20 Wheeler v. Reed (1885) 29 Ch D 50021 Casco Nat. Bk. v. Clark (1808) All ER Rep 22722 De Busche v. Alt (1878) 8 Ch 286, 31023 (1975) 1 All ER 12924 Warren v. Martin (1850) 52 U. S. 209 ; Smith v. Jefferson Bank (1906) 120 Mo. App. 527, 97 S.

him in the performance of delegated acts, in which case he is under no liability for the acts of

the additional agent25 .The agent may, on the other hand, have only procured the consent of

the principal to his hiring another to perform, as his agent, the acts which he otherwise would

have had to perform personally. In this case he is liable to the principal for any default by his

own agent26. The law on this subject is fairly well settled, but, as the parties seldom define

clearly the relations which they intend to create, a difficult question of fact is often presented.

Although the additional agent is hired in the original agent's name, the principal may be in the

position of an undisclosed principal to the additional agent, if the employment is in his

behalf.27 Roughly, this would seem to be the case if he is to receive the benefits, furnish the

consideration, and have the control. In the principal case the plaintiff was, ultimately, to

furnish the consideration, and, as the defendant was under no obligation to perform the

services of the principal, the contract was for his benefit. It is true that the defendant was to

have the immediate control but it would seem that the plaintiff was the real principal of the

additional agent.28 The court thought otherwise, however, and properly applied the law to its

interpretation of the facts.

In the case of Caplin v. Penn Mutual Life Ins. Co29, where a life insurance policy was issued

which contained the pro-vision that the insurer would lend money thereon to the "insured or

owner of the policy". The plaintiff was an assignee who sought to borrow on it. It was held,

that specific performance of the contract to lend would be granted. Ordinarily, specific

performance will not be decreed of an agreement to borrow30, or to lend money. The reason

for its refusal lies in the fact that the remedy at law is adequate, since the damages arising

from breach of a contract to borrow or to lend are easily assessable, being, in the absence of

special damages, the difference between the contract rate and the market rate of interest, plus

the expenses incurred in procuring a new loan.

SUB-AGENT

25Morris v. Warlick (1903) 118 Ga. 421, 45 S. E. 40726 Barnard v. Coffin (1886) 141 Mass. 37, 6 N. E. 364; Bank of Ky. V. Adams Express Co. (1876) 93 U. S. 17427 Whitlock v. Hichs (1874) 75 Ill. 460; see Blackburn v. Mason (1893) 68 L. T. R. (N. S.) 51028 Cf. De Bussche v. Alt (1873) 8 Ch. D. 286; Mccants v. Wells (1873) 4 S. C. 38129 (App. Div. 2nd Dept. 1918) 58 N. Y. L. J. 198730 Rogers v. Challis (1859) 27 Beav. 175

A person appointed by an agent to perform some duty, or the whole of the business relating to

his agency.Sub-agents may be considered in two points of view.

1. With regard to their rights and duties or obligations, towards their immediate employers.

2. As to their rights and obligations towards their superior or real principals.

A sub-agent is generally invested with the same rights, and incurs the same liabilities in

regard to his immediate employers, as if he were the sole and real principal. To this general

rule there are some exceptions for example, where by the general usage of trade or the

agreement of the parties, sub-agents are ordinarily or necessarily employed, to accomplish the

ends of the agency, there, if the agency is avowed, and the credit is exclusively given to the

principal, the intermediate agent may be entirely exempted from all liability to the sub-agent.

The agent, however, will be liable to the sub-agent, unless such exclusive credit has been

given, although the real principal or superior may also be liable. When the agent employs a

sub-agent to do the whole, or any part of the business of the agency, without the knowledge

or consent of his principal, either express or implied, the latter will only be entitled to recover

from his immediate employer, and his sole responsibility is also to him. In this case the

superior or real principal is not responsible to the sub-agent, because there is no privity

between them.

Where by an express or implied agreement of the parties, or by the usages of trade, a sub-

agent is to be employed, a privity exists between the principal and the sub-agent, and the

latter may justly maintain his claim for compensation, both against the principal and his

immediate employer, unless exclusive credit is given to one of them; and, in that case, his

remedy is limited to that party.

Who is a Sub-agent?

A sub-agent is a person employed by and acting under the control of the original agent in the

business of the agency (Sec. 190). In simple words, a sub-agent is the agent of the agent.

Thus, an agent is the principal of the sub-agent. He really acts in the double capacity. He is an

agent of the principal and at the same time, is the principal of the sub-agent.

