LAW RELATING TO PARTNERSHIP

MEANING OF PARTNERSHIP

 ‘Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.’

CHARACTERISTICS

It is the result of an agreement.

It is organised to carry on business*.

That the persons concerned agree to share the profits of the business.

That the business will be carried on by all or any one of them acting for all*.

Business

 Ordinary Meaning

A person's regular occupation, profession, or trade.

An activity that someone is engaged in.

Partnership Act defines ‘business’ in all inclusive manner, as ‘every trade, occupation and

profession’

Partnership…..

At will: ‘no provision in contract for the duration of the partnership’

Particular partnership : ‘particular adventure or undertakings’

REAL TEST OF PARTNERSHIP

The real test of partnership is not merely sharing of profits or carrying on of business but of Mutual Agency.

Cox V Hickman (1860) – case of trustee appointed by creditors to run a business.

Law of partnership is an extension of the law of agency.

Act of a partner to bind the firm

• Partnership agreement, whereby one partner is given the power to manage the affairs of the firm, and it is stated that whatever he does shall be binding on the partners – does not give the said partner the power to transfer immovable property.
• In order to bind the firm an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm name or in any other manner expressing or implying an intention to bind the firm.

 Partners who have entered into partnership with one another are called individually

partners & collectively a firm.

A firm as such, is not entitled to enter into a partnership with another firm or individuals.

 The name under which their business is carried out is called the firm name.

In the case of a partnership, no separate legal entity is created. A partnership is only a putting together of the partners.

The Income Tax Act had provided to treat a firm as separate assessable units. 

(A firm is a separate entity for the purpose of Income Tax)

KINDS OF PARTNERS

 The various kinds of Partners are :

Actual,

Sleeping,

Nominal,

Partners for profits only &

Partner by holding out i.e. partner by Estoppel*

MINOR AS A PARTNER

Partnership is a contract. As such all the essential elements of a valid contract must be present. But a minor may be admitted to the benefits of a partnership without any consideration but with the approval of all partners.

DURATION OF A FIRM

A partnership may be for a fixed period of time. But where no provision is made by the partners for the duration of the partnership, it is a partnership at will.

REGISTRATION OF PARTNERSHIP

Partnership Act does not provide for compulsory registration; but:

• A partner of an unregistered partnership firm cannot file a suit against the firm or any partner thereof for the purpose of enforcing a right arising from a contract conferred by the Act.
• No suit can be filed on behalf of an unregistered firm against any third party for the purpose of enforcing a contract.

LIABILITY OF A PARTNER
The liability of partners is unlimited.

RIGHTS OF A PARTNER

Right to take part in the conduct of the business

Majority rights

Ordinary Matter

Right to be consulted & express opinion (can have a contract to the contrary for petty & routine matters)

Fundamental Matter

No change can be made in the nature of the business without the consent of all the partners

CRAG vs. FORD [1842]

FACTS: Crag and Ford were partners in a firm dealing with cotton. They purchased a certain quantity of cotton. After a month’s time, Crag told Ford to sell the same. But Ford did not do so as the prevailing market rates were low and he hoped that they would rise in the coming months. After three months, the rates were still low and Ford finally sold the cotton. Crag sued Ford alleging the delay of two three months caused much greater losses to the firm than those the firm would have suffered if Ford had followed Crag’s directions. Crag claimed damages from Ford for these extra losses suffered by the firm.

HELD: The plaintiff’s case failed as the judges held that both partners had equal rights and duties in the partnership firm. Crag could have sold the cotton himself; after all, he was also responsible for running the business of the firm. He did not perform his duties diligently or in time to be able to succeed in the action for damages.

BLISSET vs. DANIEL [1853]

FACTS: Blisset was a partner in a firm where a proposal was mooted to appoint one of the partner’s son as a co-manager of the firm. Blisset objected to such an appointment. The partner whose son was nominated complained to the other partners behind Blisset’s back and persuaded them to sign and serve a notice of expulsion to him. This was in keeping with a partnership clause that empowered a majority of the partners to expel any partner without citing any reason. Blissett contested the validity of the expulsion.

HELD: The plaintiff’s expulsion was set aside. The court held that it was up to the partners and the majority to decide what was good for the firm but the partners are required to act in good faith when making use of such powers.

Right of access to books; and to inspect & copy any of the books of the firm

Right to indemnity in respect of payments made and liabilities:

• Incurred by a partner in the ordinary and proper conduct of the business.

Thomas V Atherton (1877)

Trespass by a colliery

In doing such an act, in an emergency, for the purpose of protecting the firm from loss, as would have been done by a person of ordinary prudence, in his own case, under similar circumstances.

Right to profits

Unless otherwise agreed, partners are entitled to share equally in the profits earned by the firm.

Right to interest

Interest on advance at the rate of 6% p.a.

