Agent’s Duty to Principal Under Indian Contract Act

A person employed to do any act for another or to represent another in relations with third parties is known as an "agent." The person for whom such an act is done or who is thus represented is referred to as the "principal." The contract between the principal and the agent is known as a "contract of agency." The contract establishes the principal's and agent's rights and responsibilities.

The principal duties of the agent are categorized into two groups: fiduciary duties and a set of general duties required by agency law. These general duties, however, are not unique to agency law; they are owed by any employee to the employer.

Duties of Agent

Sections 211 to 221 of Indian Contract Act, 1872 discuss agent’s duty to principle. An agent has a fiduciary duty to act loyally for the benefit of the principal in all matters relating to the agency relationship. This duty supplements the duties specified under an agency contract. A fiduciary duty occurs because agency is a trust and confidence relationship. The principal's several remedies for an agent's breach of fiduciary duty include terminating the agency and suing the agent for damages.

Duties to Execute Mandate

Every agent's first and foremost duty is to carry out the principal's mandate. He must do the task that has been given to him. Any failure to do so would make the agent absolutely liable for the principal's loss. As a result, it was decided in a number of cases −

• “The rule of equity is, that if an order is sent by a principal to a factor to make an insurance, and he charges his principal, as if it was made, if he never in fact made that insurance, he is considered as the insurer himself.”

Duties to follow Instructions or Customs

When an agent is appointed to facilitate or negotiate a transaction on behalf of the principal, the agent owes a duty to the principal to act in the best interests of the principal within the scope of the agent's authority.

In practise, the duty to act in the best interests of the principal entails the agent using his due care and skill to negotiate transaction terms on behalf of his customer with a third party to the greatest advantage of his principal under the circumstances.

Duty of Reasonable Care and Skill

Section 212 defines the standard of care and skill required of an agent.

According to common law, an agent must perform his duties with due care and skill. Agents who fail to achieve this standard are deemed negligent in the first case.

In general, an agent in a specific profession, trade, or calling who performs his duty with the care and skill expected of a reasonable, average member of the relevant profession, trade, or calling meets the requisite standard.

The Agent is bound to act with reasonable care and skill, and to pay his principal for the direct consequences of his neglect, lack of skill, or misconduct, but not for loss or harm caused indirectly or distantly by such neglect, lack of skill, or misconduct.

Duty to Avoid Conflict of Interest

An agent whose interest’s conflict with those of his principal may be unable to effectively represent him. As a result, in connection with an agency transaction, an agent may not obtain a material benefit from a third party. An agent may not deal with himself when doing the principal's business.

For Example, an authorised real estate agent cannot sell property to himself. A few courts have extended the rule to include transactions with the agent's relatives or business associates, as well as transactions with business organisations in which the agent has an interest. However, if the principal agrees, an agent may engage in self-dealing transactions. Before dealing with the principal on his own behalf, the agent must disclose all relevant facts to the principal in order for this consent to be effective.

Unless otherwise agreed by the principal, an agent may not compete with the principal in the agency business and may not assist the principal's competitors as long as he is an agent. As a result, an agent employed to purchase specific property may not purchase it himself if the principal desires it. Additionally, while still employed by the principal, an agent may not solicit customers for a planned competing business.

Duty Not to Make Secret Profit

Common law requires that an agent not profit or gain any benefit in the course and subject of his agency without his principal's knowledge and consent. Such profit, also known as secret profit, is not limited to money but can include anything of value, such as an interest-free loan, a club membership, and so on. In addition to any other remedies available to the principal for the agent's breach of duty, an agent who has made secret profit must account to the principal for such profit. The following are some examples of hidden profit −

• Use of Property − An agent who uses property entrusted to him by the principal to earn a profit for himself without the approval of the principal is violating his duty not to make secret profits.

• Use of Position − In some cases, an agent may get a benefit just by acting as the principal's agent. For example, an agent appointed to purchase products from a supplier on behalf of his principal gets a covert monetary benefit from the supplier in return for placing purchase orders with the supplier. The agent's acts will lead to a secret profit.

• Use of Information or Knowledge − An agent who acquires information or knowledge that he was hired by the principal to collect or discover, or that he in some way gained for the benefit of his principal, shall not use it for personal advantage. For example, while acting on behalf of a purchaser, an estate agent looks for a property for investment in a specific building specified by the principal and becomes aware of a property in that building that is being offered for sale at a price below market price.

Duty To Remit Sums

According to Section 218 of the Indian Contract Act, the agent has a duty to remit to his principal all sums received on his behalf. The agent, on the other hand, has the right to deduct his lawful costs; however, subject to this right, the principal's money must be repaid to him even if it was received under a void or illegal contract.

Duty To Maintain Accounts

Any agent who gets property for or from his principal is bound to keep such property separate from his own and is considered a trustee of such property.

For the reasons stated in subparagraph (a), an agent is required to keep proper accounts of the property received during the course of the agency and to provide such accounts to the principal upon request.

The agent's duty to account to the principal may continue even after the agency relationship has ended. As a result, the agent is bound to return to his principal any documents and property originally handed to him by the principal, as well as documents prepared at the principal's instruction and expense.

Duty not to Delegate

The general rule is that an agent may not assign his authority or duty in whole or in part unless the principal authorises and consents.

Because an agency agreement is known only to the principal and the agent, and authority is usually given to the agent personally because of his trustworthiness, skill, or experience, the agent owes it to the principal not to delegate his duties under the agency agreement to another person but to exercise the authority in person. As a result, an agent has no implied power to hire deputies or sub-agents to carry out his tasks.

Conclusion

An agency is the result of a previously accepted contract between a principal and an agent. A principal grants authority to an agent to act on his or her behalf and under the principal's control through agency. The relationship between a principal and an agent is fiduciary, and the activities of the agent bind the principal. An agent is liable to the principal when he or she acts without actual authority but with apparent authority.

An agent is obligated to indemnify a principal for loss or harm caused by his or her act, and the principal owes certain contractual duties to his or her agent. Aside from the duty of an agent to serve a principal loyally and obediently, a principal's primary duties to his or her agent include −

To compensate the agent as agreed and to indemnify and defend the agent from claims, liabilities, and expenses incurred in carrying out the principal's duties.

Frequently Asked Questions (FAQ)

Q1. What are the duties of an agent to their principal?

Ans. Agents generally owe the principal the following responsibilities: loyalty, care, obedience, and accounting.

Q2. What are the duties of an agent in a contract?

Ans. An agent has a duty of loyalty to act for the benefit of the principal and not to benefit herself at the expense of the principal. An agent is required to refrain from taking personal acts that might conflict the agency's purpose.

Q3. What is the most important duty of an agent?

Ans. Loyalty − An agent must act solely in the best interests of his or her principal, not in the best interests of the agent or a third party. Moreover, any information or knowledge obtained through the agency is strictly confidential.