Appointment of sub agent

As a general rule, an agent cannot appoint a sub-agent. However, in the following cases, an

agent can appoint a sub-agent:

1. A sub-agent may be appointed if there is a custom of the trade to appoint a sub-agent.

2. Again, a sub-agent may be appointed where the nature of the work is such that a sub-agent is necessary.

3. Where the principal expressly or impliedly allows the appointment of a sub-agent.

4. Where the work to be done is purely ministerial and does not depend upon personal skill, experience, etc. of the agent.

5. Where the principal is aware that the agent will delegate his authority.

6. Where an emergency makes it necessary to appoint a sub-agent.

Sub-Agency

An agency is a consensual relationship created by contract or by law where the principal

grants authority to an agent to act on behalf of the principal to deal with a third party.   An

agency relationship is fiduciary in nature and the actions and words of an agent exchanged

with a third party bind the principal.

A subagent is a person to whom the agent delegates as his/her agent.  Through a subagent, the

agent can perform an act for the principal.  If an agent feels that the appointment of subagents

are necessary to the proper transaction and carrying on of the business committed to the

agent, then the agent has an implied authority to make such appointments31. Generally, if an

agent employs a subagent, then the agent is the employing person and the principal is not a

party to the contract of employment.  However, a principal can be a party if s/he becomes a

surety.32

If an agent employs a subagent for his/her principal, and by his/her authority, then the

subagent is the agent of the principal and is directly responsible to the principal for his/her

conduct, and if damage results from the conduct of such subagent, the agent is only

responsible in case s/he has not exercised due care in the selection of the subagent.33

31 Consolidated Underwriters Ins. Co. v. Landers, 285 Ala. 677 (Ala. 1970)32 McKnight v. Peoples-Pittsburgh Trust Co., 360 Pa. 290 (Pa. 1948)33 Baker-Riedt Motor Co. v. Moore, 93 Okla. 153 (Okla. 1923)

Whereas, if the agent employs a subagent on his/her own account to assist him/her in the

work at his/her own risk, then there is no privity between such subagent and the principal.

Under this circumstance, a subagent is only responsible to the agent, while the agent is

responsible to the principal for the actions done by him/her and the actions by the subagent.34

An agent is responsible to the principle for the conduct of a subagent with reference to the

affairs of the principal entrusted to the subagent.35 It was observed in Shaw v. O’Byrne, 64

Utah 139 (Utah 1924), that if an agent is authorized by owners to sell certain land, and if s/he

authorizes a subagent to perform the same, then the sale made by such subagent will be

binding upon the owners.  However, a subagency cannot rise higher than the general agency

and when that general agency ceases to exist; it will automatically dissolve the subagency36.

An agent is not liable to third persons for the misfeasance or malfeasance of a subagent

employed by him/her in the service of his/her principal, unless s/he is guilty of negligence in

the appointment of such subagent or improperly co operates in the acts or omissions of the

subagent.37

“The law regarding the responsibility of a principal for persons allegedly appointed as

subagents is well settled.” Booker v. United American Insurance Co.38 “’When one employs

an agent who has either express or implied authority to employ a subagent, the subagent will

also be the agent of the principal. … [However, t]he act of a subagent will not bind the

original principal where the appointment of such subagent was not by authority, express or

implied, or was not subsequently ratified by the principal…’” Id.In other words, “a principal

will be bound by the acts of a purported subagent only if: (1) the agent had express authority

to appoint the subagent; (2) the agent had implied authority to appoint the subagent; or (3) the

principal ratified the appointment.” Id. at 1335-1336(Consolidated Underwriters Ins. Co. v.

Landers,39 Eagle Motor Lines v. Hood,40 Butler v. Standard Life Ins. Co. of the South41).

Relationship between Agent and Sub-Agent.

A subagent is a person to whom the agent delegates as his/her agent.  Through a subagent, the

agent can perform an act for the principal.  If an agent feels that the appointment of subagents

34 Id35 Sanoma, Inc. v. Interested Underwriters Concerned Via Ewing Int’l Marine Corp., 200136 Union Casualty & Surety Co. v. Gray, 114 F. 422 (3d Cir. Pa. 1902)37 Baisley v. Henry, 55 Cal. App. 760 (Cal. App. 1921)38 700 So.2d 1333, 1335 (Ala. 1997).39 285 Ala. 677, 681, 235 So.2d 818, 822 (Ala. 1970);40 395, 398, 55 So.2d 126, 129 (Ala. 1951);41 232 Ala. 238, 167 So. 307, 309-310 (Ala. 1936)

are necessary to the proper transaction and carrying on of the business committed to the

agent, then the agent has an implied authority to make such appointments[i]. Generally, if an

agent employs a subagent, then the agent is the employing person and the principal is not a

party to the contract of employment.

