Tag Archive for: principal to principal contracts

– Neha Sinha, Assistant Legal Advisor | finserv@vinodkothari.com

Introduction

Lending Service Providers (LSPs) are engaged by the Regulated Entities (REs) (banks or NBFCs) to carry out some functions of RE in connection with lenders’ functions  on digital platforms. These LSPs may be engaged in customer acquisition, underwriting support, recovery of loan, etc. As the LSPs are acting in association with REs and on behalf of REs, the question arises if LSPs are engaged as “agents” of REs or the arrangement between RE and LSP is that of on a principal to principal basis.

Aspects surrounding agency contracts are dealt with in Indian Contract Act, 1872. Principal-principal relation is not defined specifically in any statute, but the obligations and liability of both the parties is as in case of any usual commercial contract, where each party is acting independently. If it is the latter, the LSP cannot be termed as “agent”. If the LSP is not an agent, then, looking at the definition of LSP in the RBI’s Digital Lending Guidelines (discussed below), it is possible to contend that the activities of the so-called LSP do not bind the RE, as the so-called LSP, acting as a principal, is not to be treated as LSP within the meaning of the RBI Digital Lending Guidelines.

In this article, the defining features of agency contracts, in light of whether the role of LSPs is either a principal or an agent has been discussed, on the basis of the provisions of the contract law and jurisprudence thereunder.