Agency — Creation & the Agent's Authority — Contract II (Special Contracts) Notes

Agency — Definition, Who is an Agent, Features

A company is a legal person, but it has no hands to sign, no feet to walk to a shop. Everything it does, it does through people — its managers, brokers and clerks. Agency is the branch of law that makes those human acts count as the company’s own. The Latin tag says it all: qui facit per alium facit per se — he who acts through another acts himself.

What is agency?

Begin with the everyday idea. You ask a friend to buy a phone for you with your money; he buys it in your name; the shop’s contract is really with you, not him. Your friend is your agent; you are the principal. Agency lets one person create legal relations for another.

Section 182 defines the parties. 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 the principal. The test of agency is the power to bring the principal into legal relations with third parties.

Who may be a principal / an agent?

Principal (s.183): any person who is of the age of majority and of sound mind may employ an agent.
Agent (s.184): any person may become an agent — even a minor or a person of unsound mind — because the agent merely represents the principal and does not incur personal liability. But as between the principal and agent, the agent must be competent for the agent to be liable to the principal.
Consideration not necessary (s.185): no consideration is needed to create an agency.

Main features of agency.

Representative capacity — the agent represents the principal and acts on his behalf.
Power to bind — the agent can create contractual relations between the principal and third parties.
The agent is a conduit — within authority, the contract is the principal’s; the agent usually drops out.
Based on authority — everything the agent does binds the principal only so far as it is authorised (actual or apparent).
Fiduciary relationship — the agent owes duties of loyalty, good faith and no secret profit.

🧩 WORKED EXAMPLE — agent or not?

Facts. P tells B, “Buy 100 bags of cement for me from any dealer.” B buys from D in P’s name. D later sues on the price.

Rule. Under s.182, one employed to represent another in dealings with third persons is an agent; his authorised acts bind the principal (s.226).

Apply. B acted for P within authority; the contract of sale is between P and D. B is a conduit.

Conclusion. P (the principal) is bound to D; B is not personally liable on the price.

Section 182, Indian Contract Act 1872: “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 Simple Terms: An agent acts for a principal and can make contracts that bind the principal with outsiders. Anyone can be an agent; the principal must be a major of sound mind; and no consideration is needed.

flowchart TD
    A["Agency (s.182)"]
    A --> B["Principal<br/>(major, sound mind, s.183)"]
    A --> C["Agent<br/>(any person, s.184)"]
    C --> D["Represents principal"]
    C --> E["Binds principal with third parties"]
    A --> F["No consideration needed s.185"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D,E,F box;

Case Laws

P. Krishna Bhatta v. Mundila Ganapathi Bhatta (1955) — the essence of agency is the agent’s power to bind the principal to third parties.
Loon Karan Sethiya v. Ivan E. John (1969) — whether a relationship is agency depends on substance (power to represent), not the label used.

Modes of Creation of Agency

Agency is not always created by a formal appointment letter. Sometimes it is created by conduct, sometimes by an emergency, sometimes even after the act by the principal simply approving it. The examiner wants all these routes named, defined and illustrated.

How is agency created?

There are five recognised modes. Learn each by its trigger and a one-line example.

By express appointment (s.187). Authority is given in words — spoken or written (a power of attorney). The clearest case: “I appoint you my agent to sell my house.”
By implied appointment (s.187). Authority is inferred from conduct, the situation of the parties, or the ordinary course of dealing. Includes:
- Agency by estoppel — where a person by his words or conduct leads a third party to believe another is his agent, he is estopped (prevented) from denying it later.
- Agency by holding out — a species of estoppel: the principal, by past conduct, holds a person out as his agent (e.g. habitually paying for goods a servant orders).
By necessity (s.189). In an emergency, a person may act as an agent for another to protect that other from loss, even without prior authority — provided there is a real emergency, it was not possible to communicate, and he acted bona fide. Example: the master of a ship selling perishable cargo to save its value.
By ratification (s.196). Where an act is done on a person’s behalf without authority, that person may afterwards ratify (adopt) it, and it then binds him as if originally authorised (treated fully in Topic 4).
By operation of law. Agency arising automatically — e.g. a partner is the agent of the firm (Partnership Act s.18), or a company’s promoters.