‘It may be generally stated that, where agents employ sub-agents in the business of the

agency, the latter are clothed with precisely the same rights, and incur precisely the same

obligations, and are bound to the same duties, in regard to their immediate employers, as if

they were the sole and real principals.’42

The sub-agents loook to, and is controlled by the agent who appointed him, and is not under

any contract with the principal, he must look to the agent for his remuneration and indemnity.

Thus, a sub-agent will not be liable to render an account to the principal.43

However, in Union of India v. Mohd Nazim,44 a resident of India sent a valur payable article

to an addressee in Pakistan. The government of Pakistan realized the value of the article, but

did not hand over the amount to the Government of India, as it suspended the VP service

betwenn the two countries. It was held that the arrangement entered into for exchange of Vp

article under agreement between the two countries did not make the Government of Pakistan

the sub-agent of the Gavernment of India, and did not render the latter liable to pay the price

of the article to the sender.

Sub-Agent’s Responsibility

The sub-agent looks to and is controlled by the agent who apoointed him, and is not under

any contract with the pincipal.45 If money due to A is paid to P, who is Z’s servant, Z having

authority from A to collect it, P is accountable only to Z, and A cannot recover the money

directly from P.46

In S Summan Singh v. National City Bank of New York,47 A has instructed the American Bank

to remit money to X in Jullundur. The bank issued instructions to the Jullundur bank to pay

the money to X, in Jullundur. These were, in Jullundur, two persons of the name of X, and

42 Story of Agency, 386.43 Purushotham Haridas v. Amruth Ghee Co Ltd AIR 1961 AP 143; relying on Hugh Francis Hoole v. Royal Trust Co. AIR 1930 PC 274 44 AIR 1980 SC 43145 Except in cases of substituted agent appointed bt the agents: S.194.46 Stephens v. Badcock (1832) 3 B&Ad 35447 AIR 1952 Punj 172

Jullundur bank paid the money to the wrong person. It was held that A could not recover

money from the Jullundur bank, as there was no privity of contract between them.

A authorised B to carry on business on his behalf in any manner that he liked. B appointed C

as commission agent to enter unto transactions of purchase and sale of bullion in the

following terms:

i. To render accounts to B of all transactions and sale;

ii. To be responsible for the solvency of persons and whom he did business;

iii. To act on instructions of B on behalf of B;

iv. To charge certain commission on the transactions.

It was held that the terms on which the business was done, showed that the rehip between B

and C was one of the pricipal and agent and not of principal and principal and, therefore, C

was a sub-agent, and the case fell under S. 192, and not under S. 226. As such, C was not

answerable to A, and suit for accounts by A against C was not sustainable.48

Liability of agent to principal for acts of sub-agent .-

Plaintiff, an in-surance company, appointed defendant its agent to effect insurance, and issue

policies for it in a certain territory. Defendant, without authority from the plaintiff, appointed

a sub-agent and confided to him the general charge of his business. Without the agent's

knowl-edge the sub-agent delivered a policy (countersigned by him in the agent's name), and

re-ceived payment (which was turned into the agent's account), covering a risk which the

plaintiff company had instructed the agent not to take. A loss occurred, which the company

paid, and it now sues the agent for indemnity. Held, that the agent is liable for this act of his

sub-agent, and the fact that he had no knowledge that the policy was issued, or the pre-mium

received, is no defense. Franklin Fire Ins. Co, v, Bradford49.

This holding, if we assume that the facts are correctly interpreted, is in accord with the

general rule that an agent who employs a sub-agent on his own account is responsible to his

principal for the manner in which the business has been done, whether by himself or his

agent.50 If the sub-agent is really the agent of the original agent, the latter is responsible for

48 Rughunath Prasad v. Seva Ram Tikam Das AIR 1980 All 15.49 (1901) 201 Pa. 32, 50 Atl. Rep. 286, 55 I. R. A. 408.150 MECHEM ON AGENCY, 197

his acts within the scope of the authority conferred, even though he may have been ignorant

of the particular act, or may have expressly forbidden it.51 The court held that, under the

circumstances, there was no forgery committed when the sub-agent signed the agent's name

to the policy, and that the act was within the scope of the authority conferred by the agent

upon the sub-agent. In another case, however, growing out of the same transaction and

involving the same agent and sub-agent, the court of ap-peals for the third circuit, in a similar

suit by another insurance company, held that the act of the sub-agent was not within the

scope of the authority, that the countersigning of the policy was legally a forgery, and

therefore that the agent was not responsible. Bradford v. Hanover Ins. Co.52 This holding, like

the other, is sound in law, if the facts are rightly interpreted.

