Agency in Law: Definitions, Creation, and Termination of an Agency Relationship

Theoretical overview

Agent:  according to section 182 an agent is a person employed to do any act for another or to represent another in dealing with third person.

Principal: the person for whom such act is done or who is represented is called the principal.

In an agency one person(principal) employes the another person(agent) to represent him or to act on his behalf in dealing with a third person.

For example: if I authorize my agent to sell my house to a third person and he does so I become bound for sale of the house to the third person in the same way as if I myself contracted to sell the house to third person.

The agent is the connecting link between the principal and the third party.

According to the definition the agent neve act on his behalf but always on the behalf of another.

Kinds of agent

1. Auctioneers: sell of goods or property by auction by open sale.
2. Broker: authority to negotiate the sale or purchase on the behalf of his principal to third party 
3. Factors: who is entrusted with the possession of the goods for the purpose of sale. He also has power to sell the goods on credit and also to receive the price from the buyer.

Features of a contract of agency

1. The principal should be competent to contract:-according to section 183 any person who is the age of majority according to law to which he is subject and who is of sound mind may employe an agent. It has already been noted that for a validity of contract the parties must be competent to contract. Since in agency the agent creates a contractual relationship between the principal and the third party , it is necessary that principal and third person should be competent to contract.
2. No consideration is necessary to create an agency:- section 185 provides that no consideration is necessary to create an agency from the very start of the contract  of agency the principal agrees to bound by the act done by the agent on his behalf.
3. The agent may not be competent to the contract:- according to section 184 as between the principal and the third party any person may become the agent but no person who is not of the age of majority and of sound mind can become the agent. The capacity of agent could be looked from two angles. Firstly capacity of the to act on his behalf of principal so as to bind his principal and third person. Secondly his 

Mode of creation of agency

There are 4 modes of creation of agency which are followed under:

1. By expressed authority 
2. By implied authority 
3. By ratification
4. By operation of law

By expressed authority

according to section 186 an agency can be established by oral or written agreement. When an agent is appointed by written or oral agreement the agency is said to be established by an expressed agreement. The agent is bound by law to function according to the term of such contract.

For example: X (owner of shop) appoints Y as his agent by written agreement to manage his shop here the relation of principal and agent is created b/w the X
& Y by an expressed agreement.

By implied authority

according to section 187 of Indian contract act 1872 , an agency is said to be implied when it is understand from the conduct or behaviour of the parties. 

For example A owns a shop in Agra but he lives in Chandigarh and visits the shop occasionally the shop is managed and run by B and he orders goods from C in the name of A from the shop and pays the amount of the goods  from the funds of A with A’s knowledge. Here B has implied authority from A to order goods in name of  A for the purpose of shop.

Implied agency includes following:

• By Estoppel
• By holding out 
• By necessity

a. By estoppel:- when a person willfully leads another to believe that a certain person is acting as his agent either by his conduct or in word he is estoppel from deniying the truth of agency.

For example: in the presence of A,B says to C that he(B) is A’s agent though it not so actually. A has been silent on this statement by B. it is agency by estoppel. If C entered into any agreement with B believing him as A agent than afterwards A is estopped from denying the agency.

b. By holding out:- the principal is bound by the act of agent if on earlier occasion he had made other believe that other person doing act on his behalf is doing with his authority.

For example: X allow his servant to buy goods on credit from local dealer and pay for them. One day X has given the money to his servant to bought goods from creditor on cash servant bought good on credit as  usually and runs away with the cash. X is liable to pay the amount to the dealer.

c. By necessity:- agency by necessity exist when a person is forced by certain condition to act as an agent of the others with his consent.

For example: P sent 1000 liters of milk by a truck to Agra. On his way truck meet with an accident the milk was in danger of perishing so the driver sold the milk. The truck driver becomes an agent of  P by necessity.

By operation of law

at times contract of agency comes into operation by virtue 

For example: a/c to partnership act every partner is agent of the firm as well as of others.

Agency by ratification

agency by ratification is when the principal approves an act of agent (which is not allowed to be done). It is also known as ex-post facto agency which means agency arises after the event.

According to section 197 the ratification of an act can be expressed or implied.

the act was already done by agent the unauthorized act of the agent become  authorized. For eg. A gives some money belonging to B as loan to C without B knowledge. Later B receives interest on the loan from C , B’s conduct in this case implies his acceptance of A’s action.

