TEST FOR DETERMINING AGENCY:

ANALYSIS USING CASE LAWS

Submitted by
Anitta Jose
1420
4th semester B.A. LL.B
NATURE OF AGENCY

Agency in law connotes the relation which exists where one person has an authority or capacity
to create legal relations between a person occupying the position of principal, and third parties.1
The essential feature of an agent is his power of making the principal answerable to third persons
and enabling the principal to sue third parties directly, or render him liable to be sued directly by
the third party2. The test of agency is whether the person is purporting to enter into transaction on
behalf of the principal, i.e., to create, modify or terminate contractual obligations between his
principal, whom he represents, and some third person3. In order to constitute an agency, it is not
necessary to have a formal agreement.

An agent, though bound to exercise his authority with all lawful instructions given to him, is not
subject to the direct control or supervision of the principal. His function is to enter into contract
relations on behalf of his principal with third persons. He acts at his discretion and judgment, but
within the limits of his authority.4 
Certain persons are referred to in common parlance as ‘agents’ even though they may not really
have this power of changing their principal’s relations with third parties. 'To carry on the
business of an ‘agent’ is not the same thing as saying that you are contracting as agent.’ They
may be estate agents or insurance agents, whose business it is to canvass business for their
principals. Yet the rules of agency to the extent they govern their relations vis-à-vis their
principal, are applicable to them. There is no magic in the word agency’. It is often used in
commercial matters where the real relationship is that of vendor and purchaser.5 A ‘distributing
agent’ or exclusive agent’ in a particular territory for a proprietary commodity does act put a
consumer into contractual relations with the manufacturer. The word ‘agent’ is often used in
business as meaning one who has no principal, but who on his own account offers for sale, some
particular article having a special name.6 Distributors and franchisees are also referred to as
agents, though they may actually act as principals, dealing in their own name. They are really

1
Halsbury’s laws of England, ‘Agency’,4th edition, Volume 1(2)
2
Varsha Engg Pvt Ltd v. Vijaya Traders, AIR 1983 Guj 166
3
State of Bihar v Dukhul Das, AIR 1962 Pat 140
4
State of Madras v. Jayalakshmi Rice Mill Contractors Co, AIR 1959 AP 352
5
Re Neville, ex p White, [1871] 6 Ch App 397
6
Wheeler & Wilson Mfg Co v. Shakespeare ,(1869) 39Lj Ch 36
purchasers for resale7. Persons describing themselves as agents may not really be so; they may be
‘independent merchants, dealers, consultants or intermediaries.”8
Agency is not transferable or assignable. It is personal in character, depending on the terms of
the contract between the principal and the agent.9

TEST FOR DETERMINING AGENCY RELATIONSHIP

The test of determining the existence of agency relationship has been explained by Judge
Dhawan of the Allahabad High Court in the following words:10
“Agency depends on true nature of relationship. The American jurisprudence refers to a case in
which it was held that the use of the words ‘agency agreement’ and ‘agent’ by the parties in a
contract does not necessarily establish a relationship of agency in the legal sense. The law in
India is the same. It has been held in several decisions that the fact that the parties have called
their relationship an agency is not conclusive, it the incidence of this relationship, as disclosed by
evidence does not justify a finding of agency, and that the court must examine the true nature of
the relationship and the functions and responsibilities of the alleged agent.” 
Applying this test to the facts of the case before him the learned Judge held that when the Assam
Government placed its quota of a commodity at the hands of a dealer for resale to consumers, he
was not an agent of the Government even if he was described as such in the
agreement11.Similarly “a person does not become an agent merely because he gives advice in
matters of business”12. A “procurement agent” has been held to be not an agent, as he is only a
person directed to do an act on a commission and not to represent another.

