Agency service


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Agency service

  1. 1. Agency ServiceIntroductionYou have already learnt that goods and services are made available to consumers by the producerseither directly, or through retail stores, or through some intermediaries such as wholesalers andretailers. You have studied about the services provided by these intermediaries — wholesalers andretailers in one of your previous lessons. Besides these intermediaries, you may also utilize the servicesof some other intermediaries in your day to day life. For example, when you want to raise a loan, youseek the advice of someone who knows the procedure to be followed for raising loan; when you want tobuy a house, you take the help of some property agent. In the same way, when you want to invest yoursavings, you take the advice of a person who knows the pros and cons of different avenues ofinvestment. These intermediaries from whom you may seek specialized services are known as agentsand their business as agency. In this lesson, you will study about agents and their activities.ObjectivesAfter 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;• identify the key activities involved in rendering various agency services; and• discuss the rights and duties of an agent.Definition of agent and agencyAn agent is a person employed to do any act for another, or to represent another in dealings with anythird person. The person for whom such act is done, or who is so represented is called the principal. Therelationship between the agent and the principal is called ‘agency’. In simple words, we can say that anagent is a person who is engaged to act on behalf of anotherperson and deals with other parties as arepresentative of some person or persons. Thus, for example, when Shrey asks Sameer to represent himin dealing with Sanjay, then Shrey is the principal, Sameer, the agent and Sanjay, the third party. All suchactivities done on behalf of others are included in agency service. Under Agency Service, an agent worksas a link between the principal and other parties. An agent is fully authorized to work on behalf of theprincipal. The work done by an agent for his principal will be legally deemed to have been done by theprincipal himself who is responsible for all his actions. For example, a person engages a servant and asks
  2. 2. 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 lateron, the servant continues to purchase goods from the shopkeeper, the shopkeeper is entitled to claimmoney from the person. Remember that a principal is liable only for the lawful acts of his agent. If forexample, an agent, on directions of his principal, beats up a person and is fined as a result, then hecannot make his principal liable to reimburse the amount of fine. We have now known about theprincipal 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 ofthe husband except under special circumstances and for special purposes. But, if a person appoints abroker to sell his car on his behalf, the broker is an agent. Now let us see who can appoint an agent andwho can be an agent. Who can appoint an agent? Any person who is an adult, of sound mind, having anability to enter into a contract, can appoint a representative or an agent. Only a capable adult canappoint a representative or an agent.Who can be an Agent?Under the law, no qualifications have been prescribed for an agent; any person who has the fullconfidence of the principal can work as an agent. A minor or a person of unsound mind may also beappointed as an agent, but he cannot be held liable by the principal for any negligence in performing thework. Thus, if a person appoints a minor to sell his old car for not less than Rs.40,000, and the car is soldfor Rs.35,000, the owner of the car will be bound by the transaction, and he will have no right againstthe agent for compensation.Difference between an Agent and a ServantAfter studying the definition of an agent, you may be under the wrong impression that an agent is aservant of the principal. This is, however, not true. The difference between an agent and a servant maybe clearly understood from the following table: see last pageDifference between a Contractor and an AgentPerhaps you might have heard about contractors. The contractors work on contracts to constructbuildings, dams, roads, bridges etc; and work according o the plans and maps of the architects andengineers. They also arrange for labour and materials. The contractor’s remuneration is either a fixedamount or a certain percentage of the total construction cost. Work must be completed within a fixedperiod. Although the contractor works for the principal, he is not the representative of the principal. Assuch he is different from an agent. He works independently and runs the risks involved in the contractwork.
