Whether in claim petition, the Insurance company can take the defence that they are not liable to pay compensation as their agent has committed the fraud?

When admittedly Ganesan is the Agent of the Insurance Company and received the premium from Gurusamy and in fact that Gurusamy was also given a policy, we are shocked and surprised to see, how the Insurance Company can disown its liability, more so when it does not suspect the bona fides on the part of Gurusamy. It is not the case of the Insurance Company that as per rules/conditions of the Policy, whenever a client receives a Policy from the agent, he has to go over to the office and contact the -manager or any named officer to show the policy which he has received to ascertain its genuineness.{Para 9}

10. Let us turn to analyse the legal position. The word 'agent' is derived from the Latin word "agere" which means 'to do'. Thus, an agent is a person, who acts for another whether by express or implied consent. The general rule is that whatever a person may do himself, he may authorize another to do for him in accordance with the maxim "qui facit per alium facit per se " meaning he who does anything by another, does it by himself.

In Krishna v. Ganapathi, MANU/TN/0264/1955 : AIR1955Mad648 , a Division Bench of this Court explained the concept of agency in the following terms:

"An agent is thus a person either actually or by law held to be authorized and employed by any person to bring him into contractual or other legal relations with a third party. He is a representative vested with authority, real or ostensible to create voluntary primary obligations for his principal by making promises or representations to third person calculated to induce them to change their legal relations. Representative character and derivative authority may briefly be said to be the distinguishing feature of an agent."

(a) What House of Lords ruled way back on 19th July, 1912 in Lloyd v. Grace, Smith & Co. 1912 AC 716 would be relevant.  In that case, Lord Macnaghten expressed his view in the following terms,

"The only difference in my opinion between the case where the principal receives the benefit of the fraud, and the case where he does not, is that in the latter case the principal is liable for the wrong done to the person defrauded by his agent acting within the scope of his agency; in the former case he is liable on that ground and also on the ground that by taking the benefit he has adopted the act of his agent; he cannot approbate and reprobate."

Lord Shaw of Dunfermline agreed with Lord Macnaghten and further added the following,

"The case is in one respect the not infrequent one of a situation in which each of two parties has been betrayed or injured by the fraudulent, conduct of a third. I look upon it as a familiar doctrine as well as a safe general rule, and one making for security instead of uncertainty and insecurity in mercantile dealings, that the loss occasioned by the fault of a third person in such circumstances ought to fall upon the one of the two parties who clothed that third person as agent with the authority by which he was enabled to commit the fraud.

... I am aware of the approval given to this language in subsequent cases, as for instance in Ruben v. Great Fingall Consolidated, 1906 AC 439, by Lord Davey, and in British Mutual Banking Co. v. Charnwood Forest Rv. Co., 18 O.B.D. 714, by Lord Bowen. If I may respectfully do so, I tender my entire concurrence in the opinion Just delivered by my noble and learned friend Lord Macnaghten upon the dicta of Lords Davey and Bowen in these cases. But I do so subject to this - that I cannot bring myself to think that it was ever distinctly meant to be announced or suggested as law that, on the assumption that a person deals with an agent in good faith, and that the conduct of the agent is fully within the scope of his authority, then the principal of that agent is not responsible for the agent's fraud, by reason of the fact that the agent did not mean to 'benefit his principal by the fraud, but to benefit himself. That, in my opinion, is not the law. On the contrary, the principal is, in such circumstances, legally responsible for his agent's conduct."

The principal is liable for the fraud of his agent acting within the scope of his authority, whether the fraud is committed for the benefit of the principal or for the benefit of the agent.

 IN THE HIGH COURT OF MADRAS

C.M.A. No. 55 of 1997

Decided On: 27.10.2003

The National Insurance Company Limited Vs. M. Nandan and Ors.

Hon'ble Judges/Coram:

A.S. Venkatachala Moorthy and S.R. Singaravelu, JJ.

Citations: II(2004)ACC645, 2004ACJ1449, 2004(2)CTC522, (2004)1MLJ146, MANU/TN/1923/2003.

