Acknowledgement

I would like to express my gratitude towards my professor ‘Sir Anuj Pandey’ for bestowing us
with the opportunity to work and research on the project topic:
‘Meaning of Agency and Modes of Creation of Agency’.
The research I’ve done and the time I’ve invested in making of this project has helped me alott
in understanding the topic and clearing my doubts, eventually creating a clear picture of the
concept in my mind.

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 INTRODUCTION
As we move towards a mercantile world it is almost impossible for a person to perform all the
tasks himself or rather, he finds performing all the tasks himself quite exhaustive. At some point
at the juncture of business, there arises a requirement for a person to represent him in front of
a third party. A person appointed by the principal for such a purpose is known as an Agent, the
person who appoints the agent for the purpose of representing him is known as Principal and a
contract by which the agent is appointed is known as a contract of agency.
Section 182 of Indian Contract Act 1875 defines the term “agent” as a person employed to do
any Act for another call to represent another in dealing with third person, while the person for
whom such Act is done or who is represented is called the “principal”.
The agent may be expressly or impliedly authorized to do an act on behalf of the principal. If a
person authorized his agent to sell his house to a third person, and he does so, then the
principal becomes bound for the sale of the house to the third person in the same way as if he
himself contracted to sell the house to the third person.
The agent Acts only as a connecting link between his principle and the third person. Therefore,
a contract entered by an agent and obligation arising from the acts done by the agent may be
enforced in the same manner and will have the same legal consequences as if the contract had
been entered into and the Act done by the principal in person.
The term “agency” itself is not defined under Indian Contract Act 1875 therefore Court is
entitled with the task of examining the nature of the agreement and determining whether the
contract between two parties is a contract of agency under the law.
In case of Loon Karan v. John and Co.1 It was held that mere conferring of the license on a
person by the government of Assam to have exclusive right to purchase yarn and sell it to the
customer, did not make the license-holder a government’s agent, even though he had been
described as an agent in the agreement.
To explain the Agency, it can be stated that agency is a legal concept which is determined by
the court when it becomes necessary to do so, mostly to resolve the problems created by
certain facts, where the determination of agency relationship is determined by court.

1 AIR1967ALL308

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 Features of Contract of Agency

• Principal-Agent Relationship: The contract establishes a legal relationship between the

principal and the agent, where the agent Acts on behalf of the principal.

• Consensual Agreement: Like all contracts, a contract of agency is formed through the mutual
consent of the parties involved. There must be an offer and acceptance between the principal
and the agent.

• Agent's Authority: The principal grants authority to the agent to Act on their behalf. This
authority may be express or implied, and it defines the scope of the agent's Actions.

• Legal Purpose: The agency relationship must be formed for a lawful purpose. Any Actions or
instructions given by the principal that involve illegal Activities are not binding.

• Consideration: As with any contract, there should be consideration exchanged between the
principal and the agent. This could be in the form of monetary compensation or other benefits

• Agent's Fiduciary Duty: The agent owes a fiduciary duty to the principal, meaning they must Act
in the best interests of the principal and avoid any conflicts of interest.

• Revocability: Unless the agency relationship is coupled with an interest or is made irrevocable,
the principal usually has the right to revoke the agent's authority at any time

• Formalities: In general, a contract of agency does not require any specific formality. It can be
oral or in writing, unless a specific form is required by law for a particular type of agency.
• Competency of the Principal: Section 183 of the Indian Contract Act 1875 throws light on the
subject of, competency of a principal to form a contract as, “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”. Thus establishing three essentials
• Age of majority: The age of 21 is established a s the age of majority under Indian Majority Act
• Soundness of mind: Any person who is of sound mind can employ an agent so as to competent
to understand the consequences of any Action or deed or even agreements made by him on the
behalf of the principal

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• Competency of the Agent: Section 184 of the Indian Contract Act 1875 deals with the
competency of an agent as, “as between the principal and a third person, any person may
become an agent, but no person who is not of the age of majority and of sound mind can
become agent, so as to be responsible to his principal according to the provisions in that behalf
herein contained”.
The capacity of an agent can be observed from two points. The first one being the one that
binds the agent to the principal while the second one that binds the principal to the third
person by the authority that is delegated by the principal to the agent.