Interest on capital shall be payable only out of profits

Right to remuneration

Unless otherwise agreed, partners are not entitled to receive any salary or remuneration for taking part in the conduct of the business

Right to use of partnership property

Property originally brought in

B N Murthy & Sons V V V Sugana (1978) 

– Land- theatre - firm to exhibit films

Property subsequently acquired

Partner’s property in firm’s use

Robinson V Ashton (1875) 

- Cotton mill case

Right to be consulted for admission of new partner

No liability before joining (there may be a contract to the contrary)

Right to retire*

Right not to be expelled*

Right of outgoing partner to share in the subsequent profits if his final settlement is not carried out by the other partners

Right of outgoing partner to carry on competing business (there may be a contract to the contrary)

  

DUTIES OF A PARTNER

Duty of Good Faith (fiduciary relation - every partner should be just, faithful and observe utmost good faith towards every other partner of the firm)

To carry on the business to the greatest common advantage (He must use his knowledge & skill for the common benefit of the firm)

Bentley V Craven (1853)

– Sugar refiners case

Due diligence: to attend diligently to the business and use his knowledge & skill to the common advantage of all the partners.

A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm

Sasthi Kenkar V Man Gobinda (1919)

 – dissolution of firm - managing partners failed to sue firms for amounts due – one claim became time barred & other lost due to insolvency of debtor

Duty to indemnify for fraud in the conduct of the business of the firm.

The liability for fraud cannot be excluded by any contract to the contrary.

Duty to render true accounts

Duty to use the property for the firms purposes

Duty to share in the losses

Duty to account for personal profits from partnership transactions

Any transaction of the firm

Use of the property of the firm

Use of the business connection of the firm

Use of the firm name

Duty to account for profits in competing business (opportunity to make it comes his way while he was partner of the firm)

INTRODUCTION OF A PARTNER

A person may be admitted as a partner with the consent of all the existing partners. An incoming partner does not become liable for any act done prior to his admission as a partner. A minor can be admitted only to share the profits of the firm.

RETIREMENT OF A PARTNER

 A partner can retire from a firm:

   

with the consent of all the partners,

 in accordance with an express agreement by the partners, or

where the partnership is at will, by giving notice in writing to all the other partners of his

intention to retire.

LIABILITY OF A RETIRED PARTNER

A retired partner continues to be liable for all acts of the firm done before his retirement. He  continues to be liable as a partner to third parties for any act done by the firm after his retirement until a public notice* is given of the retirement.

*except in the case of a sleeping partner

  

PUBLIC NOTICE

  A public notice has to be given:

On the retirement or expulsion of a partner

On the dissolution of a registered firm

On the election to become or not to become a partner in a registered firm by a minor on attaining majority

NOTICE TO BE GIVEN TO:

The registrar of firms

The official gazette

Publication in at least one vernacular newspaper circulating in the district where the firm has its place or principal place of business.

EXPULSION OF A PARTNER

A partner may be expelled from the partnership provided the power of expulsion is conferred by the contract between the partners and the power is exercised by a majority of the partners.

The power should be exercised in good faith.

The test of good faith is that the expulsion must be in the interest of the partnership, the expelled partner is served with a notice and that he is given an opportunity of being heard.

INSOLVENCY OF A PARTNER

 Where a partner is adjudicated insolvent, he ceases to be partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.

The firm is not liable for any act of the insolvent partner after the date of the order of adjudication.

  

DEATH OF A PARTNER

Subject to contract between the partners, a firm is dissolved by the death of a partner.

No public notice is required of the death of the partner.

Whether or not the firm is dissolved, the estate of the deceased partner is not liable for the acts of the firm done after his death.

TRANSFER OF PARTNER’S INTEREST

A partner may transfer his interest in the firm by sale, mortgage or charge. The transfer may be absolute or partial. It does not entitle the transferee, during the continuance of the firm:

• to interfere in the conduct of business of the firm,
• to require accounts of the firm or
• to inspect the books of the firm.

On transfer of interest by a partner, the transferee only becomes entitled to receive the share of profit of the transferring partner.

 DISSOLUTION OF A FIRM

A firm can be dissolved without the order of court.

A firm can be dissolved by the court at the suit of a partner.

DISSOLUTION WITHOUT COURT ORDER

By agreement by the partners
By compulsory dissolution –

When all the partners or all but one partners is insolvent  or
By the happening of any event which makes it unlawful for the business of the firm to be
carried on by the partners
When the term of the partnership expires
When the particular adventure for which the firm was constituted is accomplished

On the death of the partner or when a partner becomes insolvent*
 Dissolution by notice of partnership at will

DISSOLUTION BY COURT ORDER
(On a Suit by a Partner)

Insanity of partner
When a partner is permanently incapable of performing duties of a partner
Misconduct of a partner*

Snow V Milfred (1868)
– Case of the adulterous banker
Persistent breach of agreement & destruction of mutual confidence
Transfer of interest in the firm
Business cannot be carried on except at a loss
Any other ground which the court finds as just & equitable

INDEMNITY & GUARANTEE

CONTRACT OF INDEMNITY

A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself , or by the conduct of any other person, is called a contract of indemnity.

