Contract of Agency

Meaning
One of the most notable aspects of modern business organizations is the rise and significance
of intermediaries. In today's business environment, it is not always feasible for an individual to
handle every task alone. Therefore, delegating certain responsibilities to another person
becomes essential. This individual is known as an "agent," and the agreement under which they
are appointed is referred to as a "contract of agency." The law of agency operates on the
principle that "an act done by an agent on behalf of the principal is considered as done by the
principal himself."
When a person employs another person to do any act for himself or to represent him in dealing
with third persons, it is called a ‘Contract of Agency’. The person who is so represented is
called the ‘principal’ and the representative so employed is called the ‘agent (Sec. 182). The
duty of the agent is to enter into legal relations on behalf of the principal with third parties. But,
by doing so he himself does not become a party to the contract to the contract not does he incur
any liability under that contract. Principal shall be responsible for all the acts of his agent
provided they are not outside the scope of his authority.
 The contract of the agency is a legal relationship, where one person appoints another
to perform the transactions on his behalf.
 When a person employs another person to do any act for himself or to represent him in
dealing with the third persons, it is called a ‘Contract of Agency’.

Legal Provision
 Section 182 of the Indian Contract Act, 1872 defines “agent” and “principle”.
o An “agent” is a person employed to do any act for another, or to represent
another in dealings with third persons.
o The person for whom such act is done, or who is so represented, is called the
“principle”.

Who Can Appoint an Agent?

 As per Section 183 of the Indian Contract Act, only a person who is a major and of
sound mind can appoint an agent. Minors and persons of unsound mind cannot act
as principals, but their guardian can appoint an agent on their behalf (as seen in
Madanlal v. Bherulal).

Who Can Be an Agent?

 According to Section 184, any person can become an agent between the principal
and third parties. However, a minor or a person of unsound mind can be an agent,
but they cannot be held liable to the principal for any misconduct or negligence.
 For example, if A appoints B (a minor) as his agent to sell a diamond ring and instructs
him not to sell it for credit or below Rs. 9,000, but B sells it for Rs. 5,000 on credit,
the sale will be valid between A and the buyer (C). However, A cannot claim
 damages from B because B is a minor. If B were an adult, he would have been liable
for misconduct.
 Thus, while anyone can be an agent, appointing a minor or an unsound person is
risky since they cannot be held responsible for their actions.

Nature and Features of Contract of Agency

The law of agency is based on the principle "Qui facit per alium, facit per se", meaning "He
who acts through another, acts himself." An agent acts on behalf of a principal, and their actions
legally bind the principal. Let’s understand the key features of agency with real-life examples
and case studies.
1. Principal-Agent Relationship
An agency is created when the principal authorizes the agent to act on their behalf in business
transactions.
Example: A company appoints a stockbroker to buy shares on its behalf. The broker acts as an
agent, and the company (principal) is bound by the broker’s transactions.
Case Study – P. Krishna Bhatta v. Mundila Ganapathi Bhatta (1919)
In this case, a person appointed an agent to manage his property. The court held that the agent’s
actions, done within the scope of authority, were binding on the principal.
2. Delegation of Authority
The principal transfers certain responsibilities to the agent, allowing them to perform tasks on
their behalf.
Example: A travel agency (agent) books tickets for passengers on behalf of an airline company
(principal).
Case Study – Syed Abdul Khader v. Rami Reddy (1979)
An agent was authorized to sell land but exceeded his authority. The Supreme Court ruled that
the agent could not bind the principal beyond the given authority.
3. Binding Effect of Agent’s Actions
The acts of the agent, done within their authority, legally bind the principal in dealings with
third parties.
Example: A salesperson in a car showroom (agent) sells a car on behalf of the company
(principal). The company must honor the sale even if the salesperson made the deal.
4. No Requirement of Consideration
A contract of agency does not require consideration (payment). An agent may work voluntarily
or for a commission.
Example: A family member (agent) sells property on behalf of another family member
(principal) without charging any fee.
5. Fiduciary Duty of Agent
The agent must act in good faith, in the best interest of the principal, and avoid conflicts of
interest.
Example: A lawyer (agent) must protect the client’s (principal's) interest and not represent the
opposing party.
6. Contractual and Legal Obligations
The agent’s actions create rights and liabilities for the principal in relation to third parties.
Example: A real estate agent (agent) negotiates a lease agreement on behalf of a landlord
(principal). The tenant deals directly with the agent, but the lease legally binds the landlord.
Case Study – National Bank of India v. Sohan Lal (1965)
An agent collected payments for a bank but misused the funds. The court ruled that since the
agent was legally appointed, the bank had to bear the loss.
7. Competence of the parties to enter a contract of agency-
Section183: 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.
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
became an agent, so as to be responsible to his principal according to the provisions in that
behalf herein contained.

