Agency Under Indian Contract Act

Modern commercial and business transactions rarely take place directly between parties. In many situations, individuals or organisations conduct business through representatives who act on their behalf. The law recognises this arrangement through the concept of agency. The law relating to agency plays a crucial role in facilitating trade, commerce, and contractual dealings.

The Indian Contract Act, 1872 contains detailed provisions governing agency under Chapter X (Sections 182 to 238). These provisions regulate the relationship between the principal, the agent, and third parties. The law determines how authority is granted, how acts of agents bind principals, and how rights and duties arise between the parties involved.

The law of agency is significant because most business operations function through representatives such as brokers, auctioneers, managers, insurance agents, commission agents, and other intermediaries. The relationship of agency allows one person to legally represent another in transactions with third parties. Understanding the nature of this relationship is therefore essential in contract law and commercial law.

Meaning of Agency

Agency refers to a legal relationship in which one person authorises another to act on his behalf in dealings with third parties. The person who grants authority is called the principal, while the person who acts on behalf of the principal is called the agent.

The essential feature of agency is representation. The agent represents the principal in contractual or commercial transactions. When the agent acts within the scope of authority, the acts performed by the agent legally bind the principal as if the principal had personally performed those acts.

Agency allows a principal to conduct business through another person without being physically present. This is particularly useful when business operations are conducted across different locations or require specialised expertise.

Definition of Principal and Agent

The Indian Contract Act, 1872 defines these terms in Section 182.

An agent is a person employed to do any act for another person or to represent another person in dealings with third parties.

The principal is the person for whom the act is done or who is represented by the agent.

Thus, the principal grants authority, and the agent exercises that authority while dealing with third persons. The actions of the agent create legal relationships between the principal and the third party.

Parties to an Agency Relationship

A contract of agency usually involves three parties.

Principal

The principal is the person who authorises another person to act on his behalf. The principal delegates authority to the agent and becomes bound by acts performed by the agent within the scope of that authority.

Agent

The agent is the person appointed by the principal to perform certain acts or represent the principal in dealings with third persons.

Third Party

The third party is the person with whom the agent enters into transactions on behalf of the principal. The contract created by the agent binds the principal and the third party.

For example, if a businessman appoints a representative to purchase goods on his behalf, the businessman becomes the principal, the representative becomes the agent, and the seller of the goods becomes the third party.

Essentials of a Contract of Agency

Certain essential elements must exist for a valid agency relationship.

Competence of the Principal

According to Section 183 of the Indian Contract Act, any person who has attained the age of majority and is of sound mind may employ an agent. In other words, any person competent to contract may appoint an agent.

Minors and persons of unsound mind cannot appoint agents because they lack contractual capacity.

Capacity of the Agent

Section 184 provides that, as between the principal and third persons, any person may become an agent. However, a person who is not of the age of majority and of sound mind cannot be held responsible to the principal.

This means that although even a minor may technically act as an agent in certain circumstances, such a person cannot be held personally liable to the principal.

Consideration Not Necessary

Unlike most contracts, a contract of agency does not require consideration. Section 185 of the Indian Contract Act states that no consideration is necessary to create an agency.

The absence of consideration does not affect the validity of the agency relationship. However, this does not deprive the agent of the right to remuneration where payment for services has been agreed or is customary.

Creation of Agency

An agency relationship may arise through several methods recognised by law.

Agency by Express Agreement

Agency is commonly created through an express agreement between the principal and the agent. The appointment may be made either orally or in writing.

In such cases, the principal clearly authorises the agent to perform certain acts or represent him in transactions with third parties.

Agency by Implied Agreement

Agency may arise from the conduct of the parties or the circumstances of the case. Even without a formal appointment, the behaviour of the parties may indicate the existence of an agency relationship.

For example, if the owner of a shop allows a manager to regularly purchase goods on behalf of the business, the manager may be considered an agent by implication.

