DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

2019-20
CONTRACT LAW

FINAL DRAFT
PROJECT TOPIC
PRINCIPAL’S DUTIES TO AGENT

SUBMITTED TO SUBMITTED BY
Ms. PRIYA ANURAGINI SAUVIK SINGH

ASSISTANT PROFESSOR 190101132

CONTRACT LAW SEMESTER- II
Dr. RMLNLU, LUCKNOW SECTION- B
 ACKNOWLEDGEMENT

Nothing in this whole world can be accomplished alone and our piece of work is
also not an exception too, in successful completion of this piece work there has
been help and support of various peoples. We are obliged to our professor Ms.
Priya Anuragini who has given us golden chance for this research project. We
would also like to thank the almighty and our parents for their moral support
and our friends who are always there to extend the helping hand whenever
and wherever required.
We further extend our thanks to library staff and all the administrative
authorities of DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY who
helped us in getting all the materials necessary for the project.

TABLE OF CONTENTS
 ❖ LIST OF CASES REFERRED

❖ LIST OF ABBREVIATIONS

❖ INTRODUCTION

❖ AGENT AND PRINCIPAL

❖ PRINCIPAL’S DUITES TO AGENT

❖ INDEMNIFICATION

❖ COMPENSATION

❖ REIMBURSEMENT

❖ DUTY TO PERFORM

❖ TORT AND OTHER DUTIES

❖ CONCLUSION

❖ BIBLIOGRAPHY
 LIST OF CASES REFERRED

Adamson v Jarvis [1824-34] All ER Rep 120 12

Adamson v Jarvis, 4 Bing. 66 14
Alkins v Jupe (1877) 2 CPD 375 13
Babasa Bakale v Hombana AIR 1932 Bom. 593 11
Babasa Bakale v Hombanna, AIR 1932 Bom. 593 10
Burrows v Rhodes, (1899) 1 Q. B. 816 14
Collins v Evans [1824] QB 820 13
Davis v Harwood, (1890) 24 Q.B.D. 12
Duncan v Hill, (1873) L.R. 8Eq. 242 12
Firm Hagami Lal v Bhuralal AIR 1961 Raj 52 11
Firm of Madhawji Thawor v Yar Hussain Hydor Dasti, AIR 1926 Sind 40 13
Firm of Pratapchand Nopaji v Firm of Kotrik Venkat Setty & Sons AIR 1975 SC 1223 14
Folwer v Lock, (1872) L.R. 7 C.P. 272 15
Ganges Valley Bone Mills Co. Ltd. v akshi Narayan, 80 C.L.J. 297 11
Hazari Lal v Hari Ram, AIR 1959 Raj. 153 12
Isaac W.C. Solloway v J.P. Malonglin, AIR 1938 P.C. 12
Lucey v Hill, (1874) 18 Eq. 182 12
Mathura Das Jagan Nath v Jiwanmal Gian Chand, AIR 1928 Lah. 196 11
Pirthi Singh v Mathu Ram AIR 1932 Lah. 356 12
Pratap chand v Kotrike Venkata Shetty and Sons, AIR 1975 SC 1223 10
Ram Kumar v Laxmi Narayan, 225 I.C. 550 12
Rangnath v Firm Ram Ram Chander, AIR 1935 Sind 38 10
Shamas Din v Agha Muhammad, 59 IC 971 11
State v Chakiat Bros AIR 1975 Ker 13 13
Tuff v Warman (1858) 27 L.J.C. p. 322 15
Wilson v Merry, L.R. 1 Sc. App 330 15
 LIST OF ABBREVATIONS

1. & - And

2. AIR - All India Reporter

3. Anr - Another

4. Co - Company

5. Ed – Edition

6. Ltd – Limited

7. Sec.- Section

8. Ors - Others

9. SCC - Supreme Court Cases

10. SCR - Supreme Court Reports

11. S.C- Supreme Court

12. I.C-Indian Cases

13. A.C- Appeals Cases

14.ILR- Indian Law Report

15.ICA- Indian Contract Act

 NEED OF THE STUDY

The objective of our project work is exploring the duties of the principal towards the agent.
How the arrangement of agency works between the principal and the agent, what are their
responsibilities towards each others? The purpose of our project work is exploring the
duties of the principal towards the agent and what could be different circumstances for
performing the agency relationship, and what are the responsibilities of the principal
towards the agent in different circumstances of their agency relationship.

