Contract of Agency: Definition and Creation

An agent is a person employed to do any act for another or to represent another in dealings with third persons (S.182); agency may be created by express or implied appointment, ratification, necessity, or estoppel.

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 (S.182, Indian Contract Act, 1872). The distinguishing feature of agency is representative capacity: the agent's acts bind the principal as if the principal had acted himself.

Legal Framework

Provision	Subject	Key Rule
S.182	Agent and principal defined	Agent is employed to act for another or represent another in dealings with third persons
S.183	Who may employ an agent	Any person who is of the age of majority and of sound mind
S.184	Who may be an agent	Any person may be an agent between principal and third parties, but only a person of majority and sound mind can be responsible to the principal
S.185	Consideration not necessary	No consideration is necessary to create an agency
S.186	Authority may be express or implied	Authority need not be conferred in any particular form
S.187	Definitions of express and implied authority	Express authority is given by words; implied authority is inferred from circumstances, conduct, and the usual course of dealing
S.196	Ratification of unauthorised acts	A person may ratify acts done on his behalf without authority, thereby adopting them
S.197	Ratification may be express or implied	Ratification may be expressed in words or implied from conduct

Essentials of Agency

Element	Explanation
Principal competent to contract	S.183 requires the principal to be a major of sound mind; a minor cannot appoint an agent
Agent's competence	Any person may act as agent as between principal and third parties (S.184), but a minor agent is not responsible to the principal
Consent of both parties	Agency rests on the agent's consent to act and the principal's consent to be represented
Intention that the agent act representatively	The agent must act in the principal's name or on his behalf, not for himself
No consideration required	S.185 dispenses with consideration, unlike ordinary contracts

Why S.185 dispenses with consideration: Agency is not primarily a bargain between principal and agent but a legal power to affect the principal's relations with third parties. The third party's protection depends on the existence of authority, not on whether the agent was paid. Requiring consideration would invalidate countless gratuitous agencies such as a friend authorised to collect a document, and would leave third parties who dealt in good faith without recourse.

Why a minor cannot appoint an agent but can act as one: The principal is bound by the agent's acts, so appointing an agent is an exercise of contractual capacity, which a minor lacks under Mohori Bibee v Dharmodas Ghose. Acting as an agent, by contrast, involves no personal liability towards third parties, since the agent merely transmits the principal's authority. S.184 therefore permits a minor to be an agent as between principal and third parties while denying the principal any remedy against the minor agent.

Modes of Creating Agency

1. Express Appointment (S.186, S.187)

Authority conferred by words, spoken or written. A power of attorney is the common formal instrument. No particular form is required unless a statute so demands.

2. Implied Appointment (S.187)

Authority inferred from the circumstances of the case, the conduct of the parties, the course of dealing between them, or trade usage.

Sub-category	Basis	Example
Agency by conduct	Course of dealing between the parties	A repeatedly allows B to buy goods on his account and pays for them
Agency by trade usage	Recognised custom of a particular trade	A commission agent's customary authority in a produce market
Agency by cohabitation	Presumption where a wife manages the household	Wife pledging her husband's credit for necessaries

3. Agency by Ratification (S.196, S.197)

Where acts are done by one person on behalf of another without that other's knowledge or authority, the person on whose behalf they were done may elect to ratify them. Ratification has retrospective effect: the act is treated as authorised from the outset.

Condition for valid ratification	Explanation
The act must have been done on the principal's behalf	The actor must have professed to act for the principal, not for himself
The principal must have been in existence and competent at the time of the act	A company not yet incorporated cannot ratify pre-incorporation contracts
Full knowledge of material facts	S.198: ratification without knowledge of materially defective circumstances is not binding
The whole transaction must be ratified	S.199: a principal cannot ratify the beneficial part and reject the rest
The act must be lawful	An act void or illegal cannot be ratified
Ratification must not injure a third person	S.200: ratification cannot be made so as to subject a third party to damages or terminate a right vested in him

**Keighley, Maxsted and Co v Durant (1901)** House of Lords

Facts: An agent was authorised to buy wheat at a certain price. He exceeded that price and bought at a higher figure, intending the purchase to be for himself and the principal jointly, but he did not disclose to the seller that he was buying for the principal. The principal later purported to ratify the purchase and then failed to take delivery.

Issue: Can a principal ratify a contract that the agent made without disclosing that he was acting on the principal's behalf?

Held: No. Ratification is only possible where the person doing the act professed at the time to act on behalf of the principal. An undisclosed intention to benefit another cannot be converted into agency by later ratification.