• No consideration is necessary to create an agency: No consideration is required to give to a

person the authority of an agent, or to make him liable to the principal for negligence, such
matters may be defined by the terms of a contract and are in their nature, independent of
contract.
Section 185 of the Indian Contract Act 1875 provides that no consideration is necessary to make
an agency as the principal, from the very nature of the contract provides his assent by agreeing
to be bound by the Acts done by the agents on his behalf and that itself is sufficient detriment
of the principal along with the liability of the principle to indemnify the agent stands as a
testament to the validity to the contract of agency.

Conclusively, the following Act should be possible through Agency:

• To do Act for himself through another i.e. by an agent
• To show business transaction to agent.
• To do transaction with third party
• To set up lawful connections with principal and third party.

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 Modes of creation of Agency
An Act done by the agent towards the principal binds the principal towards the third person, in
following situations the principal is bound by the Acts of the agents in such situations the agent
has the power to bind the principal:

Acts done with Principal’s Authority

The authority of an agent is discussed in Section 186, as per the provision of this Section the
authority can exist in two forms i.e., expressed authority and implied authority.
An authority that is given in the forms of words whether spoken or written constitutes an
expressed authority while in case of implied authority the authority is inferred by the courts
from the circumstances of the case, and things spoken or written, or the ordinary course of
dealing, maybe be taken in account for determining the authority in such circumstances.

Expressed Authority:
Section 186 of The Indian Contract, 1872 defines that the authority of an agent may be
expressed or implied.[9] Therefore, an express contract of agency can be made orally or in
writing. In this context, an authority is said to be expressed when it is given by words spoken or
written.

Usually a principal appoints an agent by making an express agreement with him. When an
appointment of an agent is made by a written agreement or by deed it is known as "Power of
Attorney". "Power of Attorney" gives the right to an agent to Act on behalf of his principal.
In an Indian case law of Syed Abdul Khader V. Rami Reddy2 a person was appointed as a
caretaker of agricultural land by giving him power of attorney to Act on behalf of principal, but
before the supreme court of India the following issue that "how could three persons can
appoint one single agent and also by single power of attorney" was raised. Here, the validity of
appointment of agent was questioned.
The competent court held the regarded power to be valid and further held that it is applicable
to their respective agricultural land. To add further the court has also held that "the expression
agency is used to connote the relation which exists between a person occupying the position of
principal and third parties".

2
(1979) 2 SCC 601

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Implied Agency
Implied agency may arise from the circumstances or situations of each case and may be from the
conduct of parties also. Section 187 of The Indian Contract,1872 defines implied authority, an
authority is said to be implied in cases when;
1. It is to be inferred from the circumstances of the case.
2. Inferred from the things spoken or written.
3. Inferred from the ordinary course of dealing may be accounted circumstances of the
case.
The agent's implied authority depends on the nature of the business for which the agent has
been authorized. For example; an agent having authority to make a bet has an implied authority
to the payment if the bet is lost. An agent having been authorized to sell artificial manure has an
implied authority to warrant as to the proportion of its ingredients.
Illustration:
A owns a furniture shop in Delhi but he lives in Tamil Nadu. The furniture shop is managed by B
in the absence of A. B orders raw materials and essential commodities for the shop from C in the
name of A. Here, B has an implied authority from A to purchase raw materials and essential
commodities from C.
➢ Principal bound by Estoppel
Section 237 of The Indian Contract, 1872 deals with the agency by estoppel. In certain situations,
agent do not have implied or express authority to do an Act on behalf of his principal but the
principal through his conduct creates an impression on the mind of third person that his agent
has an authority to Act on his behalf.
For example, if a person announces himself as an agent of the other in presence of that person,
and he does not deny the statement made by the other then he cannot deny him as his agent
later. In such cases the principal will be liable towards the third person for the acts done by the
agent on the ground of law of estoppel, in this context principal will be only liable if such acts and
obligations were within the scope of the agent's authority.
Illustration:
G entrusts F with some negotiable instruments endorsed in blank, F sells them to C in violation
of private orders from G. Here the sale is good. The representation which creates apparent
authority make to be a variety of forms of which the commonest is representation by conduct,
that is, by permitting the agent to Act in some way in the conduct of the principal's business with
other persons3.