STATEMENT OF PROBLEM

● What contract duties are owed by the principal to the agent?

● Does the principal owe the agent duties: contract, tort, and workers’ compensation?

● What are circumstances where the principal have to indemnify the agent in the
period of agency?

LITERATURE REVIEW

This section presents a review of the literature on SANJIVA RAO’S Contract Act and Law
Relating to the Tenders etc. 9 th Edn, written by Gyanendra Kumar & R. B. Shetty. This book
explains agency in a very detailed manner. Duties of the principal towards the agent are
explained in comprehensive manner in the relevant sections. In ICA, 1872 duties of the
principal towards his agent are covered in the sections 222 to 225. The scope and
applicability of the each section is explained in this book with the help of the relevant case
laws. Although the all the duties and liabilities of the principal towards his agent are not
mentioned in the ICA, 1872, but the author have tried to explain maximum possible
circumstances. It is quite helpful in clearing the doubts regarding different provisions and
their applicability. It is a very good book for reference of ICA, 1872 in a detailed manner.

HYPOTHESIS

The Principal owes different kinds of duties towards the agent in agency relationship and
these duties can be: contract, tort, and workers’ compensation.

METHODOLOGY

The methodology adopted by me is Doctrinal research and literature review wherein I have
taken help of already done and existent data to draw the conclusions. My research is mainly
based upon secondary means in which I have taken help of books, magazines articles, law

journals and online database to form my opinions.

INTRODUCTION

The Indian Contract Act, 1872 defines the principal as the person or entity on whose behalf
and subject to whose control an agent acts. A principal can be a person, corporation,
partnership, not-for-profit organization, or even a government agency. The principal owes
the agent duties too. The Indian Contract Act, 1872 does not define exhaustively the duties
of the principal to his agent. The principal has to perform his/her own part of the agency in
different ways. There are certain duties of principal towards the agent such as
Indemnification, Cooperation, Compensation, Reimbursement and providing safe working
conditions. Various case laws have been dealt to explain these matters. Agent is authorized
to create a contract between his principal and third party. An agent can-be sued on his
personal liabilities and the authority of an agent can be revoked. Principal’s duties to an
agent are defined in Indian Contract Act, 1872 from section 222 to section 225. These
section deals with the different types of duties principal owes towards his agent in the
course of agency.

Agent and Principal

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

dealing with the third person. The person for whom such act is done, or who is represented
is called the principal. Thus, what distinguishes an agent from a person appointed to do any
act is the agent’s representative capacity coupled with a power to affect the legal
relationship of the principal with the third person. It is only when he acts as a representative
of the other in business negotiations, that is to say, in the creation, modification or
termination of contractual obligations, between that other and third persons, that he is an
agent. Representative character and derivative authority may briefly be said to be the
distinguishing feature. To know whether a person occupies the position of an agent or not,
the law has to go by his functions. The law has to see the substance of the transaction and
not the parties’ terminology. The relevance of the expression used is an agreement has
often been in connection with the hire purchase transactions. Any person who is of the age
of majority according to the law to which he is subject, and who is of sound mind, may
employ an agent.

PRINCIPAL’S DUTIES TO AGENT

The principal owes different type of duties to the agent according to the Indian Contract Act,
1872. In any case, once a principal engages an agent, the principal owes the agent duties in
contract, tort, and statutorily workers’ compensation law. If a principal fails to fulfil these
duties, it can result in a lawsuit based on breach of contract or tort liability. These duties
are:

Indemnification
The principal must pay the agent for losses the agent incurred while acting as directed by
the principal

Compensation

A principal must compensate the agent as specified in the contract or for the reasonable
value of the services provided if no amount is specified.