🧩 WORKED EXAMPLE — agency of necessity

Facts. A ship carrying perishable fruit is delayed by a storm; the cargo will rot before reaching port and the master cannot reach the owner. The master sells the fruit at the nearest harbour.

Rule. Under s.189 (agency by necessity), an agent may, in an emergency, do all such acts to protect the principal from loss as a person of ordinary prudence would do — provided he could not communicate and acted in good faith.

Apply. There was a genuine emergency, no means of contacting the owner, and the sale protected the value of the cargo.

Conclusion. The master had authority of necessity; the sale binds the owner.

Section 187, Indian Contract Act 1872: “An authority is said to be express when it is given by words spoken or written. 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.”

In Simple Terms: Agency can be created five ways — by express words, by implication/conduct (including estoppel and holding out), by necessity in an emergency, by later ratification, and by operation of law.

flowchart TD
    A["Creation of Agency"]
    A --> B["Express appointment s.187"]
    A --> C["Implied s.187<br/>(estoppel, holding out)"]
    A --> D["Necessity s.189"]
    A --> E["Ratification s.196"]
    A --> F["Operation of law<br/>(e.g. partner, IPA s.18)"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D,E,F box;

Case Laws

Great Northern Railway Co. v. Swaffield (1874) — agency of necessity: a carrier who incurred stabling charges to protect a horse could recover them.
Chairman, L.I.C. v. Rajiv Kumar Bhaskar (2005) — holding out/estoppel binds the principal where he lets another appear as his agent.

Extent of an Agent’s Authority

Authority is the fuel of agency — but how far does it stretch? Enough to do the job, plus, in an emergency, enough to protect the principal from disaster. Sections 186–189 map its reach.

How far does an agent’s authority extend?

The authority of an agent is his power to affect the principal’s legal position. The Act describes its sources and reach:

Express or implied authority (s.186–187). Authority may be conferred in words (express) or inferred from circumstances and the ordinary course of dealing (implied).
Extent of authority (s.188). An agent having authority to do an act has authority to do every lawful thing necessary to do it; and an agent authorised to carry on a business has authority to do every lawful thing necessary, or usually done, in the course of that business.
Authority in emergency (s.189). In an emergency, an agent has authority to do all such acts for protecting the principal from loss as would be done by a person of ordinary prudence in his own case, under similar circumstances.

Beyond these, apparent (ostensible) authority — what the principal, by his conduct, holds the agent out as having — binds the principal even where actual authority is lacking, protecting third parties who deal in good faith (estoppel).

🧩 WORKED EXAMPLE — authority in an emergency

Facts. A is authorised to store P’s perishable goods in a warehouse. The refrigeration fails and the goods will spoil within hours; A cannot reach P, so A sells the goods quickly at a fair price to save their value.

Rule. Under s.189, in an emergency an agent may do all acts to protect the principal from loss that a prudent person would do; under s.188 authority extends to what is necessary to the task.

Apply. The sudden failure created a genuine emergency; selling to save value is what a prudent person would do, and A could not consult P.

Conclusion. A had authority in emergency; the sale binds P.

Section 188, Indian Contract Act 1872: “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.”

In Simple Terms: An agent’s authority may be express or implied; it stretches to everything necessary to do the authorised act or run the business (s.188), and in an emergency to whatever a prudent person would do to protect the principal (s.189). Apparent authority binds the principal to good-faith third parties.

flowchart TD
    A["Extent of authority"]
    A --> B["Express / implied s.186-187"]
    A --> C["Everything necessary s.188"]
    A --> D["Emergency s.189"]
    A --> E["Apparent (ostensible) authority<br/>- binds by estoppel"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D,E box;

Case Laws

Great Northern Railway Co. v. Swaffield (1874) — authority in emergency to incur necessary expense to protect the principal’s property.

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