This article is an illustrated example that deals with disputes between a principal and an agent, when the Agent, who has the authority to do so, appoints a person or entity to handle a specific part of the Principal’s business, and the person or entity so appointed acts negligently.
The article provides solutions for the rapid enforcement of contracts while at the same time protecting both the Principal and the Agent.
Keywords: Principal, Agent, Agency Agreement, Negligence
Reference: Indian Contract Act, Section 195, Illustration a
Section 195, Indian Contract Act
Section 195 of the Indian Contract Act deals with situations where an Agent is authorised to appoint a third-party to take care of a specific task or part of his Principal’s business. When appointing such a person, the section states that the Agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his case. The section further states that, if the Agent adheres to this standard while making the appointment, he is not liable to compensate the Principal for any losses caused by the appointee’s negligence.
Section 195, Illustration 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.
In the above illustration, it is abundantly clear that the Agent was not negligent in employing the ship-surveyor. However, in many cases, the dispute arises because the Principal accuses the Agent of being negligent while making the appointment and, therefore, liable to compensate him. Our example deals with such a situation.
X, a technology startup, engaged Y, a recruitment agency, to recruit ten sales agents to market its products. It provided Y with the minimum qualifications, such as education and necessary language skills, required of potential candidates. However, it did not specify any other conditions as it believed that Y would conduct a proper evaluation of the candidates before engaging them.
Accordingly, Y posted advertisements for the positions and recruited ten sales agents for X. However, while everyone who was recruited met the minimum qualifications, half did not perform their jobs properly, and X was forced to replace them. This cost X much money. However, more than the expenses incurred, X’s real loss was caused by X having to scale down significantly its marketing operations.
Consequently, X sued Y for compensation, alleging negligence. Y disputed the claim, arguing that all the salespeople it recruited met the qualifications that X had provided and, therefore, it could not be held liable for the losses caused by the sales agents.
Interpretation and Analysis:
In the example above, the dispute arose because there was ambiguity concerning what the Agent’s responsibilities were.
X would likely argue that 5 of the ten sales agents being incompetent showed that Y was negligent during the recruitment process, and hence, it is entitled to compensation for the losses that it suffered. It would further argue that, in such a situation, Y’s obligations extended beyond merely ensuring that the candidates met the minimum qualifications.
On the other hand, Y would argue that it followed the accepted industry practices while recruiting the sales agents, all the sales agents met the criteria set by X, and since only half did not perform, it could not be said that Y was negligent during the recruitment process.
A dispute such as the one between X and Y is not suitable for rapid resolution using Online Dispute Resolution as both parties would need to lead a lot of oral and documentary evidence. The dispute would also require several oral hearings, making it unsuitable for Online Dispute Resolution.
However, this type of dispute can be made rapid resolution friendly by incorporating the drafting solutions discussed below:
Solution 1- Removes Ambiguity By Defining Obligations And Processes (Protects Both Parties)
Agreements between Principals and Agents, where the Agent is required to engage a third party to perform specific duties or responsibilities for the Principal, must be clear about the profile, qualifications, and abilities expected from the third party sought to be engaged. It is also advisable to incorporate into the agreement a process for the Agent to follow in appointing the third party. Then, if the third-party is negligent or incompetent, the Agent can only be held liable if it has not followed the appointment process.
An unambiguous agreement process protects the Principal as it makes it easy to prove the Agent’s negligence in the event of a dispute. The Agent is protected as an unambiguous agreement makes it difficult for the Principal to make frivolous allegations against the Agent.
Solution 2 — Accelerates The Dispute Resolution Process
The agreement should have a dispute resolution clause giving the claimant the right to ask for the arbitrator’s appointment by a named institution or ODR platform and for such appointment to be made within 35 days of receipt of the defendant receiving notice.
In these cases, it will better serve the parties if either the dispute resolution clause itself or the institution or ODR platform promises a process that binds the arbitrator to rapid resolution. ODR Platforms often do this by minimizing oral hearings, not accepting documentation delays, and not allowing adjournments unless in emergencies.
A dispute between a Principal and Agent over allegations of negligence when the Agent has engaged a person or entity for the Principal can be rapidly and inexpensively resolved, provided the profile, qualifications, and abilities, and the appointment process the person or entity are well defined.
Simple Explainer For the Layman:
Magic Technologies, a consumer electronics technology startup, engaged Expert Recruiters, a recruitment agency, to recruit ten sales agents to market its products. Magic Technologies provided Expert Recruiters with the minimum qualifications, such as education and necessary language skills, required of potential candidates. However, they did not specify any other conditions as it believed that Expert Recruiters would evaluate the candidates to determine their suitability and abilities before engaging them.
Accordingly, Expert Recruiters posted advertisements for the positions and recruited ten sales agents for Magic Technologies. However, while everyone who was recruited met the minimum qualifications, half did not perform their jobs to the standards required, and Magic Technologies was forced to replace them. This cost Magic Technologies much money. However, more than the expenses incurred, the real loss was caused by Magic Technologies having to scale down its marketing operations significantly.
Consequently, Magic Technologies sued Expert Recruiters for compensation, alleging negligence during the recruitment process.
Magic Technologies argued that 5 of the ten sales agents having to be let go proved that Expert Recruiters was negligent during the recruitment process, and hence, it was entitled to compensation for the losses that it suffered. It further argued that being a professional recruitment agency, Expert Recruiter’s obligations extended beyond merely ensuring that the candidates met the minimum qualifications.
Expert Recruiters defended itself, arguing that:
- It followed the accepted industry practices while recruiting the sales agents
- All the sales agents met Magic Technologies’ criteria
- Since only half had to be let go, it could not be said that it was negligent during the recruitment process.
Both parties were forced to lead substantial evidence, and the trial was long and expensive. However, the dispute could have been resolved through Online Dispute Resolution if the agreement had contained the following:
- A clear description of the profile, qualifications, and abilities that Magic Technologies required the sales agents to have
- A well-defined process for Expert Recruiters to follow to identify and recruit the sales agents.
About the Article
Rapid Contract Enforcement is an essential requirement for the growth and prosperity of India. It will enable more investment, entrepreneurship, and trust for all stakeholders in business and commerce. The community of lawyers in India does not have access to a practical and scholarly manual that gives them a path to deliver rapid contract enforcement to their clients. Such a manual will also help lawyers to draft contracts that enable timely enforcement. Quick enforcement requires the effective use of the Arbitration Act, the institutional framework, and technology-enabled dispute resolution infrastructure. This article belongs to a series where the author analyses each of the Illustrations available in the Contract Act and recommends practical approaches to rapid enforcement.
About the Author:
Dushyant Krishnan is a Mumbai based lawyer and the co-founder of House Court, an online dispute resolution platform.