Relevance: The controlling authority on the first condition of ratification. Cite whenever the actor did not purport to act for the principal at the time.

4. Agency of Necessity

In certain circumstances a person may act for another without authority, and the law treats him as an agent, because the situation compels immediate action to protect the other's interests.

Requirement	Explanation
A real emergency	There must be an actual and pressing necessity, not mere convenience
Impossibility of communication	It must not be practicable to obtain the principal's instructions
Action bona fide in the principal's interest	The actor must act honestly and for the principal's benefit
Some pre-existing relationship	Ordinarily there must be an existing relationship such as bailee or carrier

Statutory illustrations: S.189 permits an agent, in an emergency, to do all such acts for protecting his principal from loss as would be done by a person of ordinary prudence in his own case. S.151 read with the bailee's position produces a similar result for bailees.

**Great Northern Railway Co v Swaffield (1874)** Exchequer Chamber

Facts: A horse was consigned by rail. On arrival no one came to collect it. The railway company, unable to contact the consignor and unable to leave the horse unattended, placed it in a livery stable and incurred charges.

Issue: Could the carrier recover the stabling charges from the consignor in the absence of authority?

Held: Yes. The carrier was an agent of necessity. Faced with a genuine emergency and unable to communicate, it acted reasonably and in the owner's interest, and was entitled to be reimbursed.

Relevance: The classic illustration of agency of necessity arising from an existing carrier relationship.

5. Agency by Estoppel or Holding Out

Where a person by words or conduct represents that another is his agent, and a third party relying on that representation deals with the supposed agent, the representor is estopped from denying the agency. This is dealt with more fully in the context of apparent authority.

Illustrations

Express agency: A executes a power of attorney authorising B to sell A's land. B's sale within that authority binds A. The authority is express under S.187.
Implied agency from course of dealing: For two years A has permitted his manager B to purchase raw material on credit in A's name and has always paid the invoices. B now orders material and A refuses to pay, saying B had no authority. A is bound: implied authority arises from the course of dealing under S.187.
Ratification with retrospective effect: B, without authority, contracts on A's behalf to buy machinery. A learns of it and, approving the price, writes to the seller confirming the purchase. Under S.196 the contract is treated as authorised from the date it was made, not from the date of confirmation.
Ratification impossible where agency not professed: B buys goods intending to resell them to A but tells the seller nothing about A. A later purports to ratify. Applying Keighley, Maxsted and Co v Durant (1901), there is no ratification: B did not profess to act on A's behalf.
Whole transaction must be ratified: B, without authority, contracts on A's behalf to buy two machines, one at a favourable price and one at an unfavourable price. A cannot ratify only the favourable purchase. Under S.199 ratification of a part is ratification of the whole.
Agency of necessity: A carrier holding perishable fruit finds the consignee absent and cannot reach the consignor. It sells the fruit at the best available price to avoid total loss. Applying Great Northern Railway v Swaffield (1874) and S.189, the carrier is an agent of necessity and its sale binds the owner.
No agency of necessity without emergency: A warehouseman, finding the market for stored goods declining, sells them to protect the owner from a price fall, though he could easily have telephoned the owner. There is no necessity: communication was practicable and there was no emergency. The sale does not bind the owner.

Recall Check

Why does S.185 provide that no consideration is necessary to create an agency?
State the conditions that must be satisfied for a valid ratification under S.196 to S.200.
What are the requirements of an agency of necessity?

Key Cases

Keighley, Maxsted and Co v Durant (1901) Keighley Maxsted v Durant 1901
Issue: Whether a principal may ratify an act where the actor did not disclose that he acted on the principal's behalf.
Rule: Ratification requires that the actor professed at the time to act on behalf of the principal.
Held: No ratification was possible. An undisclosed intention to benefit another cannot be converted into agency later.

Great Northern Railway Co v Swaffield (1874) Great Northern Railway v Swaffield 1874
Issue: Whether a carrier could recover expenses incurred without authority when the consignee failed to collect the goods.
Rule: In a genuine emergency, where communication is impracticable, a person in an existing relationship may act as agent of necessity.
Held: The carrier recovered the stabling charges as an agent of necessity.