  3. 3. Importance of Agents and AgencyHuman necessities were limited in ancient times. Production was limited and it was only for satisfactionof individual requirements. As the requirements increased, producers started producing goods keepingfuture demand in view. There was development of specialization in each area of production; tradecrossed the local boundaries and became international. Situations such as these gave birth to agents. Inmodern times, agents play an important role. On account of their special ability and experience, theywork as an important link between the producer and consumer, buyer and seller, creditor and debtorand employer and employee. Their business is called Agency Business. In modern times, agency businessis an important means of providing employment. Unparalelled development may be seen in the roleplayed by the agents in various areas of industry, purchase and sale, investment, employment and evenin life. Now a days the agency work is looked at with respect and pride. It is on account of this reasonthat more and more people are adopting agency work as a profession. The Government, having realizedthe importance of agents, gave them legal recognition and regularized their activities. The relationbetween the Principal and the Agent is recognised in law under the Indian Contract Act.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 themain characteristics of an Agency. These are given below:-1. Basis : Mutual relations between the principal and the agent are basedon good behaviour and full faith. By good behaviour we mean thatthe agent should work honestly and diligently. By full faith we meanthat the principal must have full faith in the agent. A person cannotbe said to be another person’s agent simply because he is working asan agent. It is essential that the principal must be fully responsible forthe activities of the agent with regard to the Agency.2. Consideration: Unlike other contracts, it is not necessary to have aclause for consideration in the contract of agency. But on completionof the contracted work, remuneration is paid under the terms of thecontract.3. Liability: The main characteristic of the relation between the principaland the agent is that the principal is liable for each lawful activityperformed 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 personas an agent. No qualification is prescribed for an agent. A minor canmake the principal liable for his legal activities but he is himself not liable.
  4. 4. Whether an individual or an organization is an Agent or not can be verifiedfrom the answer to the question whether or not the agent can make theprincipal liable for his action. If the answer is in the affirmative, the personor organization is an agent, otherwise not. The relation between the agentand the principal is based on either oral or written agreement or it may bebased on implied agreement. We shall study about this later.41.6 Legal Maxims forming the basis of law relating to agencyThere are a number of legal maxims which form the basis of law relating toagency. These are mentioned below:1) What an agent does within the scope of instructions given to himbinds the principal as if he had done it himself. Thus, a basic maximor principle of agency is “He, who does through another does byhimself”. (Qui facit per alium facit per se)2) When a person has by his conduct or statements induced others tobelieve that a certain person is his agent, he cannot subsequently denyit. This is the rule of agency by estoppel.3) Where an agent does an act for his principal but without his knowledgeor authority, or where he exceeds the given authority, the principal isnot bound by the transaction. But if he so desires he may later onagree to abide by the act of the agent. This is known as agency byratification. After ratification, agency is taken to have come intoexistence from the point of time when the agent first acted, not fromthe 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 isthat an agent is normally engaged by the principal on the basis of hisconfidence in the agent and he may not have the same confidence inthe person appointed by the agent. However, an agent may appoint anagent (or sub-agent) under certain circumstances, for instance, wherethe principal permits it, or it is customary in any trade, or the workof the agent cannot be performed otherwise.Key Activities involved in agency servicesAny person or firm rendering agency services is required to undertake certainkey activities, which depend upon the nature of services. Let us list the keyactivities involved in the case of different agency services.(1) Insurance agency: It involves educating people about the benefit ofinsurance and informing them about the terms and conditions of
  5. 5. insurance like premium payable, etc.; helping people (Clients) to fillup the form of application for insurance; collecting premium on behalfof the insurance company; help the insured people to settle any claimthat they may have to realize from the insurance company.2) Saving and investment agency: It involves educating people aboutthe benefits of saving; inform them about alternative channels ofinvestment with safe and stable income; collecting the savings atintervals on behalf of the organization; helping the investors in gettingloans against the investment, if needed3) 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 TVadvertising.4) Tours and Travel agency: It involves selecting places of touristattraction; drawing up itinerary of tours; getting reservation for travel;booking hotel accommodation; ensuring that the date, time and placeof departure and arrival on return are decided in advance and intimatedto the tourists concerned.5) Property agency: It involves keeping the people informed about landand house property on sale or available on rent; arranging the clients’visit to the site of property; acting as a link between the propertyowner and the client when the sale or hiring is finalized.6) Courier Service: It involves keeping users (clients) informed aboutthe availability of service; collecting letters, parcels or other articlesfrom the senders; arranging despatch of the articles by messenger,roadways, railways or air transport; sending proof of delivery to thesenders concerned.Duties and Rights of an AgentYou are aware that the principal is liable for the acts of the agent. You havestudied about the meaning and importance of agent and his activities; aboutthe characteristics of agency and about the methods of establishment of agency.Now we shall study about the duties of an agent towards his principal andabout the rights of the agent. The main duties of an agent towards hisprincipal are given below.
