AGENCY

Agency - Definition

• Section 182, Indian Contract Act, 1872

Sec. 182 - ‘Agent’ and ‘principal’
defined.—
An ‘agent’ is a person employed to do any
act for another, or to represent another in
dealings with third person.
The person for whom such act is done, or who
is so represented, is called the ‘principal’.
• “... what distinguishes an agent from a person
appointed to do an act, is the agent’s
representative capacity coupled with a power
to affect the legal relations of the principal
with third persons.”
• “... the expression agency is used to connote
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.”
Determination of existence of agency:
Test
• “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.
(McCarty v. King County Medical Service Corp.)
• 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, if 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.”
(Loon Karan Sohan Lal v. John
and Co. AIR 1967 All 308)
• “The Court must examine the true nature of
the agreement and the subsequent dealings
between the parties and then decide whether
it established a relationship of agency under
the law.”
 Loon Karan v. John and Co.
AIR 1967 All 308

• “conferring a licence on a person by the

Government of Assam to have the exclusive right
to purchase yarn and sell it to the customers, did
not make such a person as Government’s agent
even though he had been described as such in
the agreement.
• In this case, it was found that in fact the person
so authorised was acting solely in his own name,
and there was no indication to suggest that he
was an agent, even by implication.
• “According to this definition (i.e. Sec. 182,
Indian Contract Act), an agent never acts on
his own behalf but always on behalf of
another.
• He either represents his principal in any
transaction or dealing with a third person, or
performs any act for the principal.
• In either case, the act of the agent will be
deemed in law to be not own but of the
principal.
• So, “an agency has three parties – the
principal, agent and the third party.
• The contract is of the principal and the third
party.
• The agent is only an instrumentality who
drops out after creating the contract”
• The crucial test of the status of an agent is
that his acts bind the plaintiff.”
 Who may employ an agent?
• Section 183 - Who may employ agent.
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.
• Who cannot employ/appoint agent?
– Minor
– Person, who is of unsound mind
• So, a person qualified to appoint an agent must be a
• Major; and of
• Sound mind
 Principal should be competent to
contract
• “... for validity of a contract, the parties have
to be competent to contract.
• Since in an agency, the agent creates a
contractual relationship between his principal
and the third persons, it is necessary that the
principal and the third person should be
competent to contract.”
PRINCIPAL THIRD PARTY

AGENT
• ‘If a person is not competent to contract,
she/he cannot do so through an agent, as a
person can do only such thing through an
agent which she/he is herself/himself
personally capable of doing.’
 Who may be an agent?
• Section 184 – Who may be an agent
As between the principal and 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 an agent, so as to
be responsible to his principal according to
the provisions in that behalf herein
contained.
• Section 12 - What is a sound mind for the
purposes of contracting
A person is said to be of sound mind for
the purpose of making a contract, if, at the
time when he makes it, he is capable of
understanding it and of forming a rational
judgment as to its effect upon his interests.
• “Since agent is a mere connecting link
between the principal and the third party, it is
immaterial whether or not the agent is legally
competent to contract.
• Thus, there is no bar to the appointment of a
minor as an agent.
• However, in considering the contract of
agency itself, (i.e. the relation between
principal and agent), the contractual capacity
of the agent becomes important.”
• “Thus, if the agent happens to be a person
incapable of contracting, then the principal
cannot hold the agent liable, in case of his
misconduct or where the agent has been
negligent in performance of his duties.”
• Example
“A appoints B, a minor to sell his car for
not less than Rs. 4,00,000/-.
B sells it for Rs. 3,00,000/-.
• The principal i.e. A will be held bound by the
transaction and further shall have no against B
for claiming the compensation for not having
obeyed the instructions, since B is a minor...”
• So, the agent may not be competent to
contract.
Consideration not necessary to create
agency
• Section 185 - Consideration not necessary
No consideration is necessary to create an
agency.
• “Generally an agent is remunerated by way of
commission for services rendered, but no
consideration is immediately necessary at the
time of appointment.”
 Agent and Servant: Distinction
Lakshminarayan Ram Gopal and Sons Ltd. v.
Government of Hyderabad (AIR 1954 SC 364)
Major points of distinction
• “1. Agent - An agent has the authority to act
on behalf of his principal and to create
contractual relations between the principal
and a third party;
Servant - Whereas this kind of power is not
generally enjoyed by a servant
• 2. Servant - A master has not only the right to
direct what the servant has to do, but also (a
master) has the right to say how it is to be done.
A servant acts under the direct control and
supervision of his master and is bound to
conform to all reasonable orders given to him in
the course of his work.
Agent – An agent, though bound to exercise
his authority in accordance with all lawful
instructions... is not subject in its exercise to the
direct control or supervision of the principal.
• 3. Mode of remuneration:
The mode of remuneration is generally
different in case of Agents and Servants.
Servant – A servant is paid by way of salary or
wages.
Agent – An agent receives commission on the
basis of work done.
• 4. LIABILITY
Servant – A master is liable for a wrongful
act of his servant if it is committed in the
course of the servant’s employment.
Agent – A principal is liable for his agent’s
wrong done within the “scope of authority”.
• 5. Servant – A servant usually serves one
master.
Agent – An agent may work for several
principals at the same time.”

The court is not bound by the terminology of

the parties (i.e. whether described as a
servant or an agent), but by the substance of
the relation.
 AUCTIONEERS

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