Agency in hire-purchase transactions 

To know whether a person occupies the position of an agent or not, the law has to go by his
functions. The law has to see the substance of the transaction not the parties’ terminology.13 The
relevance of the expressions used in an agreement has often been considered in connection with
hire-purchase transactions. A transaction of this kind generally involves three parties, the dealer,
7
Chitty on contracts,28th edition, Volume 2, p 3,para 32-008
8
Supra
9
Premji Damodar v. LV Govindji & Co, AIR 1943 Sind 197
10
Loon Karan Sohan Lal v. John & Co, AIR 1967 All 308
11
Supra
12
Mohesh Chandra Bosu v Radha Kishore Bhattacharjee, (1907-08) 12 CWN 28
13
Supt of Stamps v Breul & Co,(1944) 46 Bom LR 686
who provides the goods; the financier, who provides money to the dealer and the hirer, who takes
the goods and pays hire-purchase installments to the financer. What happens in real substance is
that the dealer hands over goods as directed by the financier. Lest the dealer be regarded as an
agent of the financier a hire-purchase agreement often expressly declares that the dealer is not an
agent. The Hire Purchase Act, 1972 (repealed) regards the dealer as an agent of the financier for
some purposes; one of them is that if any representations are made by the dealer to promote the
dealer of the product, he would be deemed to an agent of the financer. But whether he is a
general agent of the finance company remains an open question. The Court of Appeal has
witnessed two views being expressed 
In one of them it was stated that the dealer is a party to the hire-purchase transaction in his own
right and not as a representative of any other party, though for many purposes he is an
intermediary between the two others.14 
The other view considered the dealer as an agent of the finance company for many purposes of
law.15 The House of Lords has expressed (obiter) the opinion that the questions of liability of the
finance company for acts or defaults of dealers can be resolved only in reference to the general
mercantile structure within which they arise or, if one prefers the expression, to mercantile
reality. The reality of the situation is that customers often do not know about the finance
company. They come only to the counter of the dealer, who does everything. “If this is so, a
general responsibility of the finance company for the acts, receipts and omissions of the dealer in
relation to the proposed transaction of hire-purchase ought to flow from this general structure of
relationship and expectation.” 

Relationship of Agency 
In Kuchwar Lime & Stone Co. v. Dehri Rohtas Light Railway Co. Ltd. & Anr16 sale and delivery
of coal at that time was governed by a Colliery Control Order and no coal could be sold by a
colliery except under the order of the Coal Commissioner, who sanctioned the supply of coal by
a colliery to the defendant company, for which priority of wagons was also sanctioned. Pursuant
to this arrangement, the colliery supplied coal at a railway station, and dispatched it by rail to the
defendant company. The defendant company refused to take delivery at the destination, and

14
Mercantile Credit Co Ltd v. Hamblin,(1965) 2 QB 241,269
15
Financings Ltd v. Stimson,(1962) 1 WLR 1184
16
AIR 1969 SC 193
claimed that it was not liable for loss arising out of detention of wagons. The railway sold the
coal by auction, and also claimed demurrage from the defendant. The defendant pleaded lack of
privity between it and the railway. It was held that the colliery was acting as agent of the
defendant for transport of coal in which the property had passed to the defendant company under
the orders of the Coal Commissioner, and the defendant was, therefore, liable for payment of
freight and demurrage. 
The Government of India opened an account in the name of an association and replenished the
account from time-to-time. The association disbursed the money in the account from time-to
time to the department of the government, and also sent monthly accounts of the moneys
disbursed, which the Government of India accepted. A letter of the Governor General in council
authorized the association to incur miscellaneous expenditure on its behalf. From these facts, it
was held that a relationship of principal and agent existed between the Government of India and
the association.17
A hypothecation deed which provided that the shares as well as the dividends were charged for
the amount borrowed, and authorized the creditor to receive directly from the company any
dividend declared, created an agency in favor of the creditor.18
The plaintiff, a common carrier, employed the defendant, another common carrier, to carry the
goods of the owner. The goods were loaded by the servants of the owner from the premises of
the owner. The plaintiff was held an agent of the owner. The fact that the freight was promised to
be paid by the plaintiff and that he was answerable to the owner, made no difference. Such an
agent could not sue the defendant for breach of duty as common carrier, to deliver goods
entrusted to him for carriage.19 However, where a railway company undertook to carry goods
from a Station of its own railway to a station on another railway, the contract was with the
former company, the latter being only its agent. 
A consumer with a priority allotment dealt with a colliery through the respondent. The colliery
sent the bill for the price to the respondent, who sent another bill to the consumer adding his
commission. It was held that the respondent was acting as an agent for the consumer.20 

17
Union of India v Kamal Kumar Goswami, AIR 1974 Cal 231
18
Mariyakutty v. Chaladean Syrian Bank Ltd, AIR 1957 Tr& Coch 174
19
Sukul Bros v HK Kavarana ,AIR 1958 Cal 730
20
State of Bombay v. Ratilal Vadilal ,AIR 1961 SC 1106
In a suit by a director against the company, a scheme was framed under an agreement, and two
persons were appointed as trustees for carrying out the scheme. The scheme was neither placed
before the shareholders, nor before the court for sanction. Sale of some shares sold pursuant to
the scheme was challenged in liquidation proceedings. The two trustees were held as mere agents
who were bound to return the money to the company.21