Reimbursement

The principal must pay back to the agent authorized payments the agent has made on the
principal’s behalf

Duty to perform

A principal has the duty to cooperate with the agent and to assist the agent in performing
his or her duties. The principal must be abide by the terms of the agency contract and owes
a duty of good faith and fair dealing to the agent. If the Principal wrongfully breaks the
Contract, the Agency is terminated, but the principal may liable for the damages to the
broker.

Tort and Other Duties

Safe Working Conditions: A principal has the duties (i) to provide its agents and employees
with safe working premises, equipment, and conditions, and (ii) to inspect working
conditions and warn agents and employees of unsafe areas.

Let's separately examine each of these obligations.

DUTY TO INDMNITFY

The principal's duty to the agent is indemnification. This means the principal must reimburse
the agent for any claims, liabilities, and expenses incurred while performing agency duties.
The principal must indemnify the agent for duties performed under the principal's authority
and also for duties performed in the reasonable furtherance of agency duties.

SECTION 222- Agent to be indemnified against the consequences of the lawful acts-
The employer of an agent is bound to indemnify him against the consequences of lawful
acts done by such agent in exercise of the authority conferred upon him.

SCOPE

A claim for indemnification under section 222, Contract act, is only maintainable if the agent
act which is implied to do is lawful. Agreements to commit criminal acts are expressly and
explicitly excluded, by sec. 224 of the Contract act, from the scope of any right to an
indemnity.1

Agent’s Right to Indemnity

The principal is bound to indemnify the agent against the consequences of the lawful acts
done by such agent in the exercise of the authority conferred upon him. 2 But before an
agent can successfully maintain any claim for indemnity against the principal he must
establish the fact that he has actually incurred a loss. 3 Where a suit is brought by an agent or
a broker to recover his brokerage or commission in respect of transaction through the
transaction in relation to which such claims are made by way of wager. Such agreement
being collateral to the wagering transactions cannot fall within the mischief of section 30 of
the Indian contract act, unless it is further established that the contracts which the
commission agent or the broker entered into with third parties on the behalf of his
constituents were also wagering contract as between the plaintiffs and these third parties.

The cause of action in such a suit is founded not directly upon the transactions themselves,
but upon the obligations which rest upon the principal to indemnify the agent against the
consequences of all the lawful acts done by him in exercise of his authority as an agent. This
is based on the principal underlying under this section. Therefore where an agent on the
behalf of his principal enters into a contract with a third party for the sale of the certain
goods, the principal cannot as against the agent plead the illegality of that contract as a
defence in an action brought by the agent to recover from the principal his brokerage,
commission or any money that he had to pay to the vendees on account of those
transactions.

1 Pratap chand v Kotrike Venkata Shetty and Sons, AIR 1975 SC 1223
2 Babasa Bakale v Hombanna, AIR 1932 Bom. 593
3 Rangnath v Firm Ram Ram Chander, AIR 1935 Sind 38
Similarly, in a converse case, where an agent receives money on the behalf of his principal
on a wagering contract between him as such agent or a third party, the agent cannot be
allowed to set up the illegality of the contract as a defence in an action brought by the
principal to recover from the agent the money so received. It thus follows that where the
broker acts on the behalf of his customer, even though the customer may gamble, the
constituent cannot set up the plea of wager against the brokers claim.4

Where the principal refuses to pay for and take the delivery of the goods purchased by the
agent under his instructions, the agent after giving proper notice to the principal would be
entitled to resell the goods on the account of the latter and hold him liable for any
deficiency resulting from the sale and the deficiency would be the measure of the loss
sustained by the agent.5 Where an agent who is authorised to make contracts for the supply
of the goods is authorised or is not forbidden to make those contracts in his own name he
becomes entitled to an indemnity against any personal liability in respect of any contract for
the purchase of goods the moment he, in his name or in that of the principal, enters into
such a contract. His right of action in respect of this indemnity is not postponed to his
satisfaction of the liabilities against which he claims indemnity. 6

