CONTRACT OF AGENCY

A. INTRODUCTION
In the present day, carrying on a business is a complex affair and an individual single
handedly cannot carry on a business successfully. He has to do things through other persons
only.
Thus when he makes a contract through another person, he is called the Principal and
the other person is called the agent and the relationship between him and the other person is
called agency.
A person who has capacity to contract may enter into a contract with another.
(i) Either by himself or (ii) Through another person
If he adopts the latter course, he is said to be acting through an agent. 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
The function of an Agent is to bring his principal into contractual relations with third
parties. The agent is thus a link between the principal and third parties.
B. DEFINITION:
Sec. 182 of the Indian Contract Act defines an agent thus: An agent is a person
employed to do any act for another or to represent another in dealings with third persons.
The person for whom such act is done or who is so represented is called the Principal.
In Krishna Vs. Ganapathi, AIR 1955 Mad 648:
Justice Ramaswami defines an agent thus when a person acts as a representative of
the other in business negotiations, i.e. in the creation, modification or termination of
contractual obligations between that other and third person, that he is an agent representative
character and derivative authority may briefly be said to be the distinguishing feature of an
agent.
C. ESSENTIALS OF AGENCY:
1. Any person who is a major and of sound mind may employ an agent. A minor, lunatic or
a drunken person cannot employ an agent. A minor, lunatic or a drunken person cannot
employ an agent. The appointment of an agent involves a contract. so, a minor etc., cannot
appoint an agent and such persons are declared to be incapable of choosing an Agent. (Sec.
183)
K. Ramachandra Road V. State of A.P. 2005 (2) CTC 417:
The A.P. High Court held that Sec.142 of Negotiable Instrument Act does not
specifically state that payee in due course of dishonoured cheque should personally file a
complaint. In absence of such specific provision, complaint could be preferred by duly
appointed power of Attorney Agent of payee in due course.
2. Agency depends upon agreement and not on contract. Any person may become an agent.
So even a minor or a person unsound mind may be an agent. In such cases, the principal is
liable for acts done by such agents. No consideration is necessary to create an agent. The
principal agreeing to be represented by the agent is a sufficient for the principal to create a
contract of Agency.
3. If a person intends to act on behalf of another, then agency relation is created and the
contract between the parties need not provide that there is any such relationship. To be an
agent, one must not act on his principal.
4. The person who is an agent need not have contractual capacity as he does not make
contracts on his behalf. So, even a minor may be an agent. If an incompetent person is

appointed as agent, the principal is liable to the third party for his acts. So, in the interest of
the Principal, the Agent should have contractual capacity.
D. PRINCIPLES OF AGENCY
The principles of agency are based on the following two rules:
1. Whatever a person can do personally, he can do through an agent. But, for acts which
are to be performed personality, the principle of agency cannot be applied.
2. He who does an act through another, does it by himself. Qui facit per alium
perse. It means that the acts of an agent are acts of the Principal.
E. TESTS OF AGENCY
There are two tests to determine the existence of agency:
i.
Loon Karan Vs. John & Co., AIR 1967, All 308 :
The Court must examine the true nature of the relationship and the functions and
responsibilities of the alleged agent to determine the existence of agency.
ii.
To determine the existence of agency, it has to be seen whether the alleged agent has
the authority to represent his principal in dealings with third parties.
F. AGENT AND PRINCIPAL:
Definition of agent:
Section 182 of the Act defines an agent as a person employed to do any act for
another or to represent another in dealings with third persons.
For e.g., appoints B to buy 200 bags of wheat on his behalf. Now B purchases the
wheat from C. There is a contract between A and C. Now A is the principal and B is the
agent.
Thus an agent has the representative capacity coupled with the power to affect the
legal relations of the principal with third persons.
Definition of Principal:
The person for whom any act is done or who is so represented by an agent is called
the principal. (Sec. 182) Any person who is of the age of majority according to the law to
which he is subject and who is of sound mind can become a principal (Sec. 183). As such a
lunatic or a minor or a drunken person cannot act as a principal.
G. DIFFERENCE BETWEEN AGENT AND SERVANT:
Agent
1. An agent is employed to bring the principal into legal relations with third person/s.
2. An agent is not subject to the direct control and supervision of the principal.
3. An agent is bound to follow all reasonable orders given to him b y the principal.
4. An agent has vast discretion and as such, he is not a servant.
5. An agent may work for several principals at the same time.
6. An agents remuneration is in the form of salary commission, brokerage, etc.
Servant:
1. A servant does not create legal relations with third persons.
2. He acts under the direct control and supervision of his employer.
3. He is also bound to follow all reasonable orders given to him in the course of his
employment.
4. He can be employed specially to act as an agent.
5. A servant usually serves only one master.
6. A servants remuneration is generally by salary or wages.
H. DIFFERENCE BETWEEN AGENT AND INDEPENDENT CONTRACTOR:
The main difference between an agent and independent contractor is as
follows.

