Creation of Agency Under the Indian Contract Act, 1872

Creation of agency under Indian law: understand express and implied agency, ratification, necessity, estoppel and relevant provisions of the Indian Contract Act, 1872.

Introduction

The law of agency is an important part of contract law because it enables one person to act on behalf of another in legal and commercial transactions. In modern business, individuals and organisations often rely on agents to purchase goods, negotiate contracts, collect payments and represent them before third parties.

The law governing agency in India is primarily contained in Chapter X, Sections 182–238 of the Indian Contract Act, 1872. An agency relationship arises when one person is authorised to act for another or represent that person in dealings with third parties.

Agency may be created through an express agreement, implied conduct, ratification of an unauthorised act, necessity in appropriate circumstances or estoppel. The method of creation determines whether the agent has authority to bind the principal and whether the principal is legally responsible for the agent’s actions.

Meaning of Agency

Section 182 of the Indian Contract Act, 1872, defines an agent as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom the act is done or who is represented is called the principal.

The relationship is based on the principle expressed by the maxim qui facit per alium facit per se, meaning that a person who acts through another is treated, in appropriate circumstances, as acting personally.

Example: A appoints B to purchase raw materials for A’s business. B acts as A’s agent, and a contract made by B within the scope of the authority may bind A.

The defining feature of agency is that the agent acts on behalf of the principal rather than solely on the agent’s own behalf.

Who Can Create an Agency?

Sections 183–185 of the Indian Contract Act, 1872, deal with the capacity to appoint an agent, who may act as an agent and the requirement of consideration.

• Section 183: A person who has attained majority under the applicable law and is of sound mind may employ an agent.
• Section 184: As between the principal and third parties, any person may become an agent. However, a person who is not of majority age and sound mind cannot be made responsible to the principal under the Act’s provisions governing an agent’s responsibility.
• Section 185: No consideration is necessary to create an agency.

Thus, an agency relationship does not require the same consideration that is generally necessary to support an ordinary contract. However, the authority granted and the legal consequences of the agency must still be established.

Modes of Creation of Agency

1. Agency by Express Agreement

Agency by express agreement arises when the principal directly communicates the authority granted to the agent through spoken or written words.

Sections 186 and 187 recognise express authority. Section 187 states that authority is express when it is given by words spoken or written.

An express agency may be created orally or in writing, subject to any legal requirement applicable to the particular transaction. A written power of attorney is a common example of express authority.

Example: A authorises B in writing to sell A’s car on specified terms. B becomes A’s agent for the authorised purpose.

Express authority provides evidence of the scope of the agent’s powers and helps prevent disputes about what the agent was permitted to do.

2. Agency by Implied Agreement

Agency by implied agreement arises from the circumstances, conduct or ordinary course of dealings between the parties rather than from an express statement of appointment.

Section 186 recognises implied authority, while Section 187 explains that it may be inferred from the circumstances of the case, including the parties’ conduct and ordinary course of dealing.

Example: A owns a shop but lives in another city. B manages the shop and regularly orders stock from suppliers in A’s name. A knows about these transactions and pays for the goods from A’s funds. These circumstances may establish B’s implied authority to order stock for the shop.

Implied agency must be inferred from the facts. Mere friendship, assistance or possession of another person’s property does not automatically create an agency relationship.

3. Agency by Ratification

Agency by ratification arises when a person performs an act on behalf of another without prior authority, and the person on whose behalf the act was done subsequently adopts or approves it.

Sections 196–200 of the Indian Contract Act, 1872, govern ratification. Under Section 196, a person may elect to ratify or disown an act done on their behalf without authority. If the act is validly ratified, it generally has the same effect as if it had originally been performed with authority.

The principal’s approval may be express or implied from conduct, subject to the statutory requirements.

Example: A, without prior authority, purchases goods on behalf of B. After learning the material facts, B expressly approves the purchase. If the requirements for valid ratification are satisfied, B may become bound by the transaction.

