In today's rapidly developing and globalizing world contracts are playing an
inevitable role. The Indian Contract Act, 1872 applies to the whole of India.
Section 10 of The Indian contract Act,1872 is very important because it defines
that all agreements are contracts if they are made by the free consent of
parties competent to contract, for a lawful consideration and with a lawful
object, and are not hereby expressly declared to be void.
Further, upcoming sections in The Indian Contract,1872 discusses about various
interesting and important concepts related to contracts. Sections from 1 to 75
in The Indian Contact Act,1872 explains about the General principles of
Contracts and Sections from 124 to 238 explains about the Special Contracts.
Special Contracts (i.e.) (Sections 124 to 238) consists of the following
concepts of contracts; Contract of indemnity (Sections 124 and 125), Contract of
guarantee (Section 126 to147), Contract of bailment (Section 148 to 171),
Contract of pledge (Section 172 to 181) and Contracts of agency (Section 182 to
238). In this article reader can get a basic idea about Contracts of Agency.
Further, a reader will be able to get an extensive knowledge regarding the
various methods of creation of agency.
The main aim of this article is to explain the various methods of creation of
agency in a manner which is easily understandable by everyone. For better
understanding and for acquiring extensive knowledge Table of contents, Foot
notes, citations, case laws and for further reading bibliography and
webliography is added to this article. Therefore, every reader who is reading
this article can easily understand and get the extensive knowledge about various
methods of creation of agency.
The concept of "Agency
" plays a very important role in the today's
rapidly developing commercial world. In The Indian Contract Act, 1872 Chapter X
deals with the laws which were related to creation of agency. The laws which
were related to agency are based upon the Latin maxim, "Qui facit per alium
facit per se
", which means "he who acts through another, acts himself."
Section 182 of The Indian Contract,1872 clearly defines the term's "agent" and
"principal". 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". Further we can
understand that agent plays a very important role in creating a legal
relationship between Principal and Third person.
In the case of Syed Abdul Khader v. Rami Reddy
Honourable supreme court
of India held that "the expression agency is used to connote the relation which
exists between a person occupying the position of principal and third
parties". Agent is appointed by the principal to represent him or to act on
behalf of him and the valid contract which creates a relationship between Agent
and Principal is called an Agency.
In the case of P. Krishna v. Mundila Ganapathi
High Court of Madras has
held that, agency is only when an agent acts as representative of the other in
business negotiations, that is, in creation, modification or termination of
contractual obligations, between that other and third person.  From these the
reader can get a basic idea about agency further essentials of creation of
agency and various methods of creation of agency are discussed.
Essentials Of Creation Of Agency:
In The India Contract Act, 1872 sections 183, 184, 185 specifically defines the
essentials of creation of agency. According to section 183, any person who is
the age of majority and of sound mind may employ an agent.  According to
section 184, any person may become an agent, but no person who is not of the age
of majority and of sound mind can become an agent. Further, Section 185
defines that no consideration is necessary to create an agency.
Apart from these sections following aspects like valid agreement between agent
and principal, contractual relationship, creation of legal relations and
intention of the parties must be fulfilled in order to create a valid agency.
The most important element in this relationship of agency is Consent.
The consent must come from both the parties and their intention to enter into
the relationship must be clear and legal. In an English case law Carr v. Hunt,
Court of Appeals of Texas has held that the consent is essential for the
creation of agency and the consent must be there from both sides as it shows
their intentions behind such relationship. 
Various Methods Of Creation Of Agency:
Agency can be created in various methods, following are the various methods
of creation of agency
- Agency by Express Agreement.
- Agency by Implied Agreement.
- Agency by Estoppel.
- Agency by Holding out.
- Agency by Necessity.
- Agency by Ratification.
- Agency by Operation of law.
- Agency in Husband-and-Wife relationship.
Agency by Express Agreement:
Section 186 of The Indian Contract, 1872 defines that the authority of an agent
may be expressed or implied. Therefore, an express contract of agency can be
made orally or in writing. In this context, an authority is said to be express
when it is given by words spoken or written. 