CONTRACT OF GUARANTEE

It is a contract to perform the promise, or discharge the liability, of a third person in case of his default.

The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor’.

The economic function of guarantee

The function of a contract of guarantee is to enable a person to get a loan, or goods on credit or an employment.

‘Guarantees are usually taken to provide a second pocket to pay if the first should be empty’

Essential Features

Principal Debt:

When the debt itself is void.

Swan V Bank of Scotland (1836)

Payment of overdraft by bank’s customer was guaranteed -those days overdrafts were contrary to statute-penalty was imposed upon parties  to such drafts & the overdraft was void-customer having defaulted, surety was sued-he was held not liable as no debt was due.

Garrard V James (1925)

Directors of Company guaranteed their company’s loan which was void as being ultra Vires, they were nevertheless liable.

Consideration:

A contract of guarantee is made without consideration.

There should be no misrepresentation or concealment:

A contract of guarantee is not a contract of absolute good faith.

Any guarantee obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction is invalid.

A guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.

There should be no misrepresentation or concealment:

London General Omnibus Co V Holloway (1912)

Defendant invited to guarantee for the fidelity of a servant-Employer had earlier dismissed him for dishonesty but did not disclose this fact to the surety-the servant committed another embezzlement-surety was held not liable.

Writing is not necessary:

In the Indian context, a guarantee may be either oral or written.

In English Law, under the provisions of the Statute of Frauds, a guarantee is not enforceable unless it is ‘in writing and signed by the party to be charged’.

The extent of Surety’s Liability

• It is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
• When there is a condition precedent to the surety’s liability, he will not be liable unless that condition is first fulfilled.(when another person has to join as a co-surety)
• ‘The surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. The surety is a guarantor, and it is his business to see that the principal pays, and not that of the creditor’ Supreme Court in Bank of Bihar Ltd V Damodar Prasad (1969)
• ‘Even if the decree is a composite one against the principal debtor, mortgaged property & the guarantor, the creditor/decree holder can proceed as he liked i.e. he could proceed against the guarantor if he so wished’ Supreme Court in State Bank of India V Indexport Registered(1992)
• ‘In case of a company in liquidation, the principal debtor can claim from the surety & need not claim from the liquidation proceedings of the company’ Supreme Court in MSEB, Bombay V Official Liquidator, H C Ernakulam (1982)
• Ganga Kushan's appeal, Supreme Court, May 2012 (Guarantor liable to repay loan if debtor defaults)Ganga Kishun, who had stood as a guarantor to a bank loan, raised by one Ganga Prasad, who had died without clearing it. Ganga Kishun had come to the apex court against the Uttar Pradesh government's decision to recover the loan arrears from him after the death of principal debtor Ganga Prasad.While dismissing Ganga Kishun's appeal, the apex court, however, faulted the government's decision to auction Ganga Kishun's entire stretch of land for Rs 25,000 to recover an arrear worth Rs 8,500 only and not confining the auction to only 1/3rd of the land which could have fetched the arrears.Impact: Provoke people into thinking twice before becoming a guarantor for a bank loan

• Continuing Guarantee:Covers a number of transactions over a period of time.The surety undertakes to be answerable to the creditor for his dealings with the debtor for a certain time.

Discharge of Surety From Liability

• By revocation: Ordinarily, a guarantee is not revocable when once it is acted upon.A continuing guarantee may at any time be revoked by the surety, as to the future transactions, by notice to the creditor.

• By the death of Surety: The death of the surety operates as a revocation of a continuing guarantee so far as regards future transactions. The surety’s heirs can be sued for liability already incurred.

• By Variance: Any variance made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

Bonar V Macdonald (1850)Guarantee of good conduct of Bank Manager-afterwards salary raised-condition that Manager would be liable for 1/4^th of losses on discount allowed by him-no communication of new arrangement to surety-substitution of a new agreement for the former discharged the surety.

While the general principle is that if the agreement of the surety is altered in a single line, the surety is entitled to be discharged, but the law now accepts that where it is self-evident that the alteration is unsubstantial or for the benefit of the surety, he is not discharged from his liability.

M S Anirudhan V Thomco’s Bank Ltd. (1963)Supreme court heard the appeal-defendant guaranteed repayment of loan-guarantee paper showed the loan to be Rs.25,000-bank refused to accept-principal reduced the amount to Rs.20,000  without intimation to surety gave it to the bank which was then accepted by bank-principal failed to pay-bank sued surety-question was whether the alteration had discharged him- held by a majority that the surety was not discharged.