Certain relationships often give rise to implied agency, such as those between partners, servants, or managers acting within the scope of their employment.

Agency by Necessity

Agency by necessity arises when a person acts on behalf of another without authority in order to protect that person’s interests during an emergency.

For example, a ship’s master may borrow money to repair the ship when the owner cannot be contacted and the repairs are necessary for the completion of the voyage.

In such circumstances, the law recognises the person as an agent because the actions are taken under pressing conditions for the benefit of the principal.

Agency by Estoppel

Agency by estoppel arises when a person, by words or conduct, creates the impression that another person is authorised to act as his agent. If a third party relies on this representation and enters into a transaction, the principal cannot later deny the authority of that person.

Section 237 of the Indian Contract Act states that when a principal induces a third party to believe that certain acts of an agent were authorised, the principal becomes bound by those acts.

Agency by Holding Out

Agency by holding out is closely related to estoppel. When a person allows another to represent himself as an agent in the course of business and does not object to it, the law treats the relationship as an agency.

For example, a manager regularly acting on behalf of a business may be considered an agent because the principal has allowed such representation.

Agency by Ratification

Ratification occurs when a person adopts an act performed on his behalf without prior authority.

According to Section 196 of the Indian Contract Act, when acts are done by one person on behalf of another without authority, the latter may choose to ratify or reject those acts. If the acts are ratified, the same legal consequences follow as if the authority had existed from the beginning.

Ratification may occur through express approval or through conduct that clearly indicates acceptance of the act.

Classification of Agents

Agents may be classified into different types depending on the nature of authority and the scope of duties.

Special Agent

A special agent is appointed to perform a specific act or transaction. The authority of such an agent is limited to a particular purpose.

For example, an agent appointed to sell a specific house is a special agent.

General Agent

A general agent is authorised to conduct all acts relating to a particular trade or business. The authority of a general agent is wider than that of a special agent.

Managers and business representatives often fall within this category.

Universal Agent

A universal agent possesses very wide authority and may perform almost all acts on behalf of the principal. Such authority is rarely granted because it allows extensive control over the principal’s affairs.

Mercantile Agents

Commercial or mercantile agents operate in business and trade. The Sales of Goods Act, 1930 defines a mercantile agent as a person who has authority in the customary course of business to sell goods, consign goods for sale, buy goods, or raise money on the security of goods.

Examples include:

• Factors
• Brokers
• Auctioneers
• Commission agents
• Del credere agents

Non-Mercantile Agents

These agents operate outside commercial trading activities. Examples include:

• Attorneys
• Solicitors
• Insurance agents
• Clearing and forwarding agents

Authority of an Agent

Authority refers to the legal power granted to an agent to act on behalf of the principal.

Authority may be either express or implied.

Express Authority

Authority is considered express when it is granted through spoken or written words. In such cases, the scope of authority is clearly stated by the principal.

Implied Authority

Implied authority arises from the nature of the agent’s position, the circumstances of the case, or the conduct of the parties.

This authority enables the agent to perform acts that are necessary or usual for carrying out the principal’s business.

For instance, a manager of a shop generally has implied authority to purchase goods required for the business.

Sub-Agent and Delegation of Authority

An agent is generally expected to perform the duties entrusted by the principal personally. The principle delegatus non potest delegare means that a person to whom authority is delegated cannot further delegate it.

However, in certain circumstances an agent may appoint a sub-agent.

A sub-agent is a person employed by and acting under the control of the original agent in the business of the agency. The sub-agent works under the supervision of the agent rather than directly under the principal.

Duties of an Agent

The Indian Contract Act imposes several duties on the agent to ensure that the interests of the principal are protected.

