Commercial Agency Contracts in India

There is no special law dealing with or regulating agency agreements in India. The principles of contract law, namely the Indian Contract Act, 1872 (Indian Contract Act) will generally apply to such agreements. If an agreement includes provisions concerning a mercantile agent, it will also be governed by the (Indian) Sale of Goods Act, 1930.

Agency agreements may also be further regulated depending upon the terms they contemplate.

Indian courts have distinguished agents from intermediaries such as distributors and licensees. For example, a distributor only buys goods from a manufacturer and resells them. It does not represent a manufacturer (principal) to third parties to bind the manufacturer. Agents, in their dealings with third parties, will bind the principal. Similarly, independent contractors are independent of any control and merely undertake to produce a specified result while employing their own means to produce that result. Agents, on the other hand, are bound to exercise their authority only in accordance with the instructions they receive from their principals. Likewise, when licensees are acting for others, they act in the exercise of the rights given to them by the licenses they may hold. Unlike agents, they act in their own name and do not represent the entities they receive a license from in dealings with third parties.

An agent is a person employed to do any act for the principal, or to represent the principal in dealings with third persons. A contract of agency may be express or implied. An express agency may be via a formal document like a power of attorney or a letter of appointment. An implied agency may be inferred from the conduct of the parties and the circumstances of the case. In the ultimate analysis, the fact of an agency has to be gauged from the true nature of relationship between the parties.

While the law does not grant any exclusivity to an agent, it is possible to contractually agree with an agent on exclusivity. Such exclusivity is typically granted for a defined territory.

This would depend upon the terms of the agreement between the principal and the agent.

An agent may be bound by a non-competition covenant during the term of the agency subject to the corresponding terms of the agency agreement. However, post the termination of the agency, an agent cannot be bound by a non-competition covenant as the same would be considered to be a restraint of trade and against the fundamental right to trade guaranteed by the Constitution of India.

Agency contracts are generally governed by the principles contained in the Indian Contract Act. The applicability of other statutes will depend on the terms of the agency contract. Further, two Indian parties cannot enter into an agreement to be governed by the laws of another country. However, if a foreign element is involved in the agreement (such as one party being from another country or where the contract or a part of it is to be performed outside India), the parties have the autonomy to choose foreign law.

Typically, arbitration before a mutually appointed tribunal is stipulated as a dispute resolution mechanism in agency agreements in India as arbitration is a quicker mode of dispute resolution in India. Two Indian parties can also choose a foreign law as the law governing the arbitration between them and choose a foreign seat and venue of arbitration. Litigation in India is time consuming and expensive.

India is not a party to the Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters. However, India has executed bilateral treaties with various countries regarding reciprocity in enforcement of judgments and decrees. The enforcement of a foreign judgment in India depends on whether the foreign judgment is passed by a superior court in a reciprocating territory or by a court in a non-reciprocating territory. A party seeking enforcement of a decree of a court in a reciprocating territory is required to file execution proceedings in India while in the case of a decree from a non-reciprocating territory, a fresh suit has to be filed before the relevant court in India.

India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention) as well as the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927 (Geneva Convention). If a party receives a binding award from a country which is a signatory to the New York Convention or the Geneva Convention and the award is made in a territory which has been notified as a convention country by India, the award would then be enforceable in India.

An agency contract is terminated in India by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent.

As mentioned above, an agency contract is terminated in India by the principal revoking his authority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent. Failure to reach sales targets agreed under a contract will be considered a breach of the agreement by the agent and the principal can terminate the agency upon such breach without the payment of any compensation for termination, subject to the terms of the agreement.

The law provides that where there is an express or implied contract that the agency should be continued for any period of time, the principal must compensate the agent, or the agent must compensate the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause. The compensation largely depends upon the nature of the business, the general qualifications which existed when the contract was entered into and the altered circumstances which came into existence.

This would depend upon the activities undertaken by the agent and its tax impact in India.

The Indian Contract Act, inter alia, provides that:

• an agent is bound to act with reasonable diligence, and compensate the principal for the direct (but not the indirect) consequences of his neglect, want of skill or misconduct;
• an agent is entitled to retain the goods or any property of the principal that he has received, until he has been paid for his services;
• an agent is bound to be indemnified against the consequences of all lawful acts done by him in the exercise of his authority;
• an agent is entitled to be compensated by the principal for any injury caused to him due to the principal’s neglect, or want of skill;
• an agent is permitted to employ a sub-agent subject to certain conditions.