Failure to Comply with the Principal's Interest in the Agency Contract: Reconsidering the Interpretation of Article 667 of the Civil Code of the IRI

One of the most challenging aspects of the Agency Contract is determining the criteria for assessing whether the principal's interests are not respected from a scientific standpoint and in accordance with the prevailing custom of any given business. Furthermore, it is essential to ascertain the sanctions thereof.
Failure to respect the interest of principal has long been the concern of jurists and then lawyers. While there is no doubt in the necessity to comply with the principal’s interest, there are a lot of difference of opinion in determining the effects of not observing the principal’s interest, and also the jurists consider it as a qualitative concept and rely on the custom in determining a standard for explaining the scope of principal’s interest. Performance of transactions without respecting the interest of the principal has always been a legal concern. Custom also deals with ambiguity in this regard, and as a result, the court refers the matter to the expert in the hearing, and the expert, due to the existence of a common scientific basis, ultimately gives an opinion intuitively and with perception, and the court has no way to control it Also, the courts have had a different approach regarding the sanction of non-observance of the principal's interest, and this adds to its ambiguity. However, the en bank members of the Supreme Court of Iran in its Unified Judicial Precedent No. 847 dated 2/25/1403, ruled on the non-effectiveness of contract till the approval of principal, but it still does not provide a criterion for determining non-compliance with principal’s interest, and the application of the notion of non- effectiveness of contract does not meet today's social needs.
The lack of effectiveness of the transaction, which we find as the basis of a non-authorized contract in the traditional commodity markets, could be considered as an effective institution from the point of view of economic and social analysis. However, the lack of effectiveness of the transaction in the new goods and services markets as well as in the financial markets lacks efficiency and causes an increase in transaction costs.
In fact, we are faced with the default of information symmetry in a small society with fast information circulation, and it has been compiled accordingly. This means that in primitive societies, people were quickly informed of all events, and as a result, the owner of a property could not have been unaware of the unauthorized transaction. Therefore, based on the assumption of symmetry of information, the legislator believed that if the owner of goods recognizes the transaction as a loss, he can disrupt it. In a traditional rural society with a limited population and with the presence of virtue-oriented and often religious people, the non-authorized transaction has always been based on the interest of the owner.
So, Non-authorized transaction has an effective and efficient function in this social system and in that context, social relations (failure of market relations) such as moral hazard and free riding caused by asymmetry of information does not fail. The reason is that, first of all, in this society, information is exchanged quickly and the type of long-term relationship between the people of this limited society is such that it leads to participation and in this participatory process, the desire for free riding (working for one's own benefit and benefiting at the expense of another) and moral hazard (preferring one's own benefit over another's) decreases.
Therefore, a non-authorized transaction in a rural society (with limited actors, and its own surrounding environment and social context) is considered as an efficient indicator, and the sanction of non-approval will not hinder this efficiency, even though in most cases we are faced with the subsequent acceptance of the owner and rejection of the transaction seems unlikely).
In this article, we have used the library method and using the sources of legal science to answer the criterion and the sanction of non-compliance with the principal's interest, and we have tried to answer the above questions by using the economic analysis method.
In order to determine the scientific criteria regarding non-observance of the principal's interest, the basics of economics and the theory of standard deviation are used as the basis for determining the extent of the principal's loss. The tolerable loss limit can be considered as the basis for determining compliance with the principal's interest.  Based on the theory of standard deviation, the tolerable loss limit in traditional and modern goods and services markets and in financial markets is scientifically explained. Using the theory of standard deviation regarding non-observance of interest has been suggested by the author for the first time.
Then, based on the current legal interpretations in Iranian law, the author suggests his willingness to annul the contract at the level of very large losses and correctness by accepting the responsibility of the agent at the level of large losses. In the case of small losses, the contract is considered correct.
In this scientific approach, the parties of any legal relationship, as well as in the stage of litigation, the court can easily make a decision based on scientific criteria. As a result, the validity or invalidity of a transaction becomes predictable, and thus we approach one of the indicators of justice, which is predictability.
At the end, the author proposes to amend Articles 663 and 667 of the Civil Code as follows:
Amended Article 663: The agent cannot perform an action that is outside the scope of the subject matter of agency or outside the limit of the powers delegated to him. The sanction of violation is the annulment (of the transaction).
Amended Article 667 of the Civil Code: The agent must, in his handlings and performances act in the interests of his principal. The criterion of compliance with principal’s interest is the amount of the tolerable loss limit, the sanction depends as the case may be, the annulment of the transaction or the validity of the transaction with the responsibility of the defaulting agent. The tolerable loss limit is determined based on the financial criteria determined by the Government Board and with the proposal of the Minister of Justice.