• Duty to Follow Instructions: According to Section 211, the agent must conduct the principal’s business according to the directions given by the principal or according to the prevailing customs of the trade in the absence of such directions. In Pannalal Janakidas v Mohanlal (1950), the Supreme Court held an agent liable for failing to follow the instructions of the principal. The principal had directed the agent to insure goods, but the agent failed to obtain insurance after collecting the premium. The agent was required to compensate the principal for the resulting loss.
• Duty to Act with Care and Skill: Under Section 212, an agent must perform duties with reasonable care, diligence, and skill. In Jayabharathi Corporation v PN Rajshekara Nadar (1991), the Supreme Court held that an agent who misinforms the principal and causes loss due to misconduct is liable to the principal.
• Duty to Render Proper Accounts: According to Section 213, the agent must provide proper accounts of transactions whenever demanded by the principal.
• Duty to Communicate with the Principal: Section 214 requires the agent to use reasonable diligence in communicating with the principal and seeking instructions whenever difficulties arise.
• Duty Not to Deal on Own Account: An agent must not deal in the business of the agency for personal benefit without the consent of the principal. Under Section 215, the principal may repudiate the transaction if the agent acts without disclosure. Under Section 216, the principal may claim any benefit gained by the agent from such dealings.
• Duty Not to Delegate Authority: An agent must generally perform duties personally and should not delegate authority to another person without permission.
• Duty to Protect the Principal’s Interest: According to Section 209, when an agency terminates due to the death or unsoundness of the principal, the agent must take reasonable steps to protect the interests of the principal.
• Duty to Pay Sums Received: Section 218 requires the agent to pay to the principal all money received on his behalf after deducting expenses properly incurred.

Rights of an Agent

The law also grants several rights to agents in order to protect their interests.

• Right to Reimbursement of Expenses: Under Section 217, an agent may retain out of the money received on behalf of the principal any expenses properly incurred while conducting the business.
• Right to Remuneration: An agent is entitled to remuneration for services rendered where payment has been agreed or is customary. In Sheikh Farid Bakhsh v Hargulal Singh (1936), the Allahabad High Court held that the principal must pay remuneration once the agent has substantially performed the duties for which he was appointed.
• Right of Lien: According to Section 221, an agent may retain the principal’s property until lawful charges, remuneration, or expenses are paid.
• Right to Indemnity: Under Section 222, the principal must indemnify the agent against the consequences of all lawful acts performed within the scope of authority.
• Right to Compensation: Section 225 allows the agent to claim compensation for injury or loss caused by the principal’s lack of skill or negligence.

Termination of Agency

The relationship between principal and agent may terminate in several ways.

Termination by Act of Parties

• Mutual Agreement: The agency relationship may be terminated by mutual consent of both parties.
• Revocation by Principal: Under Section 203, the principal may revoke the authority of the agent at any time before the authority has been exercised so as to bind the principal.
• Renunciation by Agent: The agent may also terminate the agency by renouncing the authority and notifying the principal of the intention not to act further.

Termination by Operation of Law: Agency may also terminate automatically in certain circumstances.

Performance of the Contract: If the agency is created for a specific purpose, it terminates once that purpose is accomplished.

Expiry of Time: When an agent is appointed for a fixed period, the agency ends after that period expires.

Death or Insanity: If either the principal or the agent dies or becomes of unsound mind, the agency relationship terminates.

Insolvency: Insolvency of the principal may also terminate the agency relationship.Destruction of Subject Matter: If the subject matter of the agency is destroyed, the agency automatically comes to an end.

Dissolution of Company: Where the principal is a company, dissolution of the company results in termination of the agency.

Conclusion

The law of agency under the Indian Contract Act, 1872 forms an essential part of contract law and commercial law. It provides the legal framework that allows individuals and organisations to conduct business through representatives.

The relationship between principal and agent is based on trust, authority, and accountability. The law defines how agents are appointed, how authority operates, and how rights and duties arise between the parties involved. It also determines the situations in which the acts of agents bind the principal and the circumstances in which the agency relationship may terminate.

Note: This article was originally written by Aarushi Nayyar (Chandigarh University, Gharuan) on 25 December 2020. It was subsequently updated by the LawBhoomi team on 16 March 2026.