Agency Under the Indian Contract Act, 1872: A Complete Guide for CLAT PG

What Is Agency

Essential Elements of Agency

1. There must be an agreement between the principal and the agent. This agreement need not always be formal or written. Conduct alone can establish an agency relationship in many situations.
2. Consideration is not mandatory to create an agency. Section 185 clarifies this position clearly. The reason lies in the fact that the agent usually earns compensation through commission rather than direct consideration for the agency contract itself.
3. The principal must be a person competent to contract as per Section 11. However, interestingly, even a minor can act as an agent under Section 184, though the principal cannot hold the minor personally liable.

Modes of Creating Agency

1. Express agency arises when the principal appoints the agent through clear words, spoken or written.
2. Implied agency arises from the conduct, situation, or relationship between parties. Section 187 covers this concept. Partners in a firm, for instance, are implied agents of each other under partnership law principles.
3. Agency by ratification occurs when a person acts on behalf of another without prior authority, and the principal later approves those acts. Sections 196 to 200 govern this doctrine, and ratification relates back to the date of the original act.
4. Agency by estoppel arises when the principal’s conduct leads a third party to reasonably believe that a person has authority to act as agent. Once this belief is created, the principal cannot later deny the agency.
5. Agency by necessity emerges in emergency situations where a person must act to protect another’s property or interests without prior authorisation. Classic examples include a carrier selling perishable goods to prevent total loss.

Duties of an Agent

1. Section 211 requires the agent to conduct business according to the principal’s directions. If no directions exist, the agent must follow the custom prevailing in that particular business or trade.
2. Section 212 mandates that the agent must work with reasonable skill and diligence. Any negligence resulting in loss makes the agent liable to compensate the principal for such loss.
3. Section 213 obligates agents to render proper accounts whenever the principal demands them. This duty maintains transparency and prevents misuse of the principal’s funds or property.
4. Section 215 and 216 prevent an agent from dealing on their own account without the principal’s consent. If the agent secretly earns profit through such dealing, the principal can claim that benefit entirely.

Rights of an Agent

1. Section 217 grants the agent a right to retain, out of sums received, all money due to them by way of remuneration, advances made, and expenses incurred while conducting the principal’s business.
2. Section 219 gives the agent a right to receive remuneration only after completing the agreed act, unless a special contract provides otherwise. This links payment directly to performance.
3. Additionally, Section 222 obliges the principal to indemnify the agent against consequences of lawful acts done in exercise of the authority conferred. This protects agents acting in good faith.

Extent of Agent’s Authority

Termination of Agency

1. Agency terminates by the principal revoking their authority, or by the agent renouncing the business of the principal. Both parties retain this right, though reasonable notice is often required to avoid liability.
2. It also terminates by completion of the business for which the agency was created, or by the expiry of a fixed time period, if any was set at the time of appointment.
3. Death or unsoundness of mind of either the principal or the agent automatically terminates the agency. Similarly, if the principal becomes insolvent, the agency comes to an end under the Act.

Sub-Agents and Substituted Agents

Personal Liability of the Agent