CONTRACT ONLINE CLASS – XXIV (AGENCY)

LAW OF CONTRACT
CLASS – XXIV
AGENCY

Substituted Agent

Regarding the substituted agent, Section 194 of the Contract Act provides,

“Where an agent, holding an express or implied authority to name another person to act
for the principal in the business of the agency, has named another person accordingly,
such person is not a sub-agent, but an agent of the principal for such part of the business
of the agency as is entrusted to him.

Illustrations:

a) 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.

b) A authorizes B, a merchant in Calcutta, to recover the money’s due to A from C &

Co. B instructs D, a solicitor, to take legal proceedings against C & Co., for the recovery
of the money. D is not a sub-agent, but is solicitor for A.”

Regarding agent’s duty in naming such person, Section 195 of the Contract Act provides:

“In selecting such 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, then he is not responsible to the principal for the acts or negligence of the agent
so selected.

Illustrations:

a) A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor of good

reputation to choose a ship for A. The surveyor makes the choice negligently and the
ship turns out to be unseaworthy and is lost. B is not, but the surveyor is, responsible to
A.

b) A consigns goods to B, a merchant, for sale. B, in due course, employs an auctioneer

in good credit to sell the goods of A, and allows the auctioneer to receive the proceeds
of the sale. The auctioneer afterwards becomes insolvent without having accounted for
the proceeds. B is not responsible to A for the proceeds.”

Analysis of Section 194 and Section 195

Section 194 of the Indian Contract Act, 1872 defines a substituted agent as an individual
appointed by the original agent, with the principal’s knowledge and consent, to carry out a

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specific part of the business of the agency. Before nominating a substituted agent, two key
conditions must be met:

1. The original agent must have either express or implied authority from the principal to
appoint such a person.

2. The original agent must nominate this person to act on behalf of the principal for a
specific aspect of the agency’s business.

When such an appointment is made, the original agent essentially serves as a messenger of the
principal’s direct authority, as noted in Nensukhdas Shivnaraen v. Birdichand. This does not
constitute a delegation of the original agent’s duties. Instead, it establishes a direct relationship
(privity) between the principal and the substituted agent, making the latter directly accountable
to the principal. Case law such as Central Bank of India Ltd v. Firm Rurchand Kurramal and
De Bussche v. Alt confirms that the substituted agent is considered the principal’s agent, not
the agent of the original agent.

The authority to appoint a substituted agent can be implied through the nature of the business
or established trade practices. Once the principal accepts the substituted agent, and privity is
established, the original agent ceases to be involved in transactions between the principal and
the substituted agent.

For instance, in Purushotham Haridas v. Amruth Ghee Co Ltd and Central Bank of India
Ltd v. Firm Rurchand Kurramal, the original agent is not responsible for the efficiency,
character, or negligence of the substituted agent.

Similarly, Gambhirmull Mahabirprasad v. Indian Bank Ltd and Chowdhury TC v. Girindra

Mohan Neogi establish that the original agent cannot be held accountable for the substituted
agent’s actions once the direct relationship between the principal and substituted agent is
formed.

Duties Under Section 195

Section 195 imposes a duty on the original agent to exercise reasonable prudence when
selecting a substituted agent, comparable to what a reasonable person would apply in similar
circumstances. If the agent exercises due care, they are not liable to the principal for the
substituted agent’s negligence or misconduct.

In Punjab National Bank v. Firm Ishwarbhai Bhai Lalbhai Patel & Co, it was held that the
original agent can only be held liable for the substituted agent’s failure if it is proven that the
original agent was negligent in selecting the substitute. Negligence in selection may result in
the original agent being required to compensate the principal for damages, as it would
constitute a breach of duty.

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Moreover, as established in Ramchandra Lalbhai v. Chinubhai Lalbhai, the original agent

holds the implied authority to revoke the substituted agent’s authority in the principal’s interest,
failing which they may be bound by their initial negligence in selection.

A substituted agent is an individual appointed by the original agent, with express or implied
authority from the principal, to act on behalf of the principal. Essentially, the substituted agent
is selected by the original agent at the principal’s request to perform duties for the principal. A
direct contractual relationship, or privity, exists between the principal and the substituted agent,
making the substituted agent directly accountable to the principal. Consequently, the principal
can hold the substituted agent liable and seek damages for any misconduct or breach. A
substituted agent is also referred to as a co-agent.

The original agent has no involvement in the work performed by the substituted agent beyond
their initial selection. The original agent’s primary responsibility is to ensure the substituted
agent is chosen with reasonable care. Failure to do so may result in the original agent being
held liable for damages to the principal due to negligence in the selection process. However,
the original agent is not obligated to guarantee the substituted agent’s integrity or financial
reliability and is not responsible for the substituted agent’s negligent actions.