Distinctions

Basis	Agent	Servant
Function	Represents the principal in dealings with third parties	Works under the master's direction and control
Power to bind	Can create contractual relations binding the principal	Ordinarily cannot bind the master contractually
Control	Directed as to what to do, not usually how to do it	Directed as to both what and how
Remuneration	Commission is typical	Wages or salary
Working for others	May act for several principals	Ordinarily serves one master

Basis	Agent	Independent Contractor
Representative capacity	Acts in the principal's name	Acts in his own name
Legal effect of acts	Binds the principal	Binds himself only
Liability of employer for torts	Principal liable for authorised acts	Employer generally not liable

Basis	Ratification (S.196)	Estoppel
Basis of liability	Voluntary adoption of an unauthorised act	Representation relied upon by a third party
Effect in time	Retrospective to the date of the act	Operates prospectively from the representation
Requires actor to profess agency	Yes (Keighley Maxsted)	No; the representation comes from the principal
Principal's knowledge	Full knowledge of material facts required	Representation by conduct suffices

Flashcards

Define agent and principal under S.182.

An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person so represented is the principal.

Is consideration necessary to create an agency?

No. S.185 expressly provides that no consideration is necessary.

Can a minor appoint an agent?

No. S.183 requires the principal to be of the age of majority and of sound mind.

Can a minor be an agent?

Yes, as between principal and third parties (S.184), but a minor agent is not responsible to the principal.

Name the modes of creating agency.

Express appointment, implied appointment, ratification, necessity, and estoppel or holding out.

What is the effect of ratification under S.196?

The act is adopted and treated as authorised retrospectively, from the date it was done.

Can a principal ratify part of a transaction only?

No. Under S.199, ratification of a part of an unauthorised transaction amounts to ratification of the whole.

What did Keighley Maxsted v Durant establish?

Ratification is possible only where the actor professed at the time to act on behalf of the principal. An undisclosed intention cannot be ratified.

What are the essential conditions of an agency of necessity?

A real emergency, impracticability of communicating with the principal, bona fide action in the principal's interest, and ordinarily a pre-existing relationship.

Exam Scenario

Problem: Naveen is the owner of a cold storage unit. Over three years he has allowed his manager Zoya to buy packing material on credit in his name, and has always settled the bills. In March, Zoya orders packing material worth Rs. 4 lakhs from a supplier. Separately, and without any authority, Zoya negotiates a contract in Naveen's name to buy a refrigeration compressor at a price well above market, telling the seller she is acting for Naveen. In the same month a power failure threatens Naveen's stock of frozen goods while he is abroad and unreachable; Zoya hires a diesel generator at an above-market emergency rate to save the stock. Naveen now refuses to pay for all three. Advise the parties.

Step 1: Split the three transactions

Each transaction rests on a different basis: implied authority for the packing material, ratification for the compressor, and necessity for the generator.

Take them in that order, since Naveen's answer differs in each.

Step 2: Packing material, implied authority under S.187

S.187 makes authority implied where it is inferred from the circumstances, the conduct of the parties, and the course of dealing. Three years in which Naveen permitted the orders and paid the bills is exactly such a course of dealing.

Zoya therefore had implied authority. Naveen is bound to the supplier for Rs. 4 lakhs.

Step 3: Compressor, Naveen's election under S.196

Zoya acted without authority but professed to act for Naveen, so S.196 gives Naveen an election.

Naveen's choice	Effect on Naveen	Seller's position
Ratify	The contract binds him retrospectively, from the date Zoya made it	Enforces against Naveen
Refuse to ratify	Not bound	Claim against Zoya personally under S.235 for wrongly representing her authority

The requirement in Keighley, Maxsted and Co v Durant (1901) is satisfied here, since Zoya did disclose that she acted for Naveen. Ratification is therefore legally available to him should he want the compressor.

Step 4: Generator, agency of necessity with S.189

Test the requirements in sequence:

A genuine emergency. The power failure threatened imminent loss of the frozen stock.
Communication impracticable. Naveen was abroad and unreachable.
Bona fide action in the principal's interest. Zoya hired the generator to save his stock.

S.189 supplies the standard: whether she did what a person of ordinary prudence would do in his own case. Hiring a generator at an emergency rate to save frozen stock plainly satisfies it.

Naveen is bound and must reimburse the hire charges.

Two traps in this problem

S.199 blocks a partial ratification. Naveen cannot ratify the compressor at a reduced price. He takes the transaction as made or not at all.

Ratification depends on a professed agency. Had Zoya not disclosed that she acted for Naveen, Keighley, Maxsted and Co v Durant (1901) would have put ratification out of reach entirely.

Conclusion. Naveen is liable for the packing material and the generator. He may accept or reject the compressor contract under S.196, and if he rejects it the seller's recourse lies against Zoya.