First-Year Law Notes & Flashcards

AGENCY 

Introduction

Contract of Agency – Meaning and Scope

When one party confers authority on another to act on their behalf, the legal relationship that arises between them is called an Agency . In such a relationship, the person who delegates authority is the Principal , and the person who acts on behalf of the principal is the Agent . This relationship enables the agent to perform tasks or enter into dealings with third parties in a manner that binds the principal.

Under the Indian Contract Act, 1872 , provisions relating to agency are dealt with in Chapter X (Sections 182 to 238). The law of agency plays a vital role in the business world since most commercial dealings—whether by individuals, firms, or corporations—are carried out through agents. Without this mechanism, large-scale business operations across cities, states, and countries would be almost impossible.

Definition of Agent – Section 182

According to Section 182 of the Indian Contract Act, 1872 , an Agent is defined as “a person employed to do any act for another, or to represent another in dealings with third persons.” Thus, the agent acts not for himself, but on behalf of another, and his acts have legal consequences for the principal.

Example:  
Suppose A owns a textile business in Mumbai but lives in London. To manage the day-to-day transactions, A appoints B to operate the business and enter into sales contracts with buyers. Here, B acts as A’s agent , binding A to the contracts made with third parties.

Definition of Principal – Section 182

The same section defines a Principal as “the person for whom such act is done, or who is so represented.” The principal is, therefore, the party who delegates authority and on whose behalf the agent acts.

Example:  
A resides in Chandigarh but owns a shop in Delhi. She appoints B to manage and conduct sales at the Delhi shop. In this scenario, A is the principal (since she delegates her authority), while B is the agent (who carries out business dealings on her behalf).

Nature of Agency Contracts

A Contract of Agency can arise either expressly or by implication. It may be created through an express agreement (written or oral), or it may be implied from the conduct of the parties, the relationship between them, or even from the circumstances of the case. Regardless of the form, the essence of agency is that the agent represents the principal in dealings with third parties, and the acts of the agent bind the principal as if the principal had performed them personally.

Types of Agency

Agency can arise in different ways under the Indian Contract Act:

1. Express Agency

When authority is given to an agent in express terms—either orally or in writing—it is called an Express Agency .

Example:  
If A appoints B through a written power of attorney to sell a property on her behalf, this is an express agency.

2. Implied Agency

Implied agency arises from the conduct of the parties, their relationship, or circumstances of the case, even though there is no express agreement.

Example:  
If a wife buys household goods on credit from a shop and the husband has previously paid for such purchases, it may be implied that the wife has authority to act as her husband’s agent.

3. Agency by Necessity

When a person acts as an agent in a situation of emergency or necessity without express authority, the law treats such actions as valid if done in good faith.

Example:  
A sends perishable goods to B by train. Due to a railway strike, the goods cannot reach the destination. To prevent them from spoiling, B sells the goods. Here, B acts as an agent by necessity.

4. Agency by Estoppel – Section 237

If the principal, by words or conduct, leads a third party to believe that another person is his agent, the principal is estopped from denying the authority of that person, even if no real authority was given.

Example:  
A sees B regularly collecting money on his behalf without objection. Later, when B collects money from a customer, A cannot deny B’s authority because his conduct created an impression of agency.

5. Agency by Ratification – Section 196

When a person acts without authority, but the principal later accepts and confirms the act, the agency is said to be created by ratification . Ratification makes the act binding as if the agent had authority from the beginning.

Example:  
Without authority, C buys goods on behalf of D . If D later accepts and sells those goods, it amounts to ratification of C’s act , creating an agency.

6. Agency by Law (Statutory Agency)

In certain situations, the law itself treats a person as an agent of another. This is known as statutory or legal agency.

Example:  
Company directors act as agents of the company in law. Similarly, partners in a partnership firm are agents of each other and of the firm as per the Indian Partnership Act, 1932 .

Who can be appointed as an Agent?

Section 183 of Indian Contract Act, 1872 :

Any person who has attained the age of majority and has a sound mind can be appointed as an agent. In other words, any person  capable of contracting  can legally be appointed as an agent. Minors and persons of unsound mind cannot be appointed as agents.