An agent is entitled to reimbursement and indemnify by his principal only on condition that
he has acted within the scope of his authority. 7 Where the plaintiffs in each case made the
settlement before the due date and behind the back of the defendant it was held that the
plaintiffs acted in flagrant breach of their duties to their principals (defendants) and the
defendants were not liable to reimburse the plaintiff for the money so paid by them. 8 The
right to indemnity extend to the losses incurred in the exercise of his authority according to
the customs and usages of the particular trades or market provided the customs or usages is
the reasonable or is known to the Principal. 9 The right extends to the full amount of the
liabilities incurred by the agent, even though they may not have been enforced against
him.10

4 Firm Hagami Lal v Bhuralal AIR 1961 Raj 52

5 Babasa Bakale v Hombana AIR 1932 Bom. 593
6 Ganges Valley Bone Mills Co. Ltd. v akshi Narayan, 80 C.L.J. 297
7 Shamas Din v Agha Muhammad, 59 IC 971
8 Mathura Das Jagan Nath v Jiwanmal Gian Chand, AIR 1928 Lah. 196
9 Davis v Harwood, (1890) 24 Q.B.D.
10 Lucey v Hill, (1874) 18 Eq. 182
By the virtue of Sec. 222 of the Contract Act, the employer of an agent is bound to
indemnify him against the consequences of all the lawful acts done by the agent in the
exercise of the authority conferred upon him. The contract of agency therefore implies a
contract by the Principal to indemnify the agent against the consequences of all the lawful
acts done by such agent in the exercise of the authority conferred upon him.11

LAWFUL ACTS

It is essential condition to enable the agent to claim compensation under this section that
the agents Act shall be lawful. It is not sufficient that his acts are innocent and are
performed in good faith.12 Hence an agent cannot claim an indemnity against the
consequences of his own wrong. 13 However he may claim indemnity if he is not aware of
the unlawfulness of the act;14 Similarly it has been held that agents who engage in
fraudulent scheme to defraud their principal forfeit their right to an indemnity in respect of
transactions which form part of the fraud. 15 But an agent may recover moneys paid out of
him on the behalf of the principal in wagering contracts, 16 because such contracts are not
unlawful but wholly void.

Note that this duty of indemnification also applies to the agent's liabilities incurred as a
direct result of authorized agency duties. If the agent's actions result in a third party
bringing a cause of action against the agent, such as a breach of contract suit, then the
principal will be responsible for any expenses the agent suffers in the defence of that
lawsuit. This includes any damages awarded to the third party.

Duty for acts done in good faith

Section 223 - Agent to be indemnified against consequences of the acts done in the good
faith.

11 Hazari Lal v Hari Ram, AIR 1959 Raj. 153

12 Ram Kumar v Laxmi Narayan, 225 I.C. 550
13 Duncan v Hill, (1873) L.R. 8Eq. 242
14 Adamson v Jarvis [1824-34] All ER Rep 120
15 Isaac W.C. Solloway v J.P. Malonglin, AIR 1938 P.C.
16 Pirthi Singh v Mathu Ram AIR 1932 Lah. 356
Where one person employs another to do an act, and the agent does the act in the good
faith, the employer is liable to indemnify the agent the consequences of that act, though it
causes an injury to the rights of the third persons.

Scope- To entitle an agent to the right of indemnity under this section it is necessary that
there should be good faith on his part. Hence an agent cannot claim indemnity in respect of
the acts which he knows to be unlawful.

Where suit is not a suit for the recovery of the specific items, but is one foe an account by a
principal against his agent for the moneys received by the agent from or on the behalf of the
principal, it has been held that an agent is entitled to deduct moneys authorisedly expended
by him for unlawful purposes.17

Unlawful Acts done in the good faith-

The preceding section deals with the indemnity against the consequences of the lawful acts;
this section with the unlawful acts done in good faith. For instance, in a suit for accounts by
the principal against the agent, the agent is entitled to deduct moneys authorisedly
expended by him for unlawful purposes, though he may not succeed in a suit to recover the
amount so expended.18 It is clearly settled that an agent cannot claim indemnity in respect
of the acts which he knows to be unlawful, even they are not criminal, whether on an
expressed or implied promise.19 Any such promise is void as being contrary to public policy.