Usually, a principal appoints
an agent by making an express agreement with him. When an appointment of an
agent is made by a written agreement or by deed it is known as "Power of
Attorney". "Power of Attorney" gives the right to an agent to act on behalf of
his principal. In an Indian case law of Syed Abdul Khader V. Rami Reddy
was appointed as a caretaker of agricultural land by giving him power of
attorney to act on behalf of principal, but before the supreme court of India
the following issue that "how could three persons can appoint one single agent
and also by single power of attorney" was raised.
Here the validity of
appointment of agent was questioned, but the court held that the regarded power
to be valid and also held that it is applicable to their respective agricultural
land. Further court has also held that "the expression agency is used to connote
the relation which exists between a person occupying the position of principal
and third parties".
Agency by Implied Agreement:
Implied agency may arise from the circumstances or situations of each case and
may be from the conduct of parties also. Section 187 of The Indian Contract,1872
defines implied authority, an authority is said to be implied:
- When it is to be inferred from the circumstances of the case
- Things spoken or written
- The ordinary course of dealing, may be accounted circumstances of the
The agent's implied authority depends on the nature of business for which the
agent has been authorized. For example; an agent having authority to make a bet
has an implied authority to the payment if the bet is lost . An agent having
been authorized to sell artificial manure has an implied authority to warrant as
to the proportion of its ingredients.
A owns a furniture shop in Delhi but he lives in Tamil Nadu. The furniture shop
is managed by B in absence of A. B orders raw materials and essential
commodities for the shop from C in the name of A. Here, B has an implied
authority from A to purchase raw material and essential commodities from C.
- Agency by Estoppel:
Section 237 of The Indian Contract, 1872 deals with the agency by estoppel. In
certain situations, agent do not have implied or express authority to do an act
on behalf of his principal but the principal through his conduct creates an
impression on the mind of third person that his agent has an authority to act on
For example, if I say that I'm an agent of my friend in his presence
to a third person and if my friend does not deny the statement, then he cannot
deny me as his agent later. In such cases the principal will be liable towards
the third person for the acts done by the agent on the ground of law of estoppel,
in this context principal will be only liable if such acts and obligations were
within the scope of the agent's authority.
G entrusts F with some negotiable instruments endorsed in blank, F sells them to
C in violation of private orders from G. Here the sale is good. The
representation which creates apparent authority make to be a variety of forms of
which the commonest is representation by conduct, that is, by permitting the
agent to act in some way in the conduct of the principal's business with other
- Agency by Holding out:
Agency by Holding out arises when the conduct of a person makes the third person
to believe that person doing some act on his behalf is doing with the authority.
Agency by holding out is similar to agency by estoppel, but in case of holding
out some positive aspect of conduct by the principal is required to establish
E allows F, his servant to purchase goods for him on credit from G and later on
E pays for them. One day E gives cash to F to purchase goods. F misappropriates
the money and purchases goods on credit from G. Now G can recover the price of
the goods from E because E had held out F as his agent on earlier occasions.
- Agency by necessity:
The implied agency can also arise in case of necessity and emergency situations.
Section 189 of Indian contract Act deals with the agency by emergency or
necessity. Under section 189 of Indian contract Act,1872 an agent is
empowered to do necessary acts that protects his principal from any type loss.
Further section 188 of Indian contract Act, 1872 discusses extent of agent's
authority and it gives authority to an agent to do anything which is lawful
and beneficial for his principal. Therefore, in case of agency by necessity an
agent must acted in a bona fide manner for protection of goods or prevention of
loss to principal.
In an English case law Great Northern Railways Co. v. Swaffield, principal sent a horse to his agent through railways, but his agent
went for some other work therefore he could not receive the horse. Thus, no one
was there to receive horse on its arrival at destination.
station master received the horse and he took the necessary steps to keep the
horse alive, therefore station master was an agent of the necessity on behalf of
principal and principal has the responsibility to pay the amount which was spent
by railway company to keep the horse alive.