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Can the court grant an injunction to the hotel operator to restrain the hotel owner from dispossessing him from the hotel premises after his agency's termination?

The submission of Mr. Dutt is primarily by relying upon Sections 202 and 221 of the Contract Act. The said Sections are reproduced as

under:

“202. Termination of agency where agent has an interest in subject-matter.—Where the agent has himself an interest in the property which forms the subject-matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest.

221. Agent’s lien on principal’s property.— In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property, whether movable or immovable of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him.”

43. There is no dispute that the petitioner was required to operate the Hotel. The Agreement termed the petitioner as ‘Operator’ and the respondent as ‘Owner’. For operating the Hotel, there were clear do’s and don’ts. In substance, the petitioner was required to operate the hotel unhindered. For operating the Hotel, the petitioner was being paid the Management Fee. The receipt of the Management Fee is the interest of the petitioner as an ‘Operator’. But the interest to have Management Fee is after the exercise of right as an ‘Operator’. In such a scenario, the agency is revocable. But if a right already exist to collect a / debt / interest / fee, for which the right to operate the hotel has been created, then the agency is irrevocable, which is clearly not the case here. Mr. Pachnanda is justified in relying upon the Judgment in the case of M. John Kotaiah (supra), wherein in Para 16 the Andhra Pradesh High Court has held as under:

“Thus it will be seen that if the interest created in the agent is in the result or the proceeds arising after the exercise of the power then the agency is revocable and cannot be said to be an irrevocable agency. However, if the interest in the subject matter, say a debt payable to the principal, is assigned to the agent as security simultaneously with the creation of the power and thereafter the agent exercises the power to collect the debt for discharge of an obligation owed by the principal in favour of the agent or owed by the principal in favour of a third party, then the agency becomes irrevocable.” (emphasis supplied)

It is settled law that where the agency is created for valuable consideration and authority is given to effectuate a security or to secure interest of the agent, the authority cannot be revoked."

(emphasis supplied)

This statement of law reproduces the English Common Law as would be evident from a reference to Article 135 in Bowstead on Agency, Fourteenth Edition, the relevant part of which is as follows :-

"Where the authority of an agent is given by deed, or for valuable consideration, for the purpose of effectuating any security, or of protecting or securing any interest of the agent, it is irrevocable during the subsistence of such security or interest. But it is not irrevocable merely because the agent has an interest in the exercise of it, or has a special property in, or lien for advances upon, the subject-matter of it, the authority not being given expressly for the purpose of securing such interest or advances.

(emphasis supplied)

(2) Where a power of attorney, whenever created is expressed to be irrevocable and is given to secure a proprietary interest of the donee of the power, or the performance of an obligation owed to the donee, then, so long as the donee has that interest, or the obligation remains undischarged, the power is irrevocable."

(emphasis supplied)

Where the performance of the agency is not to secure the interest or the benefit of the agent then the agency is not irrevocable merely because the agent has an interest in the exercise of it or has a special property in or lien for advances upon the subject-matter of it.

(9) In Palani Vannan v. Krishnaswami Konar, Air 1946 Madras 9 (2), the primary object of the power of attorney was to recover the money on behalf of the principal by the execution of a decree. The, incidental provision for the employment of an agent and enabling the agent to recover his out-of-pocket expenses from the decretal amount did not make the object of the power of attorney to be the benefit of the agent. Section 202 of the Contract Act, therefore, did not apply.

(emphasis supplied)

45. Mr. Pachnanda is also right in contending that there is no agency coupled with the interest in favour of the petitioner. Section 202 of Contract Act applies only to an agency created for the purpose of giving security for an existing interest and not where the alleged interest of the agent arises after the creation of the agency. So, it must prima facie be held that the right / interest has arisen after the creation of agency in favour of the petitioner and the Agreement is revocable.