3
Dr.R.K.Bangia Contract-II pg125

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 ➢ Agency by necessity or emergency:
The implied agency can also arise in case of necessity and emergency situations. Section 189 of
Indian contract Act deals with the agency by emergency or necessity. The implied agency can also
arise in case of necessity and emergency situations. Under Section 189 of Indian contract
Act,1872 an agent is empowered to do necessary Acts that protects his principal from any type
loss. Section 188 of Indian contract Act, 1872 deals with the extent of agent's authority and it
gives authority to an agent to do anything which is lawful and beneficial for his principal.
Therefore, in case of agency by necessity an agent must Acted in a bona fide manner for
protection of goods or prevention of loss to principal.
In an English case law Great Northern Railways Co. v. Swaffield4, principal sent a horse to his
agent through railways, but his agent went for some other work therefore he could not receive
the horse. Thus, no one was there to receive horse on its arrival at destination. Therefore, Railway
station master received the horse and he took the necessary steps to keep the horse alive,
therefore station master was an agent of the necessity on behalf of principal and principal has
the responsibility to pay the amount which was spent by railway company to keep the horse
alive.

➢ Agency By Ratification:
It has been noted that when the agent does an act for which he does not Have any authority,
the principal is not bound for the same. To this there is an exception when the principal may be
bound even for acts done without any authority. If the principal ratifies it that is to say it must
be according to subsequent approval to an act done without his authority, but on his behalf,
the principal would be bound in respect of such act.
In the Indian Contract Act, 1872 Sections 196-200 deals with ratification. Ratification is a
subsequent adoption of an Activity. Ratification mainly arises where a person who do not have
any authority act as an agent, or Act beyond the authority, or if the principal is not bound by the
contract with the agent. But the principal will be able to ratify the agent's transaction or act and
he can accept his liability.
Essentials of a valid Ratification
1. The act should be done on behalf of another. As per Section 196, for the act to be ratified,
it is necessary that the Act must have been done on the behalf of the person who seeks
to ratify such act.
2. The principal should be in existence and competent to contract when the act is done

4
(1874) LR 9 Exch 132

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 3. Ratification may be expressed or implied in the conduct of the person on whose behalf
the Acts are done.
4. According to Section 198 of Indian Contract Act 1857 no valid ratification can be made by
a person whose knowledge of the facts of the case in materially defective
5. According to Section 199 a person ratifying any unauthorized Act done on his behalf
ratifies the whole transaction of which the Act may be a part.
6. As per the provision of Section 200, the ratified Act must not be injurious to a third person,
the ratification so made otherwise will stand as invalid. For instance , A holds a lease from
B, terminable on three months’ notice. C, an authorized person, gives notice of
termination to A. The notice cannot be ratified by B, so as to be binding on A.
7. Ratification within a reasonable time. In order for the ratification to be valid, it is
necessary that the same must be done within a reasonable time period as delay in
ratification could prejudice interest of the third person therefore undue delay should not
be there.

➢ Agency in Husband-and-Wife relationship: Agency by Co-habitation

Agency in Husband-and-wife relationship is also known as agency by co-habitation. Simply

marriage alone won't create the relation of agent and principal. When a man and woman
are living together and they appear to be husband and wife to a third person, the woman
will be able to bind the man in the same way as if she was his wife. If the husband and
wife are living together then there is a presumption that wife is an agent.

But this presumption may be invalid in the following circumstances where wife is
forbidden from purchasing anything on credit or from contracting debts, Where the goods
purchased on credit are not necessaries, Where the wife is given sufficient money or
allowances and where the trader has been expressly warned not to give credit to his wife.

If the third person gives credit to the wife only, or when the husband revokes the
authority by giving a notice to a athird person, he is not bound by the wife’s act.
Similarly, if the wife lives separately from the husband, the husband is legally bound to
support her but if they were living separately for no good reason, the wife would not be
considered the husbands’ agent. When the husband and wife do not co habit together,
the husband is not responsible for the wife’s act.5

5
Dr.R.K.Bangia Contract-II pg 133

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 Conclusion

Contracts plays a very important role in the current world where everything from small things
to extraordinary things starts from a contract. Contracts plays a very important role in
establishing a legal relationship. In the current commercial world contract of agency plays an
inevitable role. An agency is created when a person delegates his authority to another person in
order to do a specific job or it may differ as per the nature of the job or task.
Establishment of a Principal Agent relationship through a contract confers some rights and
duties upon both the parties. In today's world as we are witnessing, contract of agency in every
possible sector is playing a very important role. By reading this article a reader will be definitely
able to get a clear idea about various methods of creation of agency.

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 Bibliography
• Indian Contract Act 1857 Bare Act
• Contract-II by Dr.R.K.Bangia
• Law of Contract by Mulla
• https://www.legalserviceindia.com/legal/article-10125-various-methods-of-
creation-of-agency.html
• https://www.legalserviceindia.com/legal/article-12127-contract-of-agency-
essentials-modes-of-creation-and-determination.html

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