Authority to appoint sub-agents

J purchased a note and mortgage of F and left the same in his hands for collection. F resided

in New Hampshire, the mortgagor in Nebraska. F had negotiated the original loan through

one B of Lincoln, Nebraska, and had received several payments through him after the

assignment. B finally collected the last installment of the note and failed to turn over the

proceeds. J, the holder, transferred the note and mortgage after maturity to the plaintiff, who

brings suit to foreclose. Held, that the plaintiff must fail because F, from necessity, had

implied authority to appoint B as a sub-agent to receive payment. Breck v. Meeker.53

The rule is too well settled for dispute that, as an exception to the general rule that agents

have no power tolappoint sub-agents, (Ruthven v. American Fire Ins.54; Connor v. Parker55;)

authority so to act may be implied from necessity arising out of the cir-cumstances of the

parties; Appleton Bank v. McGilvray56; Planters' etc. Nat'l Bank v. Wilmington First Nal'l

Bank.57

51 Id. a 73552 (1900) 102 Fed. Rep. 48, 43 C. C. A. 310, 49 L. R. A. 53053 (1903), - Neb. -, 93 N. W. Rep. 993.54 Co. (1894), 92 Ia. 316, 60 N. W. 66355 114 Mass. 33156 4 Gray (Mass.) 518, 64 Am. Dec. 9257 75 N. C. 534.

Substituted agent

Section 194 provides that where an agent, holding an express or implied authority to name

another person to act for the principal, has named another person, such person is not a sub-

agent, but is an agent of the principal himself. For the sake of brevity, such other person who

has been named is called a “substituted agent”.

 

A "Co-agent" or a "substituted Agent" is a person who is appointed by the agent to act for the

principal in the business of agency with the consent of the principal. 

Section 194 enacts, "where an agent holding an express or implied authority to name another

person to act for the principal, names another person accordingly, he is not a sub-agent, but a

substituted agent for the principal"

Where an agent appoints or names other person for being appointed as an agent in his place,

such person is called a substituted agent. In the words of (Section 194), “where anagent,

holding an express or implied authority to name another person accordingly, such person is

not a sub-agent but an agent of the principal for such part of the business of theagency as is

entrusted to him.”

 Examples

(1) A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the

purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent, but is A ’s agent

for the conduct of the sale.

(2) A authorises B, a merchant in Kolkata, to recover the money due to A from C &Co. B

instructs D , a solicitor to take proceedings against C & Co., for the recoveryof the money.

D is not a sub-agent but is solicitor for A (Section 194).

In the case of Central Bank Of India Ltd., ... vs Firm Rur Chand Kurra Mal,58 the Court laid

down that, ‘In view of the conclusion at which we have arrived, namely, that the relationship

between the plaintiff-firm and the Oriental Bank was one of substituted agent, it becomes

unnecessary to go into other matters which have been considered by the trial Court and which

have been argued before us. It is equally unnecessary to decide whether there was any

negligence on the part of the defendant-bank in the matter of entrusting the work to the

Oriental Bank or in the delay in informing the plaintiff firm about non-realisation of the

amount of the hundi. It was admitted by Mr. Dalip Chand Gupta that the question of

negligence would only arise if the defendant bank was the agent and not if the Oriental Bank

became the substituted agent.’

Where an agent holding an express or implied authority to name another person to act for the

principal in the business of the agency has named another person accordingly, such person is

not a sub-agent, but an agent of the principal for such part of the business of agency as is

58 AIR 1958 P H 159

entrusted to him. (Section194). Where the agent has authority to appoint an agent and the

person so appointed is in the nature of a substitute for the original agent, the contract arises

between the principal and the substitute and the substituted agent becomes responsible to the

principal for the due discharge of the duties as if he is appointed by the principal himself.

According to Section 195, in selecting substituted agent for his principal an agent is bound to

exercise the same amount of discretion as a man of ordinary prudence would exercise in his

own case; and if he does so, he is not responsible to the principal for acts or negligence of the

substituted agent so selected.

What is the difference between Sub-agent and Substituted agent?

