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Section 218: Agent's duty to pay sums received for principal

Indian Contract Act • Official Statutory Text & Practice Guide

Statutory Regulation
Legal Standard
Competent Court / Tribunal
Act 1872
Section 217 All 266 Sections of Indian Contract Act Section 219

Legal Commentary & Landmark Judgments: Section 218

Section 218 imposes an unconditional statutory duty upon the agent to pay over to the principal all sums received on his account, subject only to the legitimate deductions and retainers authorized under Section 217.

  • Fiduciary Obligation of Full Remittance: All moneys collected by an agent in the execution of his mandate are held in a fiduciary capacity and must be remitted to the principal without unreasonable delay.
  • Absolute Bar Against Setting Up Jus Tertii: An agent cannot refuse payment to his principal by asserting that a third party holds better title or that the third party has demanded the funds, unless evicting title is legally established.
  • Inadmissibility of Illegality Plea by Agent: Even if the underlying contract between the principal and the third party was void or tainted by wagering, the agent who received the proceeds cannot appropriate them or raise the illegality to defeat the principal's claim.
Key Landmark Precedents:
  • Bhagwandas Atmasing v. Atmasing AIR 1945 Bom 419: The Bombay High Court held that an agent who collects moneys on behalf of his principal under a wagering contract cannot withhold the proceeds from the principal by pleading the void nature of the transaction.
  • K.P. Sundaram Pillai v. P.S.V. Chidambaram Chettiar AIR 1938 Mad 438: The Madras High Court ruled that money received by an agent for his principal is impressed with a fiduciary character, and limitation for recovery runs under Article 3 of the Limitation Act from the date of demand and refusal.
  • T.C. Kachanam v. M.R. Govindan AIR 1959 Ker 390: The High Court affirmed that an agent's custody of principal's funds cannot become adverse; fiduciary accountability under Section 218 precludes a plea of adverse possession or prescriptive title.
Courtroom Practice & Strategic Litigation Guidance:

When suing an agent for non-remittance of trade collections, rely on Section 218 to strike out any defense where the agent attempts to question the validity of the principal's underlying customer contracts. Claim commercial pre-suit interest under the Interest Act, 1978 from the date the agent received the funds.

Section 217 All 266 Sections of Indian Contract Act Section 219