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Various Methods Of Creation Of Agency

In today's rapidly developing and globalizing world contracts are playing an inevitable role. The Indian Contract Act, 1872 applies to the whole of India. Section 10 of The Indian contract Act,1872 is very important because it defines that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.

Further, upcoming sections in The Indian Contract,1872 discusses about various interesting and important concepts related to contracts. Sections from 1 to 75 in The Indian Contact Act,1872 explains about the General principles of Contracts and Sections from 124 to 238 explains about the Special Contracts.

Special Contracts (i.e.) (Sections 124 to 238) consists of the following concepts of contracts; Contract of indemnity (Sections 124 and 125), Contract of guarantee (Section 126 to147), Contract of bailment (Section 148 to 171), Contract of pledge (Section 172 to 181) and Contracts of agency (Section 182 to 238). In this article reader can get a basic idea about Contracts of Agency. Further, a reader will be able to get an extensive knowledge regarding the various methods of creation of agency.

The main aim of this article is to explain the various methods of creation of agency in a manner which is easily understandable by everyone. For better understanding and for acquiring extensive knowledge Table of contents, Foot notes, citations, case laws and for further reading bibliography and webliography is added to this article. Therefore, every reader who is reading this article can easily understand and get the extensive knowledge about various methods of creation of agency.

The concept of "Agency" plays a very important role in the today's rapidly developing commercial world. In The Indian Contract Act, 1872 Chapter X deals with the laws which were related to creation of agency. The laws which were related to agency are based upon the Latin maxim, "Qui facit per alium facit per se", which means "he who acts through another, acts himself."[1]

Section 182 of The Indian Contract,1872 clearly defines the term's "agent" and "principal". 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".[2] Further we can understand that agent plays a very important role in creating a legal relationship between Principal and Third person.

In the case of Syed Abdul Khader v. Rami Reddy Honourable supreme court of India held that "the expression agency is used to connote the relation which exists between a person occupying the position of principal and third parties".[3] Agent is appointed by the principal to represent him or to act on behalf of him and the valid contract which creates a relationship between Agent and Principal is called an Agency.

In the case of P. Krishna v. Mundila Ganapathi High Court of Madras has held that, agency is only when an agent acts as representative of the other in business negotiations, that is, in creation, modification or termination of contractual obligations, between that other and third person. [4] From these the reader can get a basic idea about agency further essentials of creation of agency and various methods of creation of agency are discussed.

Essentials Of Creation Of Agency:

In The India Contract Act, 1872 sections 183, 184, 185 specifically defines the essentials of creation of agency. According to section 183, any person who is the age of majority and of sound mind may employ an agent. [5] According to section 184, any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent.[6] Further, Section 185 defines that no consideration is necessary to create an agency.[7]

Apart from these sections following aspects like valid agreement between agent and principal, contractual relationship, creation of legal relations and intention of the parties must be fulfilled in order to create a valid agency. The most important element in this relationship of agency is Consent.

The consent must come from both the parties and their intention to enter into the relationship must be clear and legal. In an English case law Carr v. Hunt, Court of Appeals of Texas has held that the consent is essential for the creation of agency and the consent must be there from both sides as it shows their intentions behind such relationship. [8]

Various Methods Of Creation Of Agency:

Agency can be created in various methods, following are the various methods of creation of agency

  1. Agency by Express Agreement.
  2. Agency by Implied Agreement.
    1. Agency by Estoppel.
    2. Agency by Holding out.
  3. Agency by Necessity.
    1. Agency by Ratification.
    2. Agency by Operation of law.
    3. Agency in Husband-and-Wife relationship.

Agency by Express Agreement:

Section 186 of The Indian Contract, 1872 defines that the authority of an agent may be expressed or implied.[9] Therefore, an express contract of agency can be made orally or in writing. In this context, an authority is said to be express when it is given by words spoken or written. [10]

Usually, a principal appoints an agent by making an express agreement with him. When an appointment of an agent is made by a written agreement or by deed it is known as "Power of Attorney". "Power of Attorney" gives the right to an agent to act on behalf of his principal. In an Indian case law of Syed Abdul Khader V. Rami Reddy a person was appointed as a caretaker of agricultural land by giving him power of attorney to act on behalf of principal, but before the supreme court of India the following issue that "how could three persons can appoint one single agent and also by single power of attorney" was raised.