• By release or discharge of Principal Debtor:
• The surety is discharged by any contract between creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
• Any release of the Principal Debtor is a release of the surety also.
• Where, however, the Principal Debtor is discharged by operation of insolvency laws or, in case of a company, by the process of liquidation, that does not absolve the surety of his liability.

Act or Omission:

Example: Act of the creditor in terminating the agreement of Hire-Purchase by taking possession of goods discharges the surety. There is a contract for the construction of a building, which is guaranteed by the surety, and the creditor has to supply the building material. An omission on the part of the creditor to supply the material would discharge the contractor and so would the surety be discharged.

Compromise, an extension of time and promise not to sue:

A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue the principal debtor, discharges the surety, unless the surety assents to such contract.

(Mere forbearance to sue does not discharge the surety)

By Impairing surety’s remedy:

If the creditor does any act which is inconsistent with the right of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.

M R Chakrapani Iyengar V Canara Bank (1997)

The  principal debtor disposed of the hypothecated property, the surety submitted all the particulars to the creditor but the latter took no steps to seize the property or to issue a criminal process against the debtor, the surety became discharged.

Chistovan Vaz V Indian Overseas Bank (1998)

Sale of seized vehicles after  4 years’ exposure to sun and rains, considerable diminution in value, the liability of surety to be reduced to that extent.

Union Bank of India V M P Sreedharan Kartha (1993)

A hypothecation, being not a possessory security, not much duty can be expected from the creditor towards the care of the security. Accordingly, where the contents of a hypothecated godown are lost  and the banker was not aware of any such loss otherwise than in the ordinary course of business, the guarantor was held to be not discharged to the extent of the value of the security.

State Bank of Saurashtra v Chitranjan Ranganath Raja (1980)

A pledge, being a possessory security, duty can be expected from the creditor towards the care of the security. Accordingly, where the creditor was utterly negligent with regard to the safe keeping & handling of the goods pledged & the security was lost on account of the negligence of the bank, the guarantor was held to be discharged to the extent of the value of the security.

Rights of the Surety

Against the Principal Debtor:

• Right of subrogation: The surety steps into the shoes of the creditor when he has paid all that he is liable for, or performed all he is liable for
•  Right to Indemnity:In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. The right enables the surety to recover from the principal debtor whatever sum he has rightfully paid under the guarantee.

Against the Creditor:

•  Right to securities:
• The surety steps into the shoes of the creditor and gets the right to have the securities, if any, which the creditor has against the principal debtor, irrespective of the fact whether the surety knows of the existence of such security or not.
• If the creditor loses or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

State of M P V Kaluram (1967)

The state sold a lot of felled timber to a person-price payable in 4 instalments-payment guaranteed by defendant-if there was a default in payment of an instalment, State would prevent further removal of timber & sell remaining timber for the realisation of price-buyer defaulted but even so State allowed him to remove the timber-Surety was then sued for the price-held not liable-by allowing goods to be removed by the buyer the security was lost.

• If the securities are burdened with further advances it will not affect the rights of the surety

Forbes V Jackson 1882

Mortgage of leasehold premises & insurance policy for a loan of £ 200-principal debtor borrows further sums upon same security from creditor without knowledge of surety-defaults on payment-surety pays amount with interest & claims the securities

• Right of set-off:

If the creditor sues the surety, the surety may have the benefit of the set-off, if any, that the principal debtor had against the creditor.

He is entitled to use the defences of the debtor against the creditor.

Against Co sureties:

Release by the creditor of one of the co sureties do not discharge the others; neither does it free the surety so released from his responsibility to the other sureties.

The co sureties, in the absence of a contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or that part of it which remains unpaid by the principal debtor.

LAW OF AGENCY

The law of agency is based on the Latin maxim “qui facit per alium, facit per se,” which means, “he who acts through another is deemed in law to do it himself“

AGENT & PRINCIPAL DEFINED

According to section 182 of the Indian Contract Act 1872, an ‘agent’ is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the ‘principal’."

RULES OF AGENCY

·       Whatever a person competent to contract may do himself, he may do through an agent.

·       He, who does through another, does by himself.

Therefore, the acts of an agent are the acts of the principal (subject to certain conditions e.g. where personal skill is involved.)

CONCEPT OF AGENCY

It is only when a person 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.

WHO IS A PRINCIPAL?

The person for whom such act is done, or who is so represented, is called the principal.

WHO CAN BE A PRINCIPAL?

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.

WHO CAN BE AN AGENT?

·       As between the principal and third person, any person can become an agent, even if he is not competent to contract otherwise.

·       If a person not competent to contract is appointed agent, principal is bound by his acts although such agent cannot be held liable by either the principal or third party.

TEST OF AGENCY: ACTS OF AN AGENT ARE ACTS OF THE PRINCIPAL

·       Whether the person has the capacity to bind the principal & make him answerable to the third parties.

