Creation of Agency

Agency is a common form of contract in modern times. It revolves around a relationship between two people, one of which is authorised to act on behalf of the other with a third person. When agency is formed, the principal gets bound to be held responsible for the acts of the agent toward the third party. In this article we will find out the different ways through which agency is created.

One way of creating agency is by giving authority to a person. This is under Section 187 in the following manner:

1] Express Agency – The principal directly appoints a person competent to contract and of sound mind to be their agent. The appointment can be in oral or written form.

2] Implied Agency – In this, agency arises due to certain circumstances or conduct of parties in the case. When someone is appointed in a situation where they are assumed to act or represent the person who appoints them, they become an implied agent. In other words, principal directly does not makes a person his agent. The implied authority of the such agent depends on the kind of business he has been authorised to transact.

3] Section 188 and 189 talk about an agent’s authority in emergency situation. This is in order to protect the principal from loss. The agent may not inform the principal about it and directly take necessary action. In the words of Section 189 of the Indian Contract Act, 1872:

An agent has authority in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence in his own case, under similar circumstances.

4] As per Section 237 of the Contract Act, in cases where the agent has no direct or indirect authority given by the principal to represent him, but still due to principal’s behaviour any third person assumes that the agent is authorised to act on his behalf, then the principal cannot excuse. In simple words, it is agency by estoppel.

For example, L gave some goods to M for selling them at a certain price. N being unaware of the instruction entered into contract with M and gave less price. L will be bound to the contract.

5] In yet another situation, where there was no authority given to the agent. The principal can ratify it meaning the agent was authorised beforehand and accept liability. Section 196 explains agency arising through ratification as:

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 authority.

Section 197 says that the ratification can be express or implied.

5] In a marriage, wife is assumed to be an agent for the husband as she has to look over the necessities required for living that she buys under her husband’s authority. The husband pays for the purchases. But there are exceptions where husband would not be liable. Husband will not be responsible when he had forbidden wife to credit on his name or had told the supplier to not deliver goods to her or the husband already takes care and provides with the requirements.

Indeed, agency is a very interesting form of contract


Indian Contract Act 1872 – Bare Act

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