Creation of Agency
The relationship of principal and agent may be created in and one of the following
five ways which are

Creation of
Agency

Expressed Implied Operation

Ratification
Agreement Agreement of Law

By Holding By
By Estoppel Out Necessity

1. By Express agreement:
Ordinarily the position given by the principal to his agent is an express expert, in such
a case the agent might be selected either by the words expressed or composed.
 An agent's actions bind both the principal and the third party if they act within their
given authority. This authority comes from the contract of agency, which can be either
express or implied.
Section 186 states that an agent’s authority can be express (clearly stated) or implied
(understood from actions).
Section 187 explains that an express authority is given through spoken or written
words, while implied authority is understood from circumstances or usual business
practices.
Example:
A, who lives in Delhi, owns a farm in Mumbai. He appoints B as his caretaker through
a Power of Attorney (a legal document). This creates an express agency relationship
between A (principal) and B (agent).
2. By Implied Agreement
According to Section 187 of the Indian Contract Act, an agency can be implied from
circumstances, spoken or written words, or the usual course of dealing.
Partners, servants and wives are usually regarded as agents by implication because of
their relationship.
Examples of Implied Agency
a) Car Accident Case – A owns a car but cannot drive. He allows his neighbour B to drive
it. While driving with A, B causes an accident and injures C. Since B was driving with
A’s permission, he becomes A’s implied agent, and C can sue A for damages.
b) Rent Collection Case – A and B are brothers. B owns a flat in Delhi but lives in Kanpur.
A, with B’s knowledge, rents out B’s flat, collects rent, and sends it to B, who accepts
it. Here, A is B’s implied agent, even though there was no formal appointment.
Types of Implied Agency
A. Agency by Estoppel
o Meaning: If a person, by words or actions, leads another to believe that someone
is his agent, he cannot later deny the existence of the agency.
Section 237 of Indian Contract Act,1872, provides the liability of principal
inducing belief that agent’s unauthorized acts were authorized. - ‘When an
agent has, without authority, done acts or incurred obligations to third
persons on behalf of his principal, the principal is bound by such acts or
obligations, if he has by his words or conduct induced such third persons to
believe that such acts and obligations were within the scope of the agent’s
authority.’
In the event that an individual addresses by words or leads that someone else
is his agent and third party sensibly accepts on such portrayal and goes into an
understanding, the individual who addresses so is limited by the act of others,
this is known as the agency by estoppel.
 o Example: X tells Y in front of Z that he (X) is Z’s agent. Z remains silent. Y,
believing X to be Z’s agent, enters into a contract with X. Later, Z cannot deny
the agency and must honour the contract.
B. Agency by Holding Out
o Meaning: This is similar to agency by estoppel, but here, the principal’s
positive actions make others believe a person is their agent.
o Example: A regularly allows his servant to buy goods on credit from a shop and
pays for them. Later, after the servant leaves A’s employment, he again buys
goods on A’s credit. The shopkeeper can demand payment from A because A’s
past actions "held out" the servant as his agent.
C. Agency by Necessity
o Meaning: In emergencies, a person may act as an agent without the principal’s
consent to protect their interests.
o Conditions for Agency by Necessity:
1. A real necessity must exist.
2. It must be impossible to get the principal’s instructions.
3. The agent must act in good faith (bona fide).
o Example: A milk tanker traveling from Mumbai to Delhi meets with an
accident. Since milk is perishable, the transporter sells it to avoid loss. This
sale is binding on the owner, making the transporter an agent by necessity.
3. Agency by Ratification
 Meaning: When a person acts on behalf of another without prior authorization, the
other person may approve (ratify) or reject the act. If ratified, it is treated as if the act
was originally authorized.
Ratification means subsequent acceptance and adoption of an act by the principal
originally done by the agent without authority.
According to Section 196 of ICA, 1872, “Where acts are done by one person on behalf
of another, but without his knowledge or authority, he may elect to ratify or to disown
such acts. If he ratifies them, the same effects will follow as if they had been performed
by his previous authority.”
 Types of Ratification:
o Express: Clearly stated approval.
o Implied: Approval inferred from conduct.
 Example: B, without A’s permission, lends A’s money to C. Later, C pays interest, and
A accepts it. By doing so, A implies ratification, making B’s act legally valid as if A
had authorized it from the beginning.
  Effect of Ratification:
o The agent’s previously unauthorized acts become valid and binding on the
principal.
o Ratification is retroactive, meaning it applies from the date the act was done,
not from when it was approved.
4. Agency by Operation of Law
 Meaning: In some situations, the law automatically considers one person as an agent
of another.
 Example: In a partnership, every partner is legally considered an agent of other
partners for business-related matters.