There is no indemnity if the agent knowingly commits an unlawful act. A judgement

creditor who requires an officer of the law to take specified goods, pointing them out as the
goods of the debtor, makes that officer his agent, and must indemnify him if, acting in good
faith, he commits a trespass in obeying the instructions. 20 Where working charges are
reasonably incurred by a person for another of dealing with the other’s property, he is
entitled to such expenses when his bona fides are established by proved facts. Therefore, a
person felling and cutting trees for the owner of the forest is entitled to be paid those
expenses.21

17 Firm of Madhawji Thawor v Yar Hussain Hydor Dasti, AIR 1926 Sind 40
18 ibid
19 Alkins v Jupe (1877) 2 CPD 375
20 Collins v Evans [1824] QB 820
21 State v Chakiat Bros AIR 1975 Ker 13
 Non Liability of the Principal of the agent to do a criminal agent

The relevant section dealing with this provision in Indian Contract Act is Section 224. Section
224- Non liability of employer of agent to do a criminal Act.

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.

Scope- Under this section the right to indemnify is excluded if the act which the agent was
employed to do and which he has done is criminal. There is however, no provision in the act
for the case in which the agent was ignorant or mistaken as to the facts making the criminal
or even for that in which he is deceived by his employer. In England it has been held that in
such a case right to indemnify exists. 22 This case may be followed in India as laying down a
rule of justice, equity and good conscience.

A case where the act is wrongful but not criminal the right to indemnify depends on the
good faith of the agent, which means absence of knowledge on his part of the wrongful
character of the act and the absence of any wrongful intention. 23

Non – Liability for the criminal Acts

The true construction of the section is that it only applies where the act is criminal on the
part of the agent, which, in most cases, would amount to the same thing as saying that it
must be criminal to his knowledge. Thus, where an agent was employed to enter into
forward transactions, which were offence under the statute controlling such contracts, and
the agent incurred losses, he could not claim indemnity from the principal. The rule could
hardly be held to apply to a crime committed by the means of an innocent agent. 24 This
section seems to assume that every libel for which damages can be recovered is also a
crime, or in other words, that defamation, as defined in the Indian Penal Code, includes all
the cases in which in which a civil action for injurious words is maintainable in India.
However, an indemnity against damages for libel is now a common clause in agreements

22 Burrows v Rhodes, (1899) 1 Q. B. 816

23 Adamson v Jarvis, 4 Bing. 66
24 Firm of Pratapchand Nopaji v Firm of Kotrik Venkat Setty & Sons AIR 1975 SC 1223
with publishers, and the risk faced by the publisher of having to meet a claim for libel can be
insured.

Compensation for the injury caused by principal’s neglect

SECTION 225- Compensation to the agent for the injury caused by the principal’s neglect.

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.

Compensation for the injury- An agent is not entitled to recover in an action for negligence,
if the principal can show that the agent could have by reasonable means avoided the
consequences of his (principal’s) negligence.25 Nor can he recover for an injury which has
resulted from the nature and the circumstances of his employment. 26 Again if the injury
received by a servant in the course of his employment, the master cannot held liable, for it
may be said that the servant took upon himself the risk which he foresaw or ought to have
foreseen.27

Compensation for services

The principal's duty to the agent is that of compensation. This means the principal must
compensate the agent as agreed. Keep in mind that a principal hires an agent, similar to an
employer employing an employee. The principal must therefore pay the agent a reasonable
fee. The fee doesn't have to be money, but it has to be something that is of value to the
agent, such as stock shares or tangible goods. The reasonableness of the fee is judged
according to the facts and circumstances of the agency relationship and agreement. When
the agent has performed as agreed, the principal has the duty to pay the amount of the
commission agreed. If no amount of compensation is agreed upon or stated, the principal
must pay the agent the current market rate of such services in that locality.

25 Tuff v Warman (1858) 27 L.J.C. p. 322

26 Wilson v Merry, L.R. 1 Sc. App 330
27 Folwer v Lock, (1872) L.R. 7 C.P. 272
 In some instances, the broker is not entitled to be paid for services rendered, no
compensation is due if the:

1. Objective of the agency is not legal.

2. Broker performs in a negligent Manner resulting in a loss or injury to the

principle.