·       Whether he can create legal relationship between the principal & such third parties & thus establish a Privity of contract between the principal & third parties.

AGENT & SERVANT

·       An agent has the authority to act on behalf of his principal and to create contractual relations between the principal & a third party.

·       A principal has the right to direct what the agent has to do: but a master has not only the right, but also the right to say how it is to be done.

·       While the servant is paid by way of salary or wages, the agent receives commission on the basis of work done.

·       A master is responsible for the wrong of his servant if it occurs in the course of employment. A principal is liable for his agent’s wrong done within the scope of authority.

CONSIDERATION?

No consideration is necessary to create an agency.

RELATIONSHIP OF A PRINCIPAL AND AGENT

·       A contract of agency is one of good faith.

·       The relationship is fiduciary.

KINDS OF AGENTS

MERCANTILE: Brokers, Commission Agents, Bankers, Factors etc.

NON MERCANTILE: Solicitors, Insurance Agents, Wife etc.

INSURANCE AGENT

LIC has regulations on the appointment & functions of agents. An agent may be authorised by the Corporation to collect and remit renewal premiums under policies on such conditions as may be specified. 

Harshad J Shah V LIC (1997)

3rd semi-annual Premium paid to agent-bearer cheque-encashed-but did not deposit even after grace period-meanwhile insured dies-agent deposits premium the next day-by then the policy had lapsed-in his appointment letter agent was not authorized to collect premium.

Held: The agent had not been empowered by LIC Regulations and his appointment letter to receive payment from the insured. Apparent authority can’t be invoked especially when the LIC has been careful in making an express provision in the Regulations/Rules, which are statutory in nature. In disclaiming its liability the LIC was acting in accordance with the Regulations/Rules. The said provision has been made in public interest in order to protect the Corporation from any fraud on the part of an agent and LIC was acting quite fairly.

WIFE AS AN AGENT

There must be a domestic establishment for a wife to have an implied authority of the husband to buy articles of household necessity.  

Debenham V Mellon  (1880) 

Mrs. Mellon was a hotel manageress, and lived there with her husband “in the ordinary way.” She bought clothes from William and Frank Debenham which were conceded by all sides to be necessaries. Mr. Mellon, however, gave her an allowance and forbade her to pledge his credit. The Debenhams lost the first round, and hence appealed.

Held: The Mellons did not run a regular household – the hotel supplied their food and shelter. (Absence of domestic establishment) With no household management there was no basis for a tradesman to assume that Mrs. Mellon had authority. Mr. Mellon was held not liable.

Note

Where the husband and wife are living together in a domestic establishment of their own, the wife shall have an implied authority to pledge the credit of her husband for necessaries. The implied authority can be challenged by the husband only in the following circumstances:

1.     The husband has expressly forbidden the wife from borrowing money or buying goods on credit.

2.     The articles purchased did not constitute necessities.

3.     Husband had given sufficient funds to the wife for purchasing the articles she needed to the knowledge of the seller.

4.     The creditor had been expressly told not to give credit to the wife.

Where the wife lives apart from husband without any of her fault, she shall have an implied authority to bind the husband for necessaries, if he does not provide for her maintenance.

CREATION OF AGENCY

Agency can be created in any of the following ways:

The agent gets authority from the principal. The authority can be given in two ways. Either it can be expressly given or the authority can be implied. Section 187 of the Indian Contract Act defines express and implied authority as under:

EXPRESS AUTHORITY:

An authority is said to be express when it is given by words spoken or written. The authority enables the agent to bind the principal by acts done within the scope of his/her authority. A written contract of agency is a power of attorney wherein one person empowers the other to represent him/her, or act in his/her stead for certain purposes.

IMPLIED AUTHORITY:

An implied authority arises from the conduct, situation or relationship of the parties. It is inferred from the circumstances of the case. The agency arises when the principal conducts himself / herself towards the person alleged to be the agent to the third parties in such a manner as if the principal had conceded to the appointment of that person as agent. This form of agency can be formed in any of the following manner:

1.     Agency in Emergency: According to section 189 of the Indian Contract Act an agent has authority in an emergency, to do all such acts for the purpose of protecting his / her principal from loss as would be done by a person of ordinary prudence in his /her own case, under similar circumstances.

The agent while protecting the principal from loss may exceed his / her authority thus giving rise to agency of necessity provided:

a.     He / she was not in a position to communicate with the principal

b.     Had taken all reasonable care and necessary steps to protect the interests of the principal and

c.      Had acted bona fide.

2.     Agency by Necessity: Sometimes in certain urgent circumstances the law confers an authority on a person to act as an agent for the benefit of another, there being no opportunity of communicating with that other. Such agency is called agency of necessity.

Example

Sims & Co V Midland Rly Co (1913)

A quantity of butter was consigned with the defendant railway company. It was delayed in transit owing to a strike. The goods being perishable the company sold them. The sale was held binding on the owner.