Ratification is subject to important limitations:

• The act must have been done on behalf of the person who later ratifies it.
• The person ratifying must have the necessary legal capacity.
• The principal must have sufficient knowledge of the material facts, subject to the applicable rules.
• Under Section 198, an act cannot be validly ratified where the principal’s knowledge of the facts of the case is materially defective.
• Under Section 199, ratification of an unauthorised act forming part of a transaction may extend to the whole transaction.
• Under Section 200, ratification cannot be used to subject a third person to damages or terminate a right or interest already acquired by that third person in the subject matter of the act.

Ratification therefore provides a legal mechanism for adopting certain unauthorised acts, but it cannot be used to prejudice third-party rights contrary to law.

4. Agency by Necessity

Agency by necessity may arise in exceptional circumstances where a person must act on behalf of another to protect that person’s interests and obtaining prior instructions is impracticable.

The Indian Contract Act, 1872, does not contain a separate provision expressly titled “agency by necessity.” The doctrine is recognised through general principles of agency and is relevant in circumstances where the law treats an emergency act as authorised.

Typically, the following circumstances are important:

• An emergency or necessity exists.
• It is impracticable to obtain the principal’s instructions in time.
• The action is taken in good faith to protect the principal’s interests.
• The action is reasonably necessary and proportionate to the circumstances.

Example: A transports perishable goods belonging to B. During the journey, an unforeseen emergency threatens to destroy the goods, and B cannot be contacted in time. A may be justified in taking reasonable steps, such as arranging urgent storage or sale where legally appropriate, to protect B’s interests.

Necessity does not create unrestricted authority. The action must be reasonably necessary in the circumstances, and the doctrine applies only where its legal requirements are established.

5. Agency by Estoppel or Holding Out

Agency by estoppel may arise where the principal, through words, conduct or representation, leads a third party to believe that another person has authority to act as an agent. If the third party relies on that representation in circumstances where the law permits, the principal may be prevented from denying the authority.

Section 237 of the Indian Contract Act, 1872, deals with liability arising when a principal induces third persons to believe that unauthorised acts of an agent were within the agent’s authority.

Example: A repeatedly allows B to negotiate and conclude ordinary supply contracts in A’s name. A knows that suppliers are dealing with B as A’s representative and does not correct that impression. A may be prevented from denying B’s authority in a transaction where the requirements of Section 237 and the applicable principles of estoppel are satisfied.

The doctrine protects third parties who reasonably rely on the principal’s conduct. It does not mean that any unauthorised representation by a supposed agent automatically binds the alleged principal.

6. Agency by Operation of Law

In certain circumstances, the law recognises an agency relationship because of a person’s legal status or the circumstances in which the parties operate, rather than through a separate express appointment.

Agency arising by operation of law must be distinguished from an ordinary agency created by agreement. The precise rights and obligations depend on the relevant statute and legal relationship.

Example: In certain transactions, the legal consequences of a partner’s acts on behalf of a firm are governed by the Indian Partnership Act, 1932. A partner’s authority to bind the firm is determined by the applicable partnership rules and the circumstances of the transaction.

This category should not be treated as an unlimited independent power to create agency. A legal basis must exist for attributing authority or responsibility to the relevant person.

Extent of an Agent’s Authority

Once an agency relationship is established, it is necessary to determine the scope of the agent’s authority.

Section 188 of the Indian Contract Act, 1872, provides that an agent authorised to do an act has authority to do every lawful thing necessary to perform that act. Where an agent is authorised to carry on a business, the authority extends to lawful acts necessary for the business or ordinarily performed in conducting it.

Section 189 further provides that an agent has authority, in an emergency, to do acts necessary to protect the principal from loss that a person of ordinary prudence would undertake to protect their own interests in similar circumstances.

Example: A authorises B to manage A’s trading business. B may ordinarily purchase stock and arrange routine supplies necessary for the business, depending on the scope of the authority and the circumstances.

An agent cannot assume unlimited authority merely because an agency exists. The principal’s liability depends on the scope of actual authority and any applicable rules concerning apparent authority or emergency action.

Important Case Law

Chairman, Life Insurance Corporation of India v. Rajiv Kumar Bhasker

Citation: (2005) 6 SCC 188.