In De Bussche v. Ali, [(1878) 8 Ch D 286 (310)], Thesiger LJ observed:

“The exigencies of business do from time to time render necessary the carrying out of
the instructions of a principal by a person other than the agent originally instructed for
the purpose and where that is the case, the reason of the thing requires that the rule
‘delegatus non potest delegare’ should be relaxed so as, on the one hand, to enable the
agent to appoint what has been termed a ‘substitute’, and on the other hand to constitute,
in the interest and for the protection of the principal, a direct of contract between him
and such substitute.

And an authority to devolve upon another obligations... .may and should be implied
where from the conduct of the parties to the original contract the usage of trade or the
nature of the particular business which is the subject of the agency, it may reasonably
be presumed that the parties to the contract of agency originally intended that such
authority should exist, or where in the course of the employment, unforeseen
emergencies arise which impose upon the agent the necessity of employing a substitute,
and that when such authority exists and is duly exercised privity of contract arises
between the principal and the substitute. ‘

In Mersey Docks Trustees v. Gibes, [(1866) I HL 93], it was held that an officer of Government
(e.g.,) Post-master General was not liable for the acts of those employed under him, because
the latter were not his servants but the servants of Government.

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In Chowdhury v. Girindra Mohan, [(1930) 56 Cal. 686], A had instructed B, their bankers to
collect the purchase money through the local banks of B , As A had given express authority to
delegate to a named person. It was held that no question of sub-agency could arise in the
circumstances and that it was a case of a substituted agency.

7. Differences between sub-agent and substituted agent

Although both sub-agents and substituted agents are appointed by the original agent, they differ
significantly in their roles, responsibilities, and relationships with the principal:

1. Control and Direction: A sub-agent acts as the agent’s representative and operates
under the agent’s control and direction. In contrast, a substituted agent works directly
under the principal’s control and is regarded as the principal’s agent.

2. Delegation of Duties: The agent delegates a portion of their own duties to a sub-agent.
However, in the case of a substituted agent, no such delegation occurs. The substituted
agent performs tasks assigned directly by the principal.

3. Privity of Contract: There is no privity of contract between the principal and the sub-
agent, meaning the sub-agent cannot directly sue or be sued by the principal.
Conversely, a substituted agent has a direct contractual relationship with the principal
and can sue or be sued by them.

4. Responsibility: A sub-agent is accountable solely to the agent and not directly to the
principal. On the other hand, a substituted agent is directly responsible to the principal
and has no accountability to the original agent.

5. Liability of the Agent: The original agent is liable to the principal for the actions of
the sub-agent. However, the agent is not responsible for the conduct or acts of a
substituted agent.

6. Right to Remuneration: A sub-agent cannot claim remuneration directly from the

principal and lacks the right to sue the principal for unpaid dues. In contrast, a
substituted agent can directly claim remuneration and take legal action against the
principal if necessary.

7. Validity of Appointment: A sub-agent may sometimes be appointed improperly,

whereas a substituted agent is always appointed with the principal’s approval, ensuring
legitimacy.

8. Agent’s Role and Responsibility: For a sub-agent, the original agent remains
answerable to the principal for the sub-agent’s acts as long as the sub-agency exists.
However, in the case of a substituted agent, the agent’s responsibility ends once the
substituted agent is appointed.

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9. Status and Position: A substituted agent holds a superior status and position compared
to a sub-agent due to their direct relationship with the principal and the formal approval
involved in their appointment.

These distinctions underline the differences in hierarchy, authority, and legal relationships
between sub-agents and substituted agents

II. Non-commercial agents

The following are examples of non-commercial agents:

1. Commission Merchant: A commission merchant is an individual appointed by the

principal to conduct transactions, primarily to purchase goods on the principal’s behalf.
The agent operates in their own name when dealing with third parties, thereby avoiding
any direct contractual relationship between the principal and the third party. However,
the relationship between the principal and the commission merchant remains one of
agency.

2. Commission Agent: A commission agent is responsible for conducting business on

behalf of another party in exchange for a commission. When a person receives goods
as a commission agent and sells them for the principal, they act as an agent until the
point of sale. After the sale, they become a simple debtor. Unlike a typical agent, a
commission agent can purchase goods themselves at the price set by the principal and
later resell them for profit. This unique feature differentiates them from ordinary agents.
Additionally, they are not considered fiduciary agents.

3. Estate Agent: Estate agents are individuals entrusted by property owners to facilitate
the sale of their property, with a promise to pay a fee for their services. Their primary
responsibility is to inform the principal of the best offer received at any time before a
binding sales contract is signed by the principal.

4. Election Agent: In the context of elections, a candidate may formally appoint another
person, other than themselves, as an election agent. This appointment must be made in
the prescribed manner, and a notice of the appointment must be submitted to the
returning officer as per the specified procedure.

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