The person who has attained the age of majority (18 years) and has a sound mind can become an agent. A sound mind and a mature age is a necessity because an agent has to be answerable to the Principal. (Section: 184)

Types of Agents:

1. Special Agent-  Agent appointed to do a singular specific act.
2. General Agent-  Agent appointed to do all acts relating to a specific job.
3. Sub-Agent- An agent appointed by an agent.
4. Co-Agent-  Agents together appointed to do an act jointly.
5. Factor-  An agent who is remunerated by a commission (one who looks like the apparent owner of the things concerned)
6. Broker-  An agent whose job is to create a contractual relationship between two parties.
7. Auctioneer-  An agent who acts a seller for the Principal in an auction.
8. Commission Agent-  An appointed to buy and sell goods (make the best purchase) for his Principal
9. Del Credere-  An agent who acts as a salesperson, broker and guarantor for the Principal. He guarantees the credit extended to the buyer.

Authority of an Agent as per Contract of Agency under Indian Contract Act

• express

•  Implied.

Express authority

According to Section 187 , the authority is said to be express when it is given by words spoken or written.

Implied authority

According to Section 187,  authority is said to be implied when it is to be inferred from the facts and circumstances of the case. In carrying out the work of the Principal, the agent can take any legal action. That is, the agent can do any lawful thing necessary to carry out the work of the Principal.

It is of four main types:

1. Incidental authority-  doing something that is incidental to the due performance of express authority
2. Usual authority-  doing that which is usually done by persons occupying the same position
3. Customary authority – doing something according to the pre-established customs of a place where the agent acts

Agency between Husband and Wife

Generally, there exists no agency between a husband and wife,  except  in cases where it has expressly or impliedly been sanctioned that either of them would do certain acts or transactions as the agent of the other i.e. a relationship of agency can come into existence between the two through contract, appointment, or ratification. A husband is responsible for necessaries to his wife when they are living apart due to the husband’s fault. This results in an agency of necessity where the wife can use her husband’s credit for what is necessary for her to live. But in cases where they are separated because of the wife’s own whims or faults for no just reason, the husband is not liable for the wife’s necessaries.

Distinction between Agent and Servant

1. An agent  is employed to bring the principal into the legal relationship with the third person or to represent him in dealing with third persons. Whereas,  a servant  does not ordinarily create the legal relationship between his employer and third persons.
2. An agent  is bound to follow all the lawful instructions of the principal but he is not subject to the direct control and supervision of the principal.

A servant  acts under the direct control and supervision of his employer and is bound to follow all reasonable orders given to him in the course of his employment.

• An agent  may work for several principles at the same time.
• A servant  usually serves only one master.
• A principal is liable for the wrongs of his agent  done within the scope of his Authority.
• A master is liable for the wrongs of the servant  if they are committed in the course of his employment.

Essential Elements of Contract of Agency under Indian Contract Act

1. 1 . Principal :  To constitute Agency there must be Principal, who appoints another person as agent to represent or work on his behalf.

2.  Principal must be competent : According to Section 183 principal must be competent to contract. Section 183 says that any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent.

3.  There must be an Agent :  In a Contract of agency under Indian Contract Act, Agent is a person one who is appointed by Principal to work on his behalf. According to Section 184 any person may become an agent, but no person who is not of the age of majority and sound mind can become an agent.

4.  Consideration not Necessary : Section 185 of the Indian Contract Act 1872 says that, no consideration is necessary to create an agency.  It is exception to the general rule – a contract without consideration is void. But as per this exception, it can be said that a contract without consideration is valid.

Various Methods of Creation of Contract of Agency under Indian Contract Act

Agency by Express Agreement:

This is the most obvious and simple method by which the agency can be created. The express word implies directly and firmly. Thus, there is a clear categorical statement of intention by both the parties, Principal as well as the Agent, to enter into the relationship.

This leads to the express authority being vested in the agent. The authority of the agent can be express and implied. The implied authority would be discussed later. The express authority is given by words spoken or written. Hence, there come two types in which this express agency can be created- Oral or Documentary.

Agency by operation of law:

At times contract of agency comes into operation by virtue of law.

For example : According to partnership act, every partner is agent of the firm as well as other parties. It is implied agency. On account of such implied agency only a partner can bind over firm as well as other partners, to his activities. In the same way according to companies act promoters are regarded as agents to the company

Agency by Ratification – Section 196

Sometimes, a person may act on behalf of another without his knowledge or permission. If the principal later ratifies (approves) such an act, the act is treated as if it had been authorized from the beginning. Ratification may be express (through words or writing) or implied (by conduct).