Great N Rly Co V Swafield (1874)

Defendant owner sent his horse by rail from Kings Cross to Sandy station. When the horse arrived at Sandy station there was no one to collect it and no on at the station knew the name or address of the owner. The claimant railway company arranged for the horse to be fed and stabled. When the defendant collected his horse, he refused to reimburse the railway company for their expenses in having the horse stabled.

Held: The claimant had acted in the best interests of the defendant in arranging to have the horse stabled. An agency of necessity had arisen and the defendant was bound to pay for the cost of stabling the horse.

Necessity arises only when:

1.     Inability to communicate with principal

Gwilliam V Twist (1895)

The defendant's employee Harrison, the driver of the bus in which Gwilliam had travelled, was found drunk and driving by the cop, who instructed the driver not to drive anymore. Meanwhile the omnibus was stopped quarter of a mile distance from its destination (Defendant’s depot). On account of these happenings, a passerby was called by the conductor and the driver to ride the omnibus till the destination. Unfortunately the passerby's negligence in driving led to injuries to the appellant and other co-passengers travelling in the bus.

Plaintiff’s case failed, as there was no necessity. In essence, in order for an agency of necessity to arise, the following criteria must be satisfied, the agent must be in control of the principal’s property, and a genuine emergency must have arisen requiring the agent to take particular action to protect the interests of the principal. It must be impossible for the person acting as the agent to contact the principal in order to receive instruction the agent must act in good faith and in the best interests of the principal there must be an emergency.

2.     Act should be reasonably necessary

Sachs v Milkos (1948)

The defendant agreed in 1941 to store some of the claimant’s furniture without charge. By 1944 the defendant had lost touch with the claimant and letters written to his previous known address were returned. In order to gain some space, the defendant sold the claimant’s furniture. When the claimant later returned, he sued and the defendant calmed an agency of necessity had arisen.

Held: There was no agency of necessity as no emergency had arisen when the furniture had been sold. It was not as though the house that the furniture was stored in had been destroyed and the furniture left exposed to thieves and the weather. The house was available for storage of the furniture.

Munro V Willmott (1949)

Car was left in a yard without payment. A need was felt for conversion of the yard into garage. Unsuccessful efforts were made to communicate with the owner of the car. The car was repaired and sold. Subsequently the owner claimed the car.

Held that the act of selling the car was not reasonably necessary.

ESTOPPEL

At times the principal by his / her conduct creates an impression in the mind of a third person that the agent has an authority to act on his/her behalf. In such a case the principal is liable towards the third person for the acts done by the agent, on the ground of the application of the law of estoppel. The basis of the action is what appears to the third person to be an authority, i.e. apparent or ostensible authority conferred on the agent.

Pickering V Busk (1812)

Purchaser of hemp allows it to remain in custody of broker whose ordinary business was to buy and sell. The broker sold the goods to a second purchaser for value in good faith and without notice. It was held that the latter obtained a good title under the general principle of estoppel.

Kashinath Das V Nisakar Raut (1962)

Landlord appoints tashildar to manage agricultural lands. The tashildar let out the land to tenants on certain terms. Held the action of the tashildar in letting out the disputed lands on rent basis on behalf of the plaintiff No. 1 must be held to be within the normal functions, of a Gumastha or agent as then understood.

HOLDING OUT

Such an agency is based on the “doctrine of holding out” which is a part of the law of estoppel. In this case also the alleged principal is bound by the acts of the supposed agent, if he / she has induced third persons to believe that they are done with his/her authority. But, unlike an “agency by estoppel” “agency by holding out” requires some affirmative or positive act or conduct by the principal to establish agency subsequently.

RATIFICATION

If a person may acts as an agent of someone and does an act on his/her behalf for which he/she does not have the authority, and if that someone binds himself / herself for the acts done by the agent, then it is called an agency created by ratification.

EXTENT OF AGENT’S AUTHORITY

Principal is responsible for the acts of the agent done by him within the scope of his authority. The authority of an agent may be express or implied. An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case. (Sections 186 to 187 of the act)

The authority of an agent extends to the performance of every lawful thing necessary to do an act for which he is appointed. When he is appointed to carry on business he can do every lawful thing necessary for the purpose or as is usually done in the course of conducting such business (Sec. 188).

An agent has authority in an emergency to do all such acts for the purpose of protecting the principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances, the emergency must be real not permitting the agent of communicate with the principal (Sec. 189).

An agent also has ostensible or apparent authority.

An agent also has an authority under an emergeny.

Ostensible Authority 

Apparent authority refers to a situation where a reasonable third party would understand that an agent had authority to act. This means a principal is bound by the agent's actions, even if the agent had no actual authority, whether express or implied.

