Contract of Agency as an exception for fulfilling the requirement of having consideration in a Legally Enforceable Contract

No consideration is required to construct a contract of agency, according to Section 185 of the Indian Contracts Act 1872. As a result, when a person is appointed as an agent, his appointment agreement becomes binding. The commission is the pay for an agent, but no compensation is required at the time of the employment agreement. Section 185 of the Indian Contracts Act 1872 says “No consideration is necessary to create an agency”[1]. Contracts are normally obliged to have consideration. It is one of the requirements for a contract to be enforceable. This is clearly explained under Section 10 of the Indian Contract Act which says “all agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and are not expressly declared to be void”. This is a common tactic for attacking contracts, as demonstrating a lack of consideration can lead judges to declare the contract null and void. Consideration was originally devised as a means for judges and parties to stick to their agreements. The notion was that contracts should benefit both parties and that by giving each party something to lose if the contract failed, would incentivize them to fulfil their duties. It has also resulted in the development of various concepts, including the idea of unjust enrichment and the quantum merit principle. The principles of consideration have found widespread application and are still applicable today and hence is a vital component of any contract.

The agency contract, on the other hand, is not a typical contract. The principal users of the agency contract are people like insurance agents, auto salesmen, and so on. These agents, usually work on a commission basis and have separate contracts with their respective organizations. As a result, the authors of the Indian Contract Act recognized that requiring consideration for an agency contract could lead to exploitation and negate the objective for which this particular contract was designed. However, they recognized that this is not always the case and hence believed that it would be appropriate to make the agency contract an exception. As a result, Section 185 of the Indian Contract Act permits the creation of an agency contract without consideration, but because it is not a negative enforcement, people can still incorporate a form of compensation in the agency contract.[2]

In a number of cases, such as Allahabad Bank Ltd v Simla Banking lndl Co Ltd[3], this has been proven. In this case, the court held that “the mere fact of employment, as well as the credit obtained as a result, and the promise to act, on the one hand, are sufficient to constitute agency employment on the other”. However, in Mohd Moinuddin v Mir Ahmed Ali[4] the court reminded that an agent, under the provisions of this section, cannot be deprived of his remuneration when there is an absence of an agreement stating that he would work without remuneration.

[1] Indian Contract Act 1872 § 185.

[2] Consideration under the Indian Contract Act, 1872, TAXXMAN (June 4, 20221, 10 P.M),

[3] “Allahabad Bank Ltd v Simla Banking lndl Co Ltd AIR 1952 TC 99”.

[4] “Mohd Moinuddin v Mir Ahmed Ali AIR 1965 AP 409”

Aishwarya Says:

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