Example:  
Z buys 50 boxes of apples on behalf of X without informing him. Later, X sells those apples in the market. By selling them, X has impliedly ratified Z’s purchase, thereby creating a valid agency relationship.

Limitations on Ratification:  
Ratification is not valid in the following cases:

1. When the principal does not have complete knowledge of facts.
2. When the act, if done with authority, would harm or injure the principal’s rights.
3. When the act is illegal or void by law.

Agency by Implied Authority

An implied agency arises not by explicit agreement but from the relationship of parties, their conduct, or circumstances.

Example:  
A settles abroad, and without any express request, his brother B lets out A’s agricultural land to a farmer, collects rent, and remits it to A. By this conduct, A becomes the principal and B his implied agent.

Implied authority can take several forms:

(i) Agency by Necessity

This occurs when a person, in an emergency, must act to protect the interests of another, even without express authority.

Conditions for Agency by Necessity:

1. There must be a genuine necessity.
2. It must be impossible to communicate with the principal in time.
3. The agent must act bona fide in the best interest of the principal.

Example:  
A sends 200 bags of butter via road transport. Due to a strike, vehicles stop for a week. To prevent spoilage, the transport company sells the butter in nearby villages. This is agency by necessity .

(ii) Agency by Estoppel – Section 237

When a principal, by words or conduct, leads a third party to believe that someone is his agent, he cannot later deny that person’s authority.

Example:  
In X’s presence, Y tells Z that he is X’s agent. X does not deny or correct Y. Later, Z enters into a contract with Y, believing him to be X’s agent. X is bound by Y’s actions under agency by estoppel .

(iii) Agency by Holding Out

This occurs when, on previous occasions, a principal has allowed a person to act as his agent, creating a belief in third parties that such authority continues. The principal will be bound by the acts of such a person even if, on a later occasion, he gives contrary instructions.

Example:  
B’s servant A regularly buys goods on credit from C on B’s behalf, and B has always paid. One day, B gives A money to buy goods in cash, but A again buys on credit and runs away with the money. Since B had previously allowed A to buy goods on credit, this is agency by holding out, and B must pay C.

Delegation of Authority

General Rule: Delegatus Non Potest Delegare

The principle is that “a delegate cannot further delegate.” An agent is expected to perform the duties personally because the principal has chosen him based on trust and confidence.

Exception – Sub-Agent (Section 191)

In certain situations, an agent may appoint a sub-agent , i.e., a person employed by and acting under the control of the original agent. This is permitted when:

• It is customary in the trade.

• It is necessary due to the nature of business.

• The principal expressly allows delegation.

Example:  
An estate agent may appoint a clerk to collect rent from tenants on his behalf.

Rights of an Agent

An agent enjoys the following rights under the Indian Contract Act:

1. Right of Retainer – The agent can retain money received on the principal’s behalf until his dues (remuneration or expenses) are cleared.

Example: If A sells goods for P and receives ₹50,000, he can retain his commission before remitting the balance.

2. Right to Remuneration – Once the business of agency is completed, the agent has a right to be paid agreed or reasonable remuneration.

Example: A lawyer (agent) is entitled to professional fees after completing a case for the client (principal).

3. Right of Lien – The agent can retain the principal’s movable or immovable property until payment of his dues.

Example: A commission agent can hold goods delivered by the principal until his commission is paid.

4. Right to be Indemnified – The agent has a right to be indemnified for all lawful acts done in the course of business.

Example: If A (agent) pays customs duty while importing goods for P (principal), P must indemnify him.

5. Right to Compensation – The agent can claim compensation for losses suffered due to the principal’s lack of skill, instructions, or default.

Example: If the principal gives false information to the agent, causing him losses, the agent can demand compensation.

Conclusion

The contract of agency is an essential concept in business law as it allows principals to extend their reach through agents. An agency may be created expressly or impliedly, or arise by necessity, estoppel, holding out, or ratification. Once established, the relationship imposes duties and confers rights on both the principal and agent.

Examples of agencies in practice include:

• Insurance Agents – selling policies on behalf of insurance companies.

• Travel Agents – booking tickets and packages for clients.

• Advertising Agencies – representing companies in media deals.

• Brokers and Factors – intermediaries in trade and commerce.

• Del Credere Agents – who guarantee payment to the principal if the buyer defaults.

Thus, agency law ensures smooth commercial functioning while balancing rights, duties, and liabilities among the principal, agent, and third parties.

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