46. Further, I find the stipulations in the Agreement as relied upon by Mr. Dutt, in no way create any interest of the petitioner in the hotel except to operate the same by appointing a General Manager who shall be the employee of the petitioner and the other employees being of the respondent. The right of the respondent being Owner was absolute right of selling / exchange / lease or create mortgage charge etc. of land, hotel furniture, equipment etc. Whereas the reliance placed by Mr. Dutt on Article (II) (4) only depict the right of the petitioner as an Operator to lease, sub-lease or grant concession in respect of commercial spaces or services of hotel which are customarily made in hotels in order to generate revenue. Mr. Pachnanda is justified by relying upon Article XXV (5) of the agreement which provides that the petitioner will become entitled to interest @ 24% in case the petitioner’s accounts and dues are not settled upon the termination of the agreement. This negates the submission of Mr. Dutt that the petitioner has to be compensated before vacation of the premises by it. The reliance placed by Mr. Dutt on sub-clause (3) of Article XXV, that upon termination, and before vacation of premises, the Management and Incentive Fees shall be payable to the petitioner which creates an interest in favour of the petitioner in the Hotel and the respondent cannot seek possession is misplaced. As the said clause has to be read with sub-clause (5) of the same Article, which according to me, stipulates failure on the part of the respondent to pay all accounts and dues between the parties including the amount mentioned above, i.e., (sub-clause (3)) on vacation of the premises, the petitioner shall be entitled to an interest of 24% per annum. So, prima facie it is clear that there is no stipulation in the contract that the petitioner can retain possession even after termination. Section 221 of the Contract Act has no applicability in the facts and also because it is the case of the respondent that the petitioner is not entitled to any amount. In any case, such a claim shall be decided by the Arbitrator. Section 221 (in view of Clause XXV (5)) shall also not come into play, as it is a settled law that the agent cannot exercise any lien under Section 221, if it interferes with the principal’s business. In this regard, I may refer to the judgement of the Apex Court in Southern Roadways Ltd. (supra), wherein in Para 13, it is held as under:

“The force of this argument cannot be gainsaid. Counsel, in our opinion, appears to be on terra firma. The principal has right to carry on business as usual after the removal of his agent. The Courts are rarely willing to imply a term fettering such freedom of the principal unless there is some agreement to the contrary. The agreement between the parties in this case does not confer right on the respondent to continue in possession of the suit premises even after termination of agency. Nor does it preserve right for him to interfere with the company’s business. On the contrary, it provides that the respondent could be removed at any time without notice and after removal the company could carry on its business as usual. The company under the terms often agreement is, therefore, entitled to insert and exercise its right which cannot be disputed or denied by the respondent”.

(emphasis supplied)

47. Even in USA (supra), this Court has referred to the judgment of the Supreme Court in Southern Roadways (supra) that the agent cannot exercise lien if it interferes with the Principal’s business. In the case in hand, I have already held, there is no stipulation in the contract which states that after termination of the Agreement the petitioner can be in possession of the Hotel.

IN THE HIGH COURT OF DELHI AT NEW DELHI

OMP(I)(COMM) 247/2020

ROYAL ORCHID ASSOCIATED HOTELS PRIVATE LIMITED

Vs KESHO LAL GOYAL

CORAM:

HON'BLE MR. JUSTICE V. KAMESWAR RAO

Judgment delivered on: November 03, 2020

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Twelve Golden Rules governing ratification of act of agent by principal.

There are twelve rules governing ratification of act of agent by principal.

1) The contract must be made by the agent for or on account of the principal,and not on his own account.

2) The principal must be in existence at the time of the act.Thus, a newly formed Company can not ratify an act done in its name before its incorporation.

3) A transaction which is void ab initio can not be ratified.A principal can ratify only those acts which he is legally competent to do.Thus,there can not be ratification of a void contract.A minor,can not after attaining majority,ratify a contract made during his minority,because a minor's contract is absolutely void.

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Good infographic on Pledge And Agency (Indian Contract Act, 1872)

Pledge And Agency (Indian Contract Act, 1872) [Infographics]

Click The Images For Larger Size.

Pledge

Rights Of Pawnee

Agency1

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