i.

Agent acts on behalf of another person called principal. He works under the
control of the principal and he represents and principal in dealing with other
persons.
The independent Contractor, though employed to act on behalf of another,
does the work independently of the employers control or interference. He also
does not represent his employer in dealing with third persons.
ii.
Agent is paid commission, whereas independent contractor gets his payments for
contract work as the work progresses.
iii.
An independent contractor generally buys his own materials, engages his own
labour and does the work in a manner suitable to himself, whereas an agent acts
on behalf of and on the direction of the principal. He does not invest his own
money or material or men for the work of the principal.
H. DIFFERENCE BETWEEN AGENT AND BAILEE:
1. The relationship of bailor and bailee exists till the bailee holds some goods belonging
to the bailor. But in the case of an agent, it is not so. An agent may hold a part of his
principals property and the principal may be liable for that part.
2. Any agent is the representative of the principal and can contract on his behalf. But a
bailee is not considered as a representative and he cannot contract on behalf of the
bailor.
3. A bailee receives possession of the goods from the bailor for a specific purpose. Many
agents like brokers, real estate agents are not bailees since they do not get any
possession of goods.
4. Bailees do not represent bailers, but agent represent principals.
I. DIFFERENCE BETWEEN AGENT AND TRUSTEE:
Both the agent and trustee have fiduciary relationships with the beneficiary and the
principal respectively. Both cannot act against the interests of the beneficiary / principal
respectively. Both cannot make any secret profits.
However, the trustee is the legal owner of the trust property whereas an agent is not a
legal owner of the goods entrusted to him.
An agent represents the principal whereas the trustee does not represent the
beneficiary.
J. DIFFERENCE BETWEEN AGENT AND BUYER :
An independent buyer cannot be an agent, but an agent can become a purchaser when
he pays the price to his principal and discloses him the fact.
CREATION OF AGENCY
A. INTRODUCTION:
Agency is created by agreement or by conduct of the principal and / or agent.
The principal authorizes a person called agent to act on his behalf and such person
also agrees to act as his agent and thus the relation ship of agency between them is created.
The power of the agent to affect his principal arises by agreement are by the conduct
of the principal.
The following are the ways by which an agency is created:
1. Agency by Express agreement
2. Agency by Implied Agreement
3. Agency by Necessity
4. Agency by Ratification
5. Agency by Operation of Law.
B. AGENCY BY EXPRESS AGREEMENT: (Sec. 186)
Sec. 186 of the Indian Contract Act reads the authority of an agent may be express
or implied.

Sec. 187 of the Act defines express authority.