No Relationship of Agency 
Mere use of the word 'commission’ in a contract does not convert a relationship of vendor and
purchaser into one of agency. The fact that a person is paid commission for his work is not by
itself enough to constitute agency.22 Certain millers were appointed licensees to buy paddy at a
fixed price, and to sell it at a price fixed by government, to particular persons. They received a
commission for their labor. They invested their own moneys, and the goods were stored at their
risk. They were not agents of government; and the difference between sale price and purchase
price, though termed as surcharge, was payable to government under the law and in terms of the
license.23 “ Similarly, a retailer operating a fair price shop buying wheat from the government at
wholesale rates and selling it at fixed rates, was not an agent of the government, but a mere buyer
of goods from the government.”24 However, a wholesale dealer for the sale of rice under the
Madras Food grains Procurement Order 1947 was an agent where he purchased at a fixed price,
and sold it at a price fixed by government, when he was also responsible for the safety of the
food grains.25 A person was appointed an agent for the Government of India to procure paddy in
Nepal was to have full responsibility for getting it milled at one of the mills in Bihar specified in
the letter of appointment of agency, and was to deliver an equivalent amount of rice to such
governments as was directed by Government of India, was an agent for procuring paddy only,
and not for the purpose of milling it. The contract between such person and a mill owner milling
it was not a contract by the latter with the government.26 
'Certain manufacturers sold to licensed export dealers, who exported the goods to foreign buyers;
that being the only mode of export allowed under the Cotton Textile (Export Control) Order.

21
Gaya Sugar Mills v.Nand Kishore Bajoria, AIR 1955SC 441
22
State of Madras v. Jayalakshmi Rice Mill Contractors Co, AIR 1959 AP 352
23
Supra
24
AIR 1967 Cal 568
25
AIR 1963 AP 394
26
Govt of India v. Jamunadhar Rungta, AIR 1960 Pat 19
Such a transaction did not make the exporters agents of manufacturers, because by the very act
of purchase, the exporters became principals buying as such.27
Ordinarily, a distributor or purchaser for resale is not an agent of the manufacturer. The true test
of agency is whether the distributor could represent the manufacturer to the third parties so as to
bind the manufacturer. Merely because the manufacturer had undertaken for a certain period the
repairs of the diesel engines sold to the third parties by the distributor, would not make the
distributor an agent of the manufacturer. Nor is a distributor an agent where he purchased goods
at net dealer’s price, sold to customers at retail price and retained the difference as profit; and he
could take delivery only after he had paid the price to the manufacturer, and had to bear the
transport costs, and was responsible for damage during transit.28 
The acts of a bank in the course of banking business of collection of bills, remittance, meeting
expenses of storing the goods and debiting the same to current account of the customer did not
make the bank an agent of the customer, nor was there any fiduciary relationship between the
parties, nor was the bank in charge of goods as trustee or agent of the customer.  Banks take
charge of goods, articles or securities as bailee, and not as trustee or agent.29 
A mortgagee with power to sell the mortgaged property without intervention of court is not an
agent of the mortgagor in selling the property The mortgagee’s right is different from that of the
mortgagor. The former’s right is a superior right which is not under the mortgagor, but it is
against him. In Other words, the sale is against the mortgagor’s wishes. The rights and interests
of the mortgagor and the mortgagee in regard to the sale of the mortgaged property are
conflicting.30
A person does not become an agent on behalf of another, merely because he gives him advice in
matters of business.31
A sub-contractor appointed by a contractor for completion of the latter’s work under his contract
with an employer, is not an agent of the contractor so as to entitle him to claim the dues for his
work from the employer directly32

27
State of Mysore v. Mysore Spinning and Mfg Co Ltd, AIR 1958 SC 1002
28
Vijay Traders v. Bajaj Auto Ltd ,(1995) 6 SCC 566
29
UCO Bank v Hem Chandra Sarkar, AIR 1990 SC 1329
30
Narandas Karsondas v SA Kamtam, AIR 1977 SC 774
31
(1908) 12 Cal WN 28
32
Mahomed Shafi v Fazal Din, AIR 1930 Lah 1062