3. Broker makes misrepresentations or is guilty of the fraudulent act.

Broker represents other with interest adverse to the principle without knowledge or
consent of the principal (Undisclosed dual agent).

Duty to perform

The principal's one of duty to the agent is that of good faith and fair dealing. This means the
principal must deal with the agent fairly and honestly. The principal cannot engage in
conduct that reasonably might result in harm or loss to the agent. In meeting this end, the
principal must specifically provide the agent with safe working conditions and information
about potential risks and losses.

The principal must be abide by the terms of the agency contract and owes a duty of good
faith and fair dealing to the agent. If the Principal wrongfully breaks the Contract, the
Agency is terminated, but the principal may liable for the damages to the broker. The
principal must allow the agent a fair opportunity to perform the services and must not act in
any manner which will harm the agent’s reputation. Neither the principal nor the agent may
interfere with the performance of the contract by the other and both must cooperate in the
accomplishment of the objective.

Tort and other Duties

Safe Working Conditions: A principal has the duties (i) to provide its agents and employees
with safe working premises, equipment, and conditions, and (ii) to inspect working
conditions and warn agents and employees of unsafe areas. The employer owes the
employee—any employee, not just agents—certain statutorily imposed tort and workers’
compensation duties.
The System in General

Workers’ compensation is a no-fault system. The employee gives up the right to sue the
employer (and, in some states, other employees) and receives in exchange predetermined
compensation for a job-related injury, regardless of who caused it. This trade-off was felt to
be equitable to employer and employee: the employee loses the right to seek damages for
pain and suffering—which can be a sizable portion of any jury award—but in return he can
avoid the time-consuming and uncertain judicial process and assure himself that his medical
costs and a portion of his salary will be paid— and paid promptly. The employer must pay
for all injuries, even those for which he is blameless, but in return he avoids the risk of losing
a big lawsuit, can calculate his costs actuarially, and can spread the risks through insurance.
Most workers’ compensation acts provide 100 percent of the cost of a worker’s
hospitalization and medical care necessary to cure the injury and relieve him from its
effects. They also provide for payment of lost wages and death benefits. Even an employee
who is able to work may be eligible to receive compensation for specific injuries.

CONCLUSION
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. A principal owes certain contractual duties to his/her
agent. Correlative with the duties of an agent to serve a principal loyally and obediently, a
principal’s primary duties to his/her agent include: To compensate the agent as agreed; and
to indemnify and protect the agent against claims, liabilities, and expenses incurred in
discharging the duties assigned by the principal. Thus there can be number of circumstances
where principal has duties towards his agent. These may be categorized as contract and tort
duties. The contract duties are to warn the agent of hazards associated with the job, to
avoid interfering with the agent’s performance of his job, to render accounts of money due
the agent, and to indemnify the agent for business expenses according to their agreement.
The tort duty owed by the principal to the agent employee is primarily the statutorily
imposed duty to provide workers’ compensation for injuries sustained on the job. Thus
different type of duties arises in different circumstances between a principal and an agent.
There are lot of scope to develop these duties further in the changing circumstances of the
corporate world and different types of technologies in the new world.

BIBLIOGRAPHY

BOOKS
⮚ Pollock & Mulla, Indian Contract and Specific Relief Acts, (12 th edn, Lexis Nexis
Butterworths)
⮚ John Cooke, David Oughton, Common Law of Obligations ( 3rd edn, Butterworths)
⮚ T.S. Venkatesa Iyer’s, The Law of Contracts & Tenders ( 10 th edn, Vol 2, S. Gogia &
Company)
⮚ Sanjeev Rao’s, Contract Act and law relating to Tenders etc., ( 9 th edn, Vol III, Delhi
Law House)

ONLINE SOUCES
⮚ www.scconline.com
⮚ www.lawoctopus.com
⮚ www.investopedia.com/terms/p/principal-agent-relationship.asp
⮚ https://sol.du.ac.in/mod/book/view.php?id=644&chapterid=386
⮚ studypoints.blogspot.com