Classification of Agents
Agents can be classified based on authority given and the nature of work performed.
1. Classification Based on Authority Given:
 General Agents – Have authority to act in all matters concerning a trade or profession
or to do some act in the ordinary course of business. Their authority is continuous unless
terminated.
 Special Agents – Have authority only to act in a particular transaction, such as selling
a house or a car. Their authority comes to an end when the work is completed. Persons
dealing with a special agent must ascertain the extent of their authority.
 Universal Agents – Have unlimited authority to transact all business of the principal of
every kind. They can do all such things which the principal can lawfully do and
delegate.
2. Classification Based on Nature of Work Performed:
The most important classification of agents is based on the nature of work performed. They are
divided into:
 Mercantile (Commercial) Agents
 Non-Mercantile (Non-Commercial) Agents
Mercantile Agents:
1. Broker – An agent whose ordinary course of business is to negotiate and make contracts
for the sale and purchase of goods, etc., of which he has neither possession nor control.
He acts in the name of his principal and receives a commission (brokerage).
2. Factor – A person entrusted with the possession of goods and who has the authority to
buy, sell, or deal with the goods or merchandise. A factor usually sells goods in his own
name and has a general lien on the goods.
3. Auctioneer – An agent entrusted with the possession of goods for sale to the highest
bidder at a public auction. He has the authority to deliver goods upon receipt of payment
 and can sue for the price in his own name. However, unlike a factor, he has only a
particular lien on goods for his charges.
4. Del Credere Agent – An agent who, in consideration of extra remuneration called the
Del Credere Commission, guarantees to his principal that the third person with whom
he enters into contracts shall perform their obligations. He ensures payment to the
principal.
5. Commission Agent – A mercantile agent who buys and sells goods on behalf of his
principal and receives a commission for his services. Brokers and factors may also act
as commission agents.
6. Banker – Generally, the relationship between a banker and a customer is that of a
creditor and debtor. However, when the banker collects cheques or buys or sells
securities on behalf of his client, he acts as an agent of the customer. A banker has the
right of general lien in respect of the general balance of account.

Scope and Extent of Authority of an Agent

An agent has the authority to do all things necessary for carrying out the particular purpose for
which he has been appointed. When a person is held out as an agent for a particular purpose or
business, persons dealing with him are entitled to presume that he has the authority to do all
such acts as are necessary or incidental to that business. Such authority is called apparent or
ostensible authority of the agent, as distinguished from actual or real authority. Actual authority
is created by agreements to which only the principal and the agent are parties.
General Authority – An agent has the power to do everything necessary to fulfill the purpose
for which they were appointed.
Types of Authority:
 Actual (Real) Authority – Created by an agreement between the principal and the
agent.
 Ostensible (Apparent) Authority – Third parties assume the agent has the authority
to perform all acts necessary for the business unless restricted by the principal.
Legal Provisions (Sections 188 & 237 of the Indian Contract Act):
 Section 188: An agent with authority to perform an act or run a business can do
everything necessary for it. Example: If A hires B to manage a ship-building business,
B can buy timber and hire workers.
 Section 237: If an agent acts beyond their authority, but the principal's behavior makes
third parties believe the agent had the power, the principal is still bound. Example: If A
instructs B not to sell goods below a set price but B sells at a lower price without C
knowing, A must honor the contract.
Authority in Emergencies (Section 189):
 In emergencies, an agent can take necessary actions to prevent loss, as a reasonable
person would in their own case.
  Example: In Sims & Co. v. Midland Rail Co., a railway company sold butter that was
at risk of spoiling due to transit delays. Since it was impossible to contact the owner,
the sale was considered valid.