Watteau v Fenwick (1893)

The plaintiff, Watteau, supplied cigars to a beer house named the "Victoria," which was located at Middlesbrough. A man named Humble operated the establishment. Prior to 1888, he had operated the business on his own account, but in that year, he had assigned his interest to the defendants, Messrs. Fenwick and Company. However, Humble remained the manager and continued to operate the business as before. The sign bore his name, and the license was held in his name.

The plaintiff supplied cigars to Humble. He was at all times unaware of Fenwick's involvement. Indeed, Fenwick had never given Humble any authority to act on their behalf. But when Watteau was not paid the 25 pounds owed him, he eventually sued Fenwick.

The County Court held that the defendants had held Humble out to the world as having general authority, and that they were therefore liable for the claim because of the implied authority thereby granted.

Dissatisfied with this outcome, the defendants then brought an appeal which was dismissed. The Court held that once it is established that the defendant was the principal, then the ordinary rules of principal and agent apply, notwithstanding the fact that the relationship was unknown to the plaintiff. The principal is liable for acts of the agent, as long as those are those usually confided to an agent of that character. This is true even though the agent was acting outside the scope of his actual authority.

Kannelles v Locke (1919)

The plaintiff was registered into a hotel for the night by a complete imposter. While she proceeded to her room, the imposter made off with her luggage. Hence, this action by the Plaintiff against the management of the Hotel. Held that the Hotel was responsible for the loss of luggage, as the plaintiff believed that the imposter had apparent authority. (The Hotel was pulled up for having allowed an imposter gain control of the night desk)

DESU v Basanti Devi (2000)

LIC floated a “Salary Savings Scheme” under which Bhim Singh, an employee of DESU took an insurance policy for an amount of Rs 50,000 with LIC. The insurance policy was to commence on 28-1-1992. Bhim Singh had paid Rs 636 as premium for two months to LIC. Premium for the third month was payable by 29-3-1992. The amount of the premium was deducted by DESU from the salary of Bhim Singh and remitted by it to LIC. It appears that the premium for the subsequent months was deducted by DESU from the salary of Bhim Singh but was not remitted to LIC. In the meantime Bhim Singh died on 17-8-1992. Basanti Devi, widow of Bhim Singh informed LIC of the death of her husband and requested for payment of the amount due under the policy. LIC disclaimed any liability for payment under the policy as the instalments of premium after June 1992 were not received by it. LIC, therefore, repudiated the claim of Basanti Devi. LIC said that since default had been committed in payment of premium the policy taken out by Bhim Singh lapsed. This led Basanti Devi to file a complaint before the State Commission against LIC and DESU.

On a complaint filed by Basanti Devi, widow of Bhim Singh, under Section 18 of the Consumer Protection Act, 1986 (“the Act” for short) the State Commission by its judgment dated 10-11-1993 directed the Delhi Electric Supply Undertaking (DESU) to pay a sum of Rs 50,000 with interest at the rate of 15% per annum from 17-12-1992 to the complainant till the date of payment. Life Insurance Corporation (“LIC” for short), the insurer was, however, absolved of any liability. By the impugned judgment dated 13-1-1995 by majority (2:1) the National Consumer Disputes Redressal Commission (“the National Commission” for short), on appeal, affirmed the order of the State Commission. DESU is the constituent of the Delhi Municipal Corporation, a body corporate under the Delhi Municipal Corporation Act, 1957. Both the National Commission and the State Commission are constituted under the Consumer Protection Act, 1986.

DESU appealed to the Supreme Court.

The Supreme Court held that DESU had implied authority to collect premium from Bhim Singh on behalf of LIC. There was, thus, valid payment of premium by Bhim Singh. The authority of DESU to collect premium on behalf of LIC is implied. In any case, DESU had ostensible authority to collect premium from Bhim Singh on behalf of LIC. So far as Bhim Singh is concerned DESU was an agent of LIC to collect premium on its behalf.

Therefore, the Supreme Court directed that LIC shall pay to Basanti Devi insurance amount of Rs 50,000 with interest at the rate of 15% per annum from 17-12-1992 till payment, thus substituting the Life Insurance Corporation of India for the Delhi Electric Supply Undertaking, as ordered by the State Commission and upheld by the National Commission.

For the suffering which Basanti Devi had to undergo for the default committed by DESU in not remitting the premium to LIC we would direct that DESU will pay cost of these proceedings, which we quantify at Rs 25,000

NOTE

When as agent has incurred obligations to third persons on behalf of his principal, the principal is bound by such obligations

Terence Correya v MUL (2005) 

Booking of car with the dealer for which the draft was drawn on MUL. The balance was to be paid on delivery of car. The dealership was revoked by MUL. No car was delivered to Mr. Correya. MUL contends that amount received from customer through dealer was duly credited in the account of the dealer. Cars were supplied to the dealer. The dealer was responsible to deliver such cars to individual customer.