  6. 6. Duties of an Agent. (i) To act according to principal’s directions: It is the duty of theagent to act in accordance with the order and directions of the principal.In the absence of clear cut directions, the agent should follow theprevalent trade practices. If the agent does not act according to thedirections of the principal, he has to compensate the principal for thelosses, if any, incurred by him. For example, if the principal directsthe agent to insure the goods, but the agent forgets to do so and thegoods are destroyed by fire, the agent will have to compensate theprincipal for his loss.(ii) To act with reasonable diligence: The agent should carry out thework of the principal with due diligence. If some work is not doneefficiently and with reasonable diligence, the agent has to compensatefor the losses. For example, A an agent, sells goods on credit to Cwithout making proper enquiries about C’s solvency. At the time ofsale, C was bankrupt. In this case A will have to compensate theprincipal for the loss. (iii) To render accounts: It is the duty of the agent to render correctaccount of all the transactions to the principal from time to time.(iv) To communicate with the Principal during emergency: In case ofdifficulty while doing some work, the agent should contact his principaland get instructions from him.v) No delegation of authority: No agent can appoint a sub-agent tocomplete the work assigned by the principal. But in certaincircumstances 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 alsonecessitate appointment of sub-agents, for example, travel agents ofIndian Airlines carry on business through their sub-agents in Not to misuse authority: It is the duty of the agent not to misusethe information obtained by him from his principal and from othersources and he should not try to make any personal gain, for example,purchasing goods of his principal at low prices himself and earningprofits.vii) Payment of dues: It is the duty of the agent to deduct expensesincurred and the fixed amount of commission from the total saleproceeds and to pay the balance to the principal immediately.
  7. 7. viii) Not to deal in his own name: It is the duty of the agent to ensurethat no competitor makes personal money out of the agency work. Ifan agent does some such work and earns profit out of it, it is his dutyto submit its accounts to the principal. For example, an agent sells 25sacks of his own sugar alongwith 50 sacks of his principal and earnspersonal gains. Under this situation, the agent is required to renderfull accounts to his principal.ix) To protect the interest of his principal: In case of untimely deathof the principal, or in case he becomes insane or is insolvent, it is theduty 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 setup an adverse title to the goods received by him as an agent from theprincipal. Whatever he does should be in accordance with the directionsof the principal and in the interest of the principal.Rights of the AgentRights and duties are supplementary to each other. We have discussed abovethe various duties of the agent. Let us now study the various rights of theagent. The rights of the agent are given below:i) Right to receive remuneration: The agent has the right to receivefrom the principal reasonable remuneration for the work done by himin accordance with the agreement. As soon as the agent finishes hiswork, he has the right to receive remuneration. For example, a producerappoints an agent to procure orders for his goods. He is eligible toreceive remuneration after he procures orders. It does not matterwhether the producer fulfils those orders or not.ii) Right to adjust his dues: The agent can deduct advances given byhim to the principal, the expenses incurred by him and the remunerationto 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 ofthe carelessness or inefficiency of the principal, the agent has the rightto receive compensation. The principal can be made responsible for alllegal actions taken by the agent to protect the interests of the principal.
  8. 8. Personal Liabilities of the AgentThough the principal is responsible for all legal actions taken by an agent,the agent can be held responsible by other parties in the followingcircumstances:i) When the agreement itself provides for the personal liability of theagent;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, personof unsound mind, etc. against whom no case can be filed in the court);v) When the agent enters into an agreement in his own namevi) 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 fraudulentactions;ix) When the agent is held personally responsible according to tradepractices;x) When the interest of the agent is also included in the agency agreement.What You Have LearntA person who works on behalf of another person and represents that personwhile dealing with others, is called an Agent. The person on whose behalfthe 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
  9. 9. 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 titleRights of the agent Right to receive remuneration Right to adjust his dues from sale proceeds Right of lien Right of indemnification Right of compensationTerminal Exercise1. 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 theother hand he tells Vinod that the house could not be purchased. Inthe above circumstances, what are the rights and duties of Vinod andPramod?6. Ajay purchases goods for Ram Narain without his authority and sellsthe same to Sangeeta on the liability of Ram Narain. Can the aboveactions 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.