Rights, Duties, and Liabilities of an Agent

Rights of an Agent
 Right to claim reimbursement for expenses-
o Section 217 of ICA provides that an agent had the right to retain, out of the
money received on behalf of the principal, money advance or
expenses properly incurred in conducting the agency business.
 Right to receive remuneration-
o According to Section 19, an agent also has a right to claim remuneration as
may be payable to him for acting as an agent.
 Right to indemnification against consequences of all lawful acts-
o Under Section 222 of the Indian Contract Act, 1872, enables the agent to have
a right to be indemnified by the principal against the consequences of all lawful
acts done in exercise of his authority.
o In Sheikh Farid Bakhsh v. Hargulal Singh (1936), the Allahabad High
Court said that the principal must pay the remuneration as soon as the agent
has substantially performed all the tasks, they have contracted him to perform.
 Right to Compensation-
o According to Section 225 of the Indian Contract Act, 1872, it entitles
the agent to compensation in the event of any injury or loss he suffers
because a principal lacks skill or competency.
 Right of Lien-
o Section 221 of the Indian Contract Act, 1872 says that where the agent is not
paid lawful charges, remunerations, or expenses by his principal and the
goods are under his control. He can keep the goods until the principal pays the
lawful charges.
Duties of Agent
 Duty to Execute the Mandate-
o Section 211 of the Indian Contract Act, 1872 bounds an agent to conduct the
business of his principal according to the principal’s directions or in the
principal’s absence, according to the custom of trade.
o In Pannalal Janakidas v. Mohanlal (1950), the Supreme Court held the
agent liable to compensate the principal. Here, the principal told the agent to
get the goods insured. The agent charged the premium from the principal but
never got the insurance.
 Duty to Act with Care and Skill-
o Section 212 of the Indian Contract Act, 1872 covers another role of the agent.
This law requires an agent to conduct agency business with due care and
caution.
o In Jayabharathi Corporation v. PN Rajshekara Nadar (1991), the Supreme
Court said that where the agent misinforms the principal, and the loss occurs
because of his misconduct, he is liable to the principal.
 Duty to Render Proper Account-
o Section 213 of ICA, 1872 binds the agent to render proper accounts to the
principal on demand. He must explain those accounts to the principal and
produce the vouchers in support of the entries.
 Duty to Communicate with the Principal-
o As per Section 214 of the Indian Contract Act,1872, in cases of difficulty, it
is the agent’s duty to use all reasonable diligence in communication with his
principal and seeking to get his instructions.
 Duty Not to Deal on His Account-
o If the principal wishes to deal on his behalf in the agency’s business, the agent
must disclose all material circumstances that have come to his knowledge. He
must also get consent from the principal. Non-observance of this duty may lead
to:
 Under Section 215 of the Contract Act, the principal may repudiate the
transaction and disclaim all losses.
 Under Section 216 of the Contract Act, the principal may claim from
the agent any benefit which may have resulted in him from the
transaction.
 Duty Not to Delegate His Authority-
o An agent must not delegate his authority to a sub-agent.
 Duty to Protect and Preserve the Interest-
o Under Section 209 of the Indian Contract Act, when the principal’s death or
unsoundness causes the termination of the agency, the agent must protect and
preserve the interests entrusted to him on behalf of the representative of the
deceased principal.
 Duty to Pay Sums Received-
o As per Section 218 of the Indian Contract Act, the agent must pay
his principal all sums received on his account after retaining all money due to
him regarding advances made or expenses properly incurred by him while
conducting the business.
Liability of an Agent
An agent is generally not personally liable for the contracts entered into on behalf of the
principal, provided he acts within the scope of his authority. However, there are certain
circumstances where an agent can be held personally liable:

 When Acting Without Authority – If an agent acts beyond their actual or ostensible
authority, the principal is not bound by such acts, and the agent may be personally liable
for any loss suffered by the third party.
 When Contracting in Own Name – If an agent does not disclose that they are acting on
behalf of a principal and enters into a contract in their own name, they may be personally
liable.
 Foreign Principal – If the principal is a foreign entity and not based in the country where
the contract is made, the agent may be held liable unless there is an express agreement
stating otherwise.
 Agent Personally Guarantees Performance – If an agent provides a personal guarantee for
the performance of a contract, they will be liable in case of non-performance by the
principal or third party.
 Del Credere Agent Liability – A del credere agent guarantees payment by the third party
to the principal and, in case of default, is personally liable for the amount due.
 Fraud or Misrepresentation – If an agent commits fraud or misrepresents facts while
making a contract, they can be held personally liable for the consequences.
 Breach of Duty – An agent is liable if they fail to perform their duties with reasonable care,
skill, and diligence, leading to a loss to the principal.
 Liability for Torts – If an agent commits a wrongful act (e.g., fraud, negligence) while
performing their duties, they can be personally liable, even if acting on behalf of the
principal.