Held that both MUL & its dealer were jointly & severally responsible to either deliver the car or to refund the booking amount with interest to the complainant.

RIGHTS OF AN AGENT

1.     Right of retainer until he is paid in full.

2.     Right of remuneration.

Green V Bartlett (1863)
An Agent was appointed to sell a house. The auction to find purchaser for the house fails. A person attending the auction takes the address of principal. Meets the principal & subsequently purchases the house without intervention of agent. Since the bargain was direct result  of agent’s effort, he was held entitled to commission.

3.     Right of lien. ( in addition to 1, above).

4.     Confers no authority on the agent to sell or otherwise dispose of the property without the consent of the owner

5.     Right of indemnification against the consequences of lawful acts.

6.     Right of indemnification against the consequences of acts done in good faith.

7.     Right of compensation.

DUTIES OF AN AGENT

1.     Work according to the directions given by the Principal.

Pannalal Jankidas V Mohanlal (1951)

An Agent purchases goods on behalf of principal. It was stored in a godown pending their dispatch. The agent did not follow instructions of principal to insure them. The goods were lost in an explosion in Bombay harbor. The Govt. agreed to pay 50% in respect of uninsured merchandise. Held that the rest was to be borne by agent as he failed to follow the directions of the Principal.

2.     Carry out the work with reasonable care skill and diligence.

3.     Render proper accounts.

4.     Communicate with Principal in case of difficulty.

5.     Not to deal on his own account.

6.     Pay Principal all sums received on his account.

7.     Protect and preserve interests of Principal in case of death or insolvency.

8.     Not to use information against the Principal.

9.     Not to make any secret profit.

10.  Not to put himself in a position where interest and duty conflict.

De Busche V Alt (1878)

A Ship was for sale through an agent for £ 90,000. When no buyer was found, the agent himself, without disclosing it to Principal, purchased the ship. It was sold later for £ 160,000 to a Japanese prince.  The agent was asked to account for the profit by the court.

11.  Not to delegate Authority.

CAN AN AGENT DELEGATE AUTHORITY?

The general principal is “A delegate cannot further delegate”. (Delegatus non-protest delegate). An agent, himself being the delegate of his principal, cannot further delegate his powers. However, under certain circumstances the agent may delegate some or all of his powers to another person. Such person may be either a sub-agent or a substituted agent.

SUB-AGENT

A ‘sub-agent” is a person employed by and acting under the control of the original agent in the business of agency (Section 191).

In the following cases an agent can appoint a sub-agent unless he is expressly forbidden to do so:-

                         i.         When the ordinary custom of trade permits the appointment of a sub-agent.

                       ii.         When the nature of the agency business requires the appointment to a sub-agent.

                      iii.         When the act to be done is purely ministerial and involves no exercise of discretion or confidence, e.g. routine clerks and assistants.

                      iv.         When the principal agrees to the appointment of such a sub-agent expressly or implidly.

                       v.         When some unforeseen emergency has arisen.

The relations of the sub-agent to the principal depend on the question whether the agent had an authority to appoint the sub-agent and whether sub-agent is properly appointed.

Where the sub-agent is properly employed the principal is, so far as regard third persons, represented by the sub-agent and is bound by and is responsible for his acts as if he was an agent originally appointed by the principal, therefore, will be responsible for the acts of a properly appointed sub-agent.

Where an agent, without having authority to do so, has appointed a person to act as a sub-agent, i.e., a sub-agent is improperly appointed, the principal is not represented by or responsible for the acts of the sub-agent as between himself and the third parties. The sub-agent is also not responsible to the principal for anything. The agent is responsible for the acts of the sub-agent both to the principal and to the third persons (Section 193).

SUBSTITUTED AGENT

Where an agent holding an express or implied authority to name another person to act in the business of the agency, has accordingly, named another person such person is not a sub-agent but a substituted agent. The substituted agent shall be taken as the agent of principal for such part of the work as is entrusted to him (Sec. 194).

Example: 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.

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 this, he is not responsible to the principal for acts or negligence of the substituted agent.

Example: A instructs B, a merchant, to buy a ship for him. B employed a ship surveyor of good reputation to choose a ship for A. The surveyor makes the choice negligently and the ship turns to be unseaworthy and is lost. B is not, but the surveyor is responsible to A.

RIGHTS & DUTIES OF PRINCIPAL

·       Duties of the Agent become the rights of the Principal

·       Rights of the Agent become the duties of the Principal

TERMINATION OF AGENCY

·       By Principal revoking the Agent’s Authority.

·       By the Agent renouncing the business of agency.

·       Either the Principal or Agent dying or becoming of unsound mind.

·       When Principal is adjudged insolvent.

IRREVOCABLE AGENCY

WHEN:

·       The agency is coupled with interest (the interest of the agent exists at the time of the creation of agency).

·       The agent has incurred a personal liability.

·       The agent has partly exercised his authority.