Definition of Agency

Lord Herschell in Kennedy v. De Trafford commented that agent has been the “more commonly and constantly abused” word. In this article we will try to understand the concept of agency and agent given in the Indian Contract Act along with relevant case laws.

Justice Desai of Supreme Court: The relation of agency arises whenever one person called the agent has authority to act on behalf of another called the principal and consents so to act. [Syed Abdul Khader v Rami Reddy, 1979 2 SCC 601]

Section 182 of the Contract Act defines an agent as ‘a person employed to do any act for another, or to represent another in dealings with third persons.’ The one who employes such a person is the principal.

This appears to be a vast definition that may include anyone from a servant to employee to a stranger. This makes it difficult to establish whether it is actually a contract of agency or not. But there is a line of difference. An agent has the power to represent the principal and impact the legal relations of the principal with the third party. This is not the case with a usual servant.

The Supreme Court of India explained the difference between an agent and a servant in Lakshminarayan Ram Gopal & Sons Ltd v Government of Hyderabad [Air 1954 SC 364]. An agent enjoys authority to create contract relations between the principal and third party which the servant lacks. A servant is obliged to do as directed by the master but agent has no such direct control of the principal over them. A servant gets salary for his service whereas the agent receives commission for their particular work.

Justice Ramaswami explained the concept of agency in P Krishna Bhatta v. Mundila Ganapathi Bhatta. The Madras High Court Judge stated that a person is an agent for someone “only when he acts as a representative of the other in business negotiations” in order to create or alter or terminate a contract “between that other and third persons.”

Justice Dhawan puts it on the court to examine whether the nature of the contract is agency or not, the person who is being called an agent has performed the functions of agent and the relationship between all the three parties is fit to be called an agency. He proposed a simple yet “crucial test” to determine the existence of agency in the following words, “… his acts bind the principal.”[Loon Karan Sohan Lal v. John & Co, AIR 1967 All 308,310-11]

This test was applied to the facts of different cases even before Justice Dhawan made a note of it which he also acknowledges in his judgment. In Mohesh Chandra Bosu v Radha Kishore Bhattacherrjee, mere giving advice related to business did not made a person an agent. State of Madras v Jayalakshmi Rice Mill Contractor Co [ILR 1958 AP 671] cleared that a procurement agent is not an agent because he does an act only for some commission and not to represent the principal.

To quote Justice Dhawan again, “It has been held in several cases 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.” Therefore, to understand whether a person can be called an agent the law considers their functions in the contract.


Indian Contract Act 1872 – Bare Act

Indian Contract Act and Specific Relief Act – Avtar Singh

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