Rights, Duties, and Liabilities of a Principal

Rights of a Principal
The principal has several rights concerning the agent’s conduct and obligations:
 Right to Demand Proper Performance – The principal can expect the agent to act within
their authority and perform tasks with reasonable skill and diligence.
 Right to Be Indemnified – If an agent acts beyond their authority and causes a loss, the
principal has the right to be compensated.
 Right to Receive Accounts – The principal can demand full disclosure and accounts of all
transactions conducted by the agent on their behalf.
 Right to Dismiss the Agent – If an agent acts dishonestly, negligently, or in breach of duty,
the principal has the right to terminate their authority.
 Right to Recover Secret Profits – If the agent earns unauthorized commissions or benefits
from third parties, the principal has the right to claim those profits.
Duties of a Principal
A principal must fulfill certain obligations towards the agent:
 Duty to Pay Remuneration – The principal must compensate the agent for their services,
as agreed upon.
 Duty to Reimburse Expenses – If the agent incurs legitimate expenses while performing
their duties, the principal must reimburse them.
 Duty to Indemnify for Lawful Acts – If an agent suffers a loss while acting lawfully within
their authority, the principal must indemnify them.
 Duty Not to Interfere – The principal should allow the agent to perform their work without
unnecessary interference.
Liability of a Principal
A principal is legally responsible for the actions of their agent under certain circumstances:

 Liability for Acts of Agent Within Authority – The principal is bound by the agent’s acts
when they act within their actual or ostensible authority.
 Liability for Agent’s Contracts – If an agent enters into a contract within their authority,
the principal is liable for fulfilling its terms.
 Liability for Agent’s Misconduct – If the agent commits fraud or misconduct while acting
within their authority, the principal may also be held responsible.
 Liability to Third Parties – If an agent makes commitments to third parties on behalf of the
principal, the principal must fulfill those commitments.

Termination of Agency
Section 201 of the act, 1872 describes the various modes of termination of agency.
 Termination of agency by act of the parties: -
o Agreement
 The relation of principal and agent, like any other agreement, may
be terminated at any time and at any stage by the mutual agreement
between the principal and the agent.
o Revocation by principal
 According to Section 203, ICA,1872 the principal may
revoke the authority of the agent at any time before the agent has
exercised his authority so as to bind the principal unless the agency is
irrevocable.
o Renunciation by agent
 An agent is entitled to renounce his power by refusing to act or
by notifying the principal that he will not act for the principal.
 Termination of agency by operation of law-
o Performance of the contract-
 Where the agency is for a particular object, it is terminated when
the object is accomplished or when the accomplishment of the object
becomes impossible.
o Expiry of time-
 When the agent is appointed for a fixed period of time, the agency
comes to an end after the expiry of that time even if the work is not
complete.
o Death and insanity-
 As per Section 209 of ICA,1872, When the agent or the principal dies
or becomes of unsound mind, the agency is terminated.
o Insolvency-
 The insolvency of the agent, it is accepted, also terminate the agency
unless the acts to be done by the agent are merely formal acts.
o Destructions of subject matter-
 An agency which is created to deal with a certain subject-matter comes
to an end by the destruction of the subject-matter.
o Principal and Agent becoming Alien company-
 The contract of agency is valid so long as the countries of the principal
and the agent are at peace. If war breaks out between the two
countries, the contract of agency is terminated.
o Dissolution of a company-
 When a company is dissolved, the contract of agency with or by the
company automatically comes to an end.
 Termination of
Agency

By act of the By operation of

parties law

Performance of
Agreement
Contract

By Principal Expiry of time

By Agent Death or insanity

Insolvency of the
Principal

Destruction of
Subject matter

Dissolution of
Company

Principal or
agent becoming
alien enemy