Introduction. The law of agency, as governed by the Indian Contract Act, 1872, is based on the principle that “what one does through another, he does himself.” Agency allows one person (the agent) to act on behalf of another (the principal), thereby creating legal relations between the principal and third parties. It is an essential concept for commercial transactions, enabling delegation of authority in business, trade, and industry.
Meaning of Agency
According to Section 182, 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 the act is done is called the “principal.” The core of agency lies in the authority granted by the principal and the capacity of the agent to bind the principal through his acts.
Thus, agency is a relationship in which the agent has the power to create contractual obligations between the principal and third parties.
Creation of Agency
An agency relationship can be created in several ways, depending on conduct, agreement, or operation of law. The Indian Contract Act recognises the following modes:
1. Agency by Express Agreement
Agency may be created expressly—either orally or in writing. A written authority may take the form of a “power of attorney,” granting specific or general powers.
2. Agency by Implied Agreement
Implied agency arises from conduct, circumstances, or the relationship between parties.
- Agency by Estoppel: When the principal’s conduct leads a third party to believe that a person is acting as his agent, the principal cannot deny the agency later.
- Agency by Holding Out: When a principal knowingly allows another to act as his agent.
3. Agency by Necessity
Agency arises by necessity when circumstances compel a person to act on behalf of another without prior authority, such as preserving goods from perishing.
4. Agency by Ratification (Section 196)
When a person acts without authority but the principal later approves the act, the agency is created retrospectively. Ratification binds the principal as if he originally authorised the act.
Conditions: The act must be lawful, done on behalf of the principal, and ratification must be with full knowledge.
5. Agency by Operation of Law
In some relationships—such as partners in a firm—agency arises automatically to bind each other in business transactions.
6. Agency in Emergency (Section 189)
When an agent faces an emergency, he can take reasonable actions to protect the principal’s interests as a prudent person would.
Termination of Agency
An agency may come to an end through acts of the parties or by operation of law. The Act recognises the following modes:
1. Termination by Act of the Parties
- Revocation by Principal (Section 203): Principal may revoke agent’s authority before it is exercised.
- Renunciation by Agent (Section 206): Agent may renounce his authority by giving reasonable notice.
- Termination by Mutual Agreement: Both principal and agent may end the relationship.
2. Termination by Completion of Business
When the purpose of the agency is fulfilled—such as sale of a property—the agency automatically ends.
3. Termination by Expiry of Time
If agency is created for a fixed period, it ends when that period expires.
4. Termination by Death or Insanity
The death or mental incapacity of either the principal or agent terminates the agency.
5. Termination by Insolvency of Principal
When the principal is declared insolvent, his property vests in the official receiver, terminating the agent’s authority.
6. Termination by Destruction of Subject Matter
If the subject matter (such as goods or property) is destroyed, the agency cannot continue.
7. Termination by Principal Becoming an Enemy
If the principal becomes an alien enemy due to war or political conflict, the agency stands terminated.
Extended Explanation
The law of agency ensures that commercial transactions run smoothly by allowing principals to delegate tasks. The creation modes reflect the flexible and practical nature of business relationships, while termination modes safeguard against misuse of authority. Agency by ratification and estoppel protect third-party interests, whereas termination ensures that authority is not wrongfully exercised.
Conclusion: Agency is a vital concept enabling one person to act on behalf of another. It may be created through express or implied acts, necessity, ratification, or operation of law. Agency terminates through revocation, renunciation, expiry, completion of business, death, insolvency, or destruction of subject matter. These principles together ensure clarity, protection, and smooth functioning of contractual relationships.