The Supreme Court considered the relationship between the Life Insurance Corporation of India and persons involved in collecting premiums under a salary savings scheme. The case examined the legal principles of agency, including the manner in which authority may arise from the parties’ arrangements and conduct.

The decision supports the proposition that an agency relationship may be established expressly or by necessary implication. The true nature of the relationship must be determined from the relevant arrangement and circumstances rather than from labels alone.

Legal principle: Agency may arise from express authority or be inferred from the arrangement and conduct of the parties, depending on the facts of the case.

Loon Karan Sethia v. Ivan E. John

Citation: AIR 1969 SC 73; (1969) 3 SCC 727.

The Supreme Court considered questions relating to the authority of an agent and the legal consequences of acts performed within the scope of that authority.

The case is relevant to the broader principle that the legal relationship between principal and agent depends on the authority conferred and the applicable law. It illustrates the importance of examining the actual scope of an agent’s powers rather than assuming that every act performed by a representative binds the principal.

The application of the decision must be considered in light of the particular facts and the precise issue being determined.

Difference Between Express and Implied Agency

Basis	Express Agency	Implied Agency
Creation	By spoken or written words	Inferred from conduct and circumstances
Relevant provision	Sections 186–187	Sections 186–187
Evidence	Appointment, oral instructions or written authority	Pattern of dealings, conduct and surrounding circumstances
Example	Written authority to sell a vehicle	A shop manager routinely orders stock with the owner’s knowledge
Scope	Determined by the express grant and applicable law	Determined by reasonable inferences from the circumstances and applicable law

Key Points for Law Students

• Section 182 defines agent and principal.
• Section 183 specifies who may employ an agent.
• Section 184 addresses who may become an agent.
• Section 185 provides that consideration is not necessary to create an agency.
• Sections 186–187 recognise express and implied authority.
• Sections 196–200 govern ratification of unauthorised acts.
• Section 237 addresses certain situations where the principal induces third parties to believe that an agent’s unauthorised acts fall within their authority.
• Sections 188–189 address the extent of authority and emergency authority.
• Agency by necessity and agency by operation of law depend on the applicable legal principles and circumstances.
• Chairman, LIC of India v. Rajiv Kumar Bhasker, (2005) 6 SCC 188, is relevant to agency arising expressly or by necessary implication.

Conclusion

Creation of agency under the Indian Contract Act, 1872, determines when one person may act on behalf of another and when the principal may be legally bound by the agent’s actions. Agency can arise through express appointment, implied conduct, ratification and, in appropriate circumstances, necessity, estoppel or operation of law.

The existence of agency alone does not establish unlimited authority. The scope of the agent’s powers must be determined from the agreement, the parties’ conduct, the relevant statutory provisions and the circumstances of the transaction.

For examinations, the most important provisions are Sections 182–189, which establish the foundation of agency and the scope of authority, Sections 196–200 on ratification, and Section 237 on liability arising from representations about an agent’s authority.

Frequently Asked Questions (FAQs)

1. What is the creation of agency?

Creation of agency refers to the legal process by which one person becomes authorised to act on behalf of another or represent that person in dealings with third parties.

2. Which sections govern agency under Indian law?

Chapter X of the Indian Contract Act, 1872, covering Sections 182–238, primarily governs agency.

3. Is consideration necessary to create an agency?

No. Section 185 expressly provides that no consideration is necessary to create an agency.

4. What are the main modes of creating agency?

The main modes include express agreement, implied agreement, ratification, agency by necessity, agency by estoppel or holding out, and agency arising by operation of law where legally recognised.

5. What is agency by ratification?

Agency by ratification arises when a person subsequently adopts an act performed on their behalf without prior authority, subject to Sections 196–200 and the applicable legal requirements.

6. What is the difference between express and implied agency?

Express agency is created through spoken or written words, whereas implied agency is inferred from the circumstances, conduct and ordinary course of dealings between the parties.

7. Which case is important for creation of agency?

Chairman, Life Insurance Corporation of India v. Rajiv Kumar Bhasker, (2005) 6 SCC 188, is an important Supreme Court decision concerning agency arising expressly or by necessary implication.