Here the validity of appointment of agent was questioned, but the court held that the regarded power to be valid and also held that it is applicable to their respective agricultural land. Further court has also held that "the expression agency is used to connote the relation which exists between a person occupying the position of principal and third parties".[11]

Agency by Implied Agreement:

Implied agency may arise from the circumstances or situations of each case and may be from the conduct of parties also. Section 187 of The Indian Contract,1872 defines implied authority, an authority is said to be implied:
  1. When it is to be inferred from the circumstances of the case
  2. Things spoken or written
  3. The ordinary course of dealing, may be accounted circumstances of the case.[12]
The agent's implied authority depends on the nature of business for which the agent has been authorized. For example; an agent having authority to make a bet has an implied authority to the payment if the bet is lost .[13] An agent having been authorized to sell artificial manure has an implied authority to warrant as to the proportion of its ingredients.[14]

A owns a furniture shop in Delhi but he lives in Tamil Nadu. The furniture shop is managed by B in absence of A. B orders raw materials and essential commodities for the shop from C in the name of A. Here, B has an implied authority from A to purchase raw material and essential commodities from C.
  1. Agency by Estoppel:
    Section 237 of The Indian Contract, 1872 deals with the agency by estoppel. In certain situations, agent do not have implied or express authority to do an act on behalf of his principal but the principal through his conduct creates an impression on the mind of third person that his agent has an authority to act on his behalf.

    For example, if I say that I'm an agent of my friend in his presence to a third person and if my friend does not deny the statement, then he cannot deny me as his agent later. In such cases the principal will be liable towards the third person for the acts done by the agent on the ground of law of estoppel, in this context principal will be only liable if such acts and obligations were within the scope of the agent's authority.[15]

    G entrusts F with some negotiable instruments endorsed in blank, F sells them to C in violation of private orders from G. Here the sale is good. The representation which creates apparent authority make to be a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal's business with other persons.[16]
  2. Agency by Holding out:
    Agency by Holding out arises when the conduct of a person makes the third person to believe that person doing some act on his behalf is doing with the authority. Agency by holding out is similar to agency by estoppel, but in case of holding out some positive aspect of conduct by the principal is required to establish the agency.

    E allows F, his servant to purchase goods for him on credit from G and later on E pays for them. One day E gives cash to F to purchase goods. F misappropriates the money and purchases goods on credit from G. Now G can recover the price of the goods from E because E had held out F as his agent on earlier occasions.
  3. Agency by necessity:
    The implied agency can also arise in case of necessity and emergency situations. Section 189 of Indian contract Act deals with the agency by emergency or necessity.[17] Under section 189 of Indian contract Act,1872 an agent is empowered to do necessary acts that protects his principal from any type loss.

    Further section 188 of Indian contract Act, 1872 discusses extent of agent's authority[18] and it gives authority to an agent to do anything which is lawful and beneficial for his principal. Therefore, in case of agency by necessity an agent must acted in a bona fide manner for protection of goods or prevention of loss to principal.

    In an English case law Great Northern Railways Co. v. Swaffield, principal sent a horse to his agent through railways, but his agent went for some other work therefore he could not receive the horse. Thus, no one was there to receive horse on its arrival at destination.

    Therefore, Railway station master received the horse and he took the necessary steps to keep the horse alive, therefore station master was an agent of the necessity on behalf of principal and principal has the responsibility to pay the amount which was spent by railway company to keep the horse alive.[19]
  4. Agency by Ratification:
    In the Indian Contract Act, 1872 sections 196-200 deals with ratification. In layman terms we can say that ratification is a subsequent adoption of an activity. Ratification mainly arises where a person who do not have any authority act as an agent, or act beyond the authority, or if the principal is not bound by the contract with the agent. But the principal will be able to ratify the agent's transaction or act and he can accept his liability. For a valid ratification following essentials has to be fulfilled;

Essentials Of A Valid Ratification

  1. The act should be done on behalf of another person.[20]
  2. Ratification may be express or implied.[21]
  3. Ratification should be full knowledge of facts.[22]
  4. Existence of principal and competent to enter into a contract when the act is done.
  5. Ratification should be of the whole transaction.[23]
  6. No damage to third parties.[24]
  7. Ratification should be made within reasonable time period.
  8. Ratification should be done for a lawful act.
  9. Communication.

Important Case Laws Related To Valid Ratification:

  • Saunderson v. Griffiths[25]
    In this case law the court has clarified that a person cannot ratify an act done on behalf of his wife.
  • Keighley, Maxsted & Co. v. Durant[26]
    In this case law court has clarified that an act cannot be ratified by another person if an agent acts on his own account.
  • Ashbury Railway carriage and Iron Co. Ltd v. Riche[27]
    This is a very important case law related to the ratification of a contract by an incompetent agent. In this case it was held that if an agent purports to make a contract on behalf of principal, who at that time is himself incapable of making that contract, then principal cannot validate that contract by subsequent ratification.
  • Irvine v. Union Bank of Australia[28]
    In this important case law privy council has observed that " A ratification is in law treated as equivalent to a previous authority, and it follows that, as a general rule, a person or body of persons, not competent to authorise an act, cannot give validity by ratifying it." From this we can understand that only contracts which were entered by valid and competent persons can be ratified.
  • Savery v. King[29]
    This is an important case law related to knowledge of facts. In this case law A entered into a mortgage agreement on behalf of B. But the agreement was invalid. B purported to ratify the transaction without knowing the invalidity of the agreement. Therefore, it was held that purported ratification of the same by him was of no affect. From this we can understand the importance of communication of facts and knowledge of facts.