Essential of ratification

• Ratification must be communicated.
• The act must be on the behalf of principal.
• Ratification must be made by the person on whose behalf the act was done.
• Principal must have contractual capacity.
• Only lawful act can be ratified.
• Whole transaction must be ratified.
• Ratification should not put a third party to damages.
• Ratification can be expressed or implied.

Duties of an agent

• Duty not to delegate his duty.
• Duty to follow principal directions.
• Duty to show proper skill and care.
• Duty to communicate with principal.
• Duty not to deal on his behalf.
• Duty to pay sum received for principal.

Rights of agent and duty of principal

• Right to remuneration.
• right to lien on principal property.
• Right to indemnified.
• Right  to compensation or damages due to principal negligence 

Termination of agency: section 201-210

There are two ways to termination of agency:

a)By an act of the parties       b)by operation of law

There are 3 ways by an act of parties

• By mutual agreement
• By revocation by principal
• Renunciation by agent

By mutual agreement: agency is a contract b/w the agent and the principal which is made by the consent of the both and as it is made the contract can be terminate by mutual agreement b/w the principal n agent at any time and in any situation.

Revocation by principal: the principal may revoke the authority of the agent at any time before the agent has exercised his authority. The principal must have noti9fied the third party of his revocation of agency.

Renunciation by agent: just as the principal can revoke his authority n terminates the contract of agency the agent can also renunciate his authority by serving notice to principal.

B) termination by operation of law  

• Performance e of the contract: most common way of termination of the agency is for the agent to perform what he has undertake to perform.
• Expiry of time: if the agent is appointed for fix duration of time the agency terminates at the expiry of the duration of the objective e of the principal.
• Death or insanity if the principal or agent: Death or insanity if the principal or agent leads to termination of contract.
• Insolvency of the principal: when  the principal become insolvent it become necessary that the agency will terminates.
• Destruction of the subject matter: an agency which is created to deal with a specific subject matter comes to an  end when the subject matter is destroyed.

Relevant section

• Section 182 defines the definition of principal & agent.
• Section 183 -the principal should be competent to contract 
• Section 184 – The agent may not be competent to the contract
• Section 185- No consideration is necessary to create an agency
• Section 186-the contract of agency can be by expressed authority
• Section 187 – the contract of agency can be by implied authority.
• Section 196- right of person as to act done for him without his authority (ratification)
• Section 201-210 termination  of agency

Important maxim

ex-post facto agency which means agency arises after the event.

Important case law

Chairman L.I.C v. Rajiv Kumar Bhaskar: In this case, as per the salary saving scheme of L.I.C, the employer was supposed to deduct the premium from the employee’s a salary and deposit it with L.I.C. Upon the death of the employee, it was found by his heirs that the employer has defaulted in doing so, causing the policy to lapse. A clause in the acceptance letter was referred to, in which the employer had said that he would act as the agent of the employee and not as that of L.I.C. It was held that the employer was acting as the agent of the company, thereby making the company (L.I.C) responsible as a Principal due to the fault of the Agent (the employer)

Brawwhite v. Worcester works Finance ltd: wherein the house of lord took a similar view in following terms: the relationship of the principal and the agent can only be established by the consent of the principal and agent. They will be held to have consented if they have agreed to what amount in law such a relationship and even they have professed to disclaimed it. But the consent must have been given by each of them either expressly or by implication from their words and conduct.

Keighley, Maxsted & Co. V. Durant:  in this case Keighley Maxsted & co. instructed Roberts to buy wheat on joint account i.e, for them n himself at a certain rate. Wheat was not available to Roberts at that rate so he purchase at slightly higher rate it was purchased by Roberts on his own account only Keighley Maxsted & co. purported to ratify the agreement but subsequently when the purchase fell refuse to take delivery of wheat in an action by the seller for breach of contract against Keighley Maxsted & co. it was held they could not be made liable because the act by Roberts not having been done on their behalf , purported ratification by them was ineffective. 

Points to remember

1. Agent:  according to section 182 an agent is a person employed to do any act for another or to represent another in dealing with third person.
2. Principal: the person for whom such act is done or who is represented is called the principal.
3. There are 3 type of agent Auctioneers , Broker & Factors.
4. There are 4 modes of creation of agency which are followed under:

By expressed authority , By implied authority, By ratification & By operation of law.

5. Agency by ratification: agency by ratification is when the principal approves an act of agent (which is not allowed to be done). It is also known as ex-post facto agency which means agency arises after the event.
6. There are several rights n duties of the principal and agent which they have to perform for smooth performance e of the agency 
7. The agency can  be terminates by two ways which are By an act of the parties and by operation of law