- Agency by Ratification:
In the Indian Contract Act, 1872 sections 196-200 deals with ratification. In
layman terms we can say that ratification is a subsequent adoption of an
activity. Ratification mainly arises where a person who do not have any
authority act as an agent, or act beyond the authority, or if the principal is
not bound by the contract with the agent. But the principal will be able to
ratify the agent's transaction or act and he can accept his liability. For a
valid ratification following essentials has to be fulfilled;
Essentials Of A Valid Ratification
- The act should be done on behalf of another person.
- Ratification may be express or implied.
- Ratification should be full knowledge of facts.
- Existence of principal and competent to enter into a contract when the
act is done.
- Ratification should be of the whole transaction.
- No damage to third parties.
- Ratification should be made within reasonable time period.
- Ratification should be done for a lawful act.
Important Case Laws Related To Valid Ratification:
Agency by operation of law:
- Saunderson v. Griffiths
In this case law the court has clarified that a person cannot ratify an act done
on behalf of his wife.
- Keighley, Maxsted & Co. v. Durant
In this case law court has clarified that an act cannot be ratified by another
person if an agent acts on his own account.
- Ashbury Railway carriage and Iron Co. Ltd v. Riche
This is a very important case law related to the ratification of a contract by
an incompetent agent. In this case it was held that if an agent purports to make
a contract on behalf of principal, who at that time is himself incapable of
making that contract, then principal cannot validate that contract by subsequent
- Irvine v. Union Bank of Australia
In this important case law privy council has observed that " A ratification is
in law treated as equivalent to a previous authority, and it follows that, as a
general rule, a person or body of persons, not competent to authorise an act,
cannot give validity by ratifying it." From this we can understand that only
contracts which were entered by valid and competent persons can be ratified.
- Savery v. King
This is an important case law related to knowledge of facts. In this case law A
entered into a mortgage agreement on behalf of B. But the agreement was invalid.
B purported to ratify the transaction without knowing the invalidity of the
agreement. Therefore, it was held that purported ratification of the same by him
was of no affect. From this we can understand the importance of communication of
facts and knowledge of facts.
Sometimes contract of agency comes into operation by virtue of law and also in
certain circumstances the law treats one person as an agent of another.
According to partnership act, every partner and other parties are considered as
the agent of the firm. We can consider it as an implied agency. Further even
under companies act promoters are considered as agents to the company.
Agency in Husband-and-Wife relationship:
Agency in Husband-and-wife relationship is also known as agency by co-habitation. Simply marriage alone won't create the relation of agent and
principal. When a man and woman are living together and they appear to be
husband and wife to a third person, the woman will be able to bind the man in
the same way as if she was his wife. If the husband and wife are living
together then there is a presumption that wife is an agent.
But this presumption
may be invalid in the following circumstances where wife is forbidden from
purchasing anything on credit or from contracting debts, Where the goods
purchased on credit are not necessaries, Where the wife is given sufficient
money or allowances and where the trader has been expressly warned not to give
credit to his wife.
If the wife lives apart from husband, then the husband is
legally bound to maintain his wife, if they were living separately without any
valid reasons then wife is not an agent. When the wife and husband are not
living in domestic establishment then husband cannot be held liable for the
purchases made by the wife.
Contracts plays a very important role in the current world where everything from
small things to extraordinary things starts from a contract. Contracts plays a
very important role in establishing a legal relationship. In the current
commercial world contract of agency plays an inevitable role. An agency is
created when a person delegates his authority to another person in order to do a
specific job or it may differ as per the nature of the job or task.
Establishment of a Principal Agent relationship through a contract confers some
rights and duties upon both the parties. In today's world as we are witnessing,
contract of agency in every possible sector is playing a very important role. By
reading this article a reader will be definitely able to get a clear idea about
various methods of creation of agency.
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