Agency by operation of law:
Sometimes contract of agency comes into operation by virtue of law and also in certain circumstances the law treats one person as an agent of another.

According to partnership act, every partner and other parties are considered as the agent of the firm. We can consider it as an implied agency. Further even under companies act promoters are considered as agents to the company.

Agency in Husband-and-Wife relationship:
Agency in Husband-and-wife relationship is also known as agency by co-habitation. Simply marriage alone won't create the relation of agent and principal. When a man and woman are living together and they appear to be husband and wife to a third person, the woman will be able to bind the man in the same way as if she was his wife.[30] If the husband and wife are living together then there is a presumption that wife is an agent.

But this presumption may be invalid in the following circumstances where wife is forbidden from purchasing anything on credit or from contracting debts, Where the goods purchased on credit are not necessaries, Where the wife is given sufficient money or allowances and where the trader has been expressly warned not to give credit to his wife.

If the wife lives apart from husband, then the husband is legally bound to maintain his wife, if they were living separately without any valid reasons then wife is not an agent. When the wife and husband are not living in domestic establishment then husband cannot be held liable for the purchases made by the wife.[31]

Contracts plays a very important role in the current world where everything from small things to extraordinary things starts from a contract. Contracts plays a very important role in establishing a legal relationship. In the current commercial world contract of agency plays an inevitable role. An agency is created when a person delegates his authority to another person in order to do a specific job or it may differ as per the nature of the job or task.

Establishment of a Principal Agent relationship through a contract confers some rights and duties upon both the parties. In today's world as we are witnessing, contract of agency in every possible sector is playing a very important role. By reading this article a reader will be definitely able to get a clear idea about various methods of creation of agency.

  1. Volume 1, Dr P C Markanda., Naresh Markanda And Rajesh Markanda, The Law Of Contract, (4th ed. 2018).
  2. DR. R.K. Bangia, Contract � II, (7th ed. 2017).
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  2. Anukriti Sharma, Modes of Creation of Agency, Indic Legal (sep.22,2021,10:15 PM),
  3. Toran lal verma, Modes of Creation of Agency, Commercestudy guide (sep.23,2021, 5:30 AM),
  4. Rishabh Aggarwal, Various Methods of Creation of Agency, LEGAL BITES (sep.23,2021, 7:30 AM),
  5. Sudhir Singh, an agency may be created in any of the following ways, PRESERVE ARTICLES (Sep.22 11:22 PM),
  6. Manish Jain, Modes of Creation of Agency, tax (Sep.23 12:55 PM),
  7. Falgunwariya, Essentials for creation of agency, LEGAL SERVICE INDIA E-JOURNAL (Sep.23 1:20 PM),
  8. Smriti, Modes of creating Agency, BBA NOTES (Sep.23 1:35 PM),
  9. Darshan Kadu, Three Important ways in which an agency can be created in India, SHARE YOUR ESSAYS (Sep.22 11:53 PM),
  10. Ritwik Tyagi, Contract of Agency � Features & Distinctiveness, MEDIUM (Sep.22 11:50 PM),
  11. Rohan Mathew Therattil, Power of attorney and its application in India, BNWJOURNAL (Sep.23 3:00 PM),
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  13. Amit Mishra, Creation of Agency,
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  16. Methods of creating Agency, Business Law (Sep.23 12:05 PM),
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  19. Creation of Agency, US Legal (Sep.23 1:30 PM),
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  22. Admin 1, Agency - The Indian Contract Act,1872 Notes, PROLAWCTOR (Sep.22 11:35 PM),
  23. Legislative Department,
  24. Freeman And Lockyer V. Buckhurst Park Properties (Mangal), Ltd. [1964] 1 ALL E.R. 630, DullbonlinE (Sep.23 2:20 PM),
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  26. India Kanoon,
  1. Duhaime's Law Dictionary, (last visited Sep.22, 2021)
  2. The Indian Contract Act, 1872, � 182, No.09, Acts of Parliament, 1872 (India).
  3. Syed Abdulkhader v. Rami Reddy & Ors., 1979 AIR 553, 1979 SCC (2) 601.
  4. P. Krishna Bhatta And Ors. v Mundila Ganapathi Bhatta, AIR 1955 Mad 648.
  5. The Indian Contract Act, 1872, � 183, No.09, Acts of Parliament, 1872 (India).
  6. The Indian Contract Act, 1872, � 184, No.09, Acts of Parliament, 1872