An authority is said to be express when it is given by words spoken or written.
By express authority it means oral or written authority. An agency by oral
agreement is generally valid. But in the appointment for the post of Advocate General a
written form of authority is essential.
In Companies, the appointment of an agent must be in writing and under the seal of
the Corporation. If the appointment of agent is by a deed, it is called Power of Attorney
deed.
Pole Vs. Leask:
In every case, it is only by the will of the principal that an agency is created.
Co-principals may jointly appoint an agent to act for them and in such a case, they
become jointly liable to him and may jointly sue him also
Sec. 188 speaks about the extend of agents authority. it reads an agent having an
authority to do an act, has authority to do every lawful thing which is necessary in order to do
such act.
An agent having an authority to carry on a business, has authority to do every lawful
thing necessary for the purpose or usually done in the course, of conducting such business.
Illustrations:
a. A is employed by B. residing in London, to recover at Bombay a debt due to B. a may
adopt any legal process necessary for the purpose of recovering the debt and may give
a valid discharge for the same.
b. A constitutes B his agent to carry on his business of ship builder. B may purchase
timber and other materials land hire workmen for the purpose of carrying on the
business.
C. AGENCY BY IMPLIED AGREEMENT: (Sec. 187)
Sec. 187 of the Act defines implied authority.
An authority is said to be implied when it is to be inferred from the circumstances of
the case and things spoken or written or the ordinary course of dealing may be accounted
circumstances of the case.
It means the agency is inferred from circumstances. It areises form the conduct,
situation or relationship of parties.
Illustration:
A owns a shop in Serampur, living himself in Calcutta and visiting the shop
occasionally. The shop is managed by B and he is in the habit of ordering goods from C in
the name of A for the purposes of the shop and of paying for them out of As funds with As
knowledge. B has an implied authority from A to order goods from C in the name of A for
the purposes of the shop.
Smith Vs. Moss, 1940 1 LN 424 :
The Court held that if a mother allows her son to drive a car and also pays the
maintenance expenses of the car, then the son becomes an implied agent of the mother. So
the mother is liable for the fault of his son in her capacity as principal.
Hewitt Vs. Bonvin, 1940 1 KB 188:
The borrower of a car is not regarded as an agent of the lender.
Agency by implied agreement is of three types:
a. Agency by estoppels
b. Agency by holding out
c. Agency by co-habitation
a. Agency by estoppels:

If a person by conduct or words spoken or written, will fuylly makes another person
to believe that a certain person is his agent, then he is prevented from denying subsequently
the fact of agency.
Thus if P by words spoken or written or by his conduct, holds out A as having
authority to enter into contract on his behalf, P will be bounded by the contracts made by
A.
This type of creation of Agency is called Agency by estoppels or holding out. After
the acts are done by the Agent, the Principal cannot deny agent s authority.
Sometimes as agent may do something without the principals authority. The
Principal is bound by such acts or obligation if the principal has by his words of conduct,
induced such third persons to believe that such act6s were within the scope of the agents
authority.
E.g., P entrusts A with negotiable instruments endorsed in Blank. A sells them
to T in violation of orders from P The sale is valid and binding.
Pickering Vs. Busk, 1812 KB 15, 13 RR 364:
A purchased a hemp through a broker B and allowed it to remain in the custody of
the broker. Bs business was buying ;and selling hemp. B sold the hemp for certain prince.
The Court held that the sale was binding on A as A was the principal and B was an
agent by estoppels.
b. Agency by holding out:
If a person by some positive conduct permits another person to enter into contract on
behalf of him then the first person is liable for all the acts in the course of employment of the
second person.
For e.g., a by his conduct authroize B to enter into a contract for45 A Now A is
liable for all the acts in the course of employment of B.
Kashinath Vs. Nisakar Rout:
A tahsildar was appointed to manage the landlords agricultural lands. The tahsildar
let out the lands to some tenants on certain terms. The appointment of tahsildar created an
appearance of authority which included the right to enter tenancy agreements. The Court
held that such tenancy agreements entered by the tahsildar would bind the principal namely
the landlord.
Different between Estoppel and Holding out:
Estoppel:
1. Negative conduct
2. Usually by negligence
3. Created by negative act of the principal.
Holding out:
1. Positive conduct
2. Usually by intentional and willful act.
3. Created by positive act of the principal.
C. By Co habitation (Husband and wife)
There are two situations where the wife lives with her husband and where the wife
lives separately.
i. When the wife lives with her husband:
When a man and a woman live an husband and wife, then the wife can get all
necessaries on credit from a shopkeeper. The husband is liable to the shopkeeper. The
husband is liable to the shopkeeper for the articles sold to the wife.
This co-habitation liability extends to lovers and mistresses but not to prostitutes.
To make the husband binding for the credit purchase made by the wife, the following are the
conditions:

1. The husband and wife should be living together.

2. The husband and wife must be living together in a domestic establishment of their
own. Mere fact of marriage or merely living together is not sufficient.
3. The wife can make here husband liable for the expenses of her own necessaries,
suited to the style in which the husband chooses to live.
4. The wife can make her husband liable only for supply of necessaries.
Pacquin Ltd., Vs. Beaucterk, 1906 AC 148:
If these (above four) conditions are fulfilled, then it is immaterial whether the trader
did or did not know that the buyer was really a married woman.
Girdhari Lal Vs. Crawford:
The husband can escape liability to pay to the trader by proving the following.
a. That he has expressly forbidden his wife from buying things on credit.
b. That he has expressly warned the trader not to supply goods on credit to his wife.
c. That the trader knew that the wife had been given sufficient money to buy the goods.
d. That the wife was already supplied with sufficient quantity of articles.
e. That the goods purchased were not necessaries.
ii. When the wife live separately:
a. If the wife is living apart, she can claim reasonable maintenance. This applies to
cases where the wife is deserted by the husband for no fault of her.
b. If she is living apart without any justification, she cannot get this benefit.
c. If the wife is forced to live separately from her husband, then she can buy necessaries
of life on credit.
d. Under law, a husband is bound to maintain his wife and if he does not maintain, wife
is treated as the implied agent of her husband and hence the husband is liable for
necessaries applied on credit.
D. AGENCY LBY NECESSITY:
In Jebara Vs. Ottoman, 1928, AC 269:
Agency of necessity develops from an original and subsisting agency and only applies
itself to unforeseen events not provided for in the original contract.
Thus in certain circumstances, the law may compel a person to act as an agent for
another person without the principals consent. Such agency is called as Agency by
necessity.
It arises under the following three circumstances:
a. Agents authority in an emergency
b. Protection of property of another
c. Wife as husbands agent of necessity.
a. Agents authority in an emergency: (Sec. 189)
Sec. 189 of Indian Contract Act speaks about agents authority in an emergency.
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.
Illustrations:
a. An agent for sale may heave good repaired if it be necessary.
b. A consigns provisions to B at Calcutta, with directions to send them immediately to C
and Cuttack. B may sell the provisions at Calcutta, if they will not bear the journey to
Cuttack without spoiling.
When an agent exceeds his authority in emergency, agency of necessity is created.
Following are the conditions for emergency
i.
The agent must not be in a position to communicate with the Principal. The
Communication must be practically impossible.

ii.

He must have taken reasonable and necessary steps to protect the interest of the
principal.
iii.
He must have acted bonafide, with the interests of all the parties concerned.
iv.
An actual emergency must exist.
v.
That the course taken was the only one practicable in the emergency.
E.g. P directs a at Madras to send certain goods immediately to T at Bombay.
A may sell the goods at madras if they will not bear the journey to Bombay without
spoiling.
b. Protection of property of another:
If a person is entrusted with some property of another which he has to protect, an
agency of necessity arises. Here, there may not be an express agreement.
E.g. Master of a ship becomes Agent of necessity for the cargo owner and he can take
any stepto preserve them. i.e. he can dispose of the damaged of perishable goods without
getting authority from the owner of the goods.
Great Northern railway vs. Shaffield:
A house was sent in train. When it arrived at the destination no one took its delivery.
The railway company had to feed the horse, and thus actyed as an agent of necessity and so
could recover compensation for the amount spent on feeding the horse.
Couturier Vs. Hastie:
The master of ship found that the cargo of the ship was perishing. he sold the goods
for the best prince available at the nearest port. The Court held that the sale was valid and
binding on the Cargo-Owner.
C. Wife as husbands agent of necessity
A husband is bound to maintain his wife, if he does not do so, she is entitled to pledge
her husbands credit for necessaries of life i.e., get the necessary articles on credit form a
shop keeper suitable to their living style. Here the wife is the agent and the husband is the
principal. he is bound by her acts. If the wife is living with the husband, there is implied
authority for the wife to buy articles of house hold necessity.
If the husband deserts the wife for no fault of her and does not maintain her, she is
entitled to get necessaries. The husband can be sued by the creditiors concerned as the wife
is regarded in such circumstances as an agent of necessity.
E. AGENCY BY RATIFICTION (BY CONFIRMATION OR APPROVAL) (Sec. 196 to
Sec. 200)
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.
ii. Sec. 197 Ratification may be expressed or implied:
Ratification may be expressed or may be implied in the conduct of the person on
whose behalf the acts are done.
Illustrations:
a. A, without authority buys goods for B. Afterwards B sells them to C, on his own
account Bs conduct implied a ratification of the purchase made for him by A.
b. A, without Bs authority, lends Bs money to C. Afterwards B accepts interests on the
money from C. Bs conduct implies a ratification of the loan.
iv.
Sec. 198. Knowledge requisite for valid ratification:
No valid ratification can be made by a person whose knowledge of the facts of the
case is materially defective.
iv. Sec. 199. Effect of ratifying unauthorized act forming part of a transaction:

A person ratifying any unauthorized act done on his behalf ratifies the whole of the
transaction of which such act formed and part.
v. Sec. 200 Ratification of unauthorized act cannot injure third person:
An act done by one person on behalf of another, without such other persons
authority, which if done wife authority, would have the effect of subjecting a third person to
damages or of terminating any right or interest of a third person, cannot by ratification, be
made to have such effect .
Illustrations:
a. A, not being authorized thereto by B, demands on lbahelf of B, the delivery of a
chattel, the property of B, from C, who is in possession of it.
This demand cannot be ratified by B, so as to make C liable for damages for his
refusal to deliver.
b. A holds a lease from B, terminable on three months notice. C, an unauthorized person,
gives notice of termination to A. The notice cannot be ratified by B, so as to be
binding on A.
Explanation:
1. When a person acts for another without the knowledge of authority of second
person then the second person either may accept the first persons act or reject his
act. If he accepts it, he is said to have ratified that act.
For e.g. A enters into contract on 01.03.1997 on behalf of B and without
the knowledge of B B can now accept or reject the contract entered by A
If B ratifies the contact on 01.04.1997 the contract becomes valid and it
relates back to 01.03.1997 itself.
11.The effect of agency by ratification is that, it relates back to the original
date on which is entered into by the agent. it is based on the maxim: Omni
rati habitio retro rahitur et mandato priori aequiparatur.
It means ratification of an act already done has a retrospective
effect.
111. Ratification may be express or implied on the conduct of the person on
whose behalf the acts are done.
E.g., lends ps money to T without Ps knowledge Afterwards
P accepts interest from T.Ps conduct is an implied ratification of the loan.
1V. Essentials of valid ratification:
1. The agent must state that he is acting for the principal at the time of entering into the
contract .The contract must be entered in the name of the principal.
Bolton Partners Vs.Lambert:
The managing director of a company without the companys authority by acting as its agent
accepted an offer from a third party. The company ratified the offer and hence the party was
bound to carry out the offer.
2. At the time of entering into contract by the agent, the principal must be living. The legal
heirs cannot ratify the contract entered by the promoters on its behalf before is
incorporation.
Kelner vs .Baxter:
Baxter was an agent of a company to be established in future. Baxter entered into a
contract for the purchase of a hotel from kelner. The court held that the contract could
not be ratified, because the principal i.e..; the company was not in existence at the time
of entering into the contract.
3. The principal must have the contractual capacity, both at time of contract and
ratification. If the principal is incompetent, to enter into the contract, he cannot ratify it
(should not be a minor or a lunatic)

4. The contract entered into by the agent must not be void . Void contract can never be
ratified.
5. The principal must have the knowledge of the terms of the contract. If not, the contract
is not valid.
E.g, A has authority to buy goods at the market rate. He buys it at a high rate, but
P accepts it and ratifies it. Later on, P learns that the goods belong to A , as it was
not done with knowledge of facts.
6. The principal must ratify the whole contract. There should not be any partial
or
incomplete ratification.
7. The principal must ratify the contract within a reasonable period a ratification after undue
delay is invalid.
8. Ratification can be made only if the interests of a third party are not affected
E.g., T holds a lease from P terminable on two months notice. A . an unauthorized
person, gives notice of termination to T. The notice cannot be ratified by P, as to binding
on T.
9. Ratification must be communicated to the party who is sought to be bound by the act done
by the agent.
10. The acts which the principal is incapable of doing cannot be ratified. Eg., company
cannot ratify the acts of the directors which are ultravires the powers of the company.
11. Ratification relates back to the date of the act of the agent.
e.g., A purports to be Ps agent and without his knowledge accepts an offer by T
but withdraws it even before P comes to know of it. P ratifies the act subsequently after
coming to know of it. This ratification results in a contract and binding on T.
v. No ratification:
In the following cases, ratification is not possible:
a. An agent purporting to act for a principal not in existence.
b. If the principal is incapable of entering into a contract.