It is important to understand the distinction between the two as their liability is different:

Sub-agent

1. A sub-agent is appointed by the agent and as such he is under the control of the agent.

2. A sub-agent acts under the agent.

3. There is no privity of contract between the subagent and the principal.

4. A sub-agent cannot ask for his remuneration from the principal.

5. The principal cannot hold the sub-agent liable, except in case of fraud.

6. An agent is liable for the agent acts of the sub-agent.

Substituted Agent

1. A substituted agent is only named by the agent but is under the control of the principal.

2. A substituted agent acts independently for his principal.

3. There is contractual relationship between the substituted agent and the principal.

4. A substituted agent can ask for his remuneration from the principal.

5. The principal can hold the substituted agent liable.

6. An agent is not liable for the acts of the substituted agent.

Furthermore, in Halsbury's Laws of England59 it is stated that there may be three classes of

sub-agents: (1) those employed without the authority, express or implied, of the principal, by

whose acts the principal is not bound; (2) those employed with the express or implied

authority of the principal but between whom & the principal there is no privity of contract;

(3) those employed with the principal's authority, between whom & the principal there is

privity of contract, and a direct relationship of principal and agent is, accordingly,

established.

For the acts and defaults of the first two classes the agent is responsible to the principal; in

the third case the substituted agent has the rights and liabilities of an agent vis-a-vis the

principal.60

Halsbury's Laws of England, Volume I, wherein it is stated-

"There is as a general rule no privity of contract between the principal and a sub-agent, the

sub-agent being liable only to his employer, the agent. The exception is where the principal

was a party to the appointment of the sub-agent or has subsequently adopted his acts, and it

was the intention of the parties that privity of contract should be established between them."

It can be inferred that, that the whole distinction in our law appears to turn on the original

agent naming the person he appoints to represent the principal for the whole or part of the

business first entrusted to him. Whether this naming is put to the agent or principal is by no

means apparent. The naming should, however, be to the principal himself so as to bring about

privity of contract. In case of a sub-agent no such naming is required and consequently no

such privity in law is established.

59 (Volume I) Simonds edition para- 40560 Mercantile Bank of India Ltd. v. Chetumal Bulchand AIR 1930 Sind 247

Conclusion and Suggestion

As a general rule, no doubt, the maxim 'delegatus non potest delegare' applies so as to prevent

an agent from establishing the relationship of principal and agent between his own principal

and a third person; but this maxim when analyzed merely imports that an agent cannot,

without authority from his principal, devolve upon another obligations to the principal which

he has himself undertaken to personally fulfil; and that, inasmuch as confidence in the

particular person employed is at the root of the contract of agency, such authority cannot be

implied as an ordinary incident in the contract. But the exigencies of business do from time to

time render necessary the carrying out of the instructions of a principal by a person other than

the agent originally instructed for the purpose, and where that is the case, the reason of the

thing requires that the rule should be relaxed, so as, on the one hand, to enable the agent to

appoint what has been termed a sub-agent or 'substitute' (the latter of which designations,

although it does not exactly denote the legal relationship of the parties, we adopt for want of a

better, and for the sake of brevity); and on the other hand, to constitute, in the interests and

for the protection of the principal, a direct privity of contract between him and such

substitute."61

Furthermore, as per 13th law commission report in section 190 the following changes must be

incorporated in the present act of I.C.A, 1872 and the paper affirms it too.

Where the employment of a sub agent is justified by usage of the particular trade or

business in which the agent employed, provided such a usage is neither unreasonable,

nor inconsistent with express term’s of agent’s authority

Where the authority conferred is of such a nature as to necessitate its execution

wholly or in part by means of sub- agent

Where the act done is purely ministerial and does not involve confidence or

discretion.

In my opinion, that is the true test to determine whether the person appointed by an agent

authorised in that behalf to perform part of the business of the agency is a substituted agent

of the principal or the sub- agent of the agent, and the test to be applied is the same whether

the case falls within Section 194 or whether, as in the present case, the person so appointed is

the nominee of the principal although there is a difference in the obligation undertaken by the

agent, for Section 195 applies to a case falling within Section194, while in cases where the

substituted agent is the nominee of the principal, the agent is not concerned with the character

or efficiency of the person so appointed, and his obligation quo to the part of the business of

the agency entrusted to the substituted agent ceases if and so soon as privity of contract has

been created between the substituted agent and the principal.

The true test to determine whether the person appointed by the agent authorised in that behalf

to perform part of the business of agency is a substitute agent of the principal or the sub-

agent of the agent is to see if there is a privity of contract between the principal and the

person so appointed, and the test to be applied is the same whether the case falls within

61 13 th law commission report and Pollock and Mulla)

Section 194 or whether the person so appointed is nominee of the principal, although there is

difference in the obligation undertaken by the agent.

Bibliography

References

Books

13th Law Commission Report (Universal publishing and Co.)

Pollock & Mulla, Indian Contract Act& Specific Relief Acts, vol 2 (13th edn, Lexis

Nexis Butterworths Wadhwa 2009)

Avtar Singh, Contract & Specific Relief Act (10th edn, EBC)

P C Markanda, The Law of Contracts (2nd edition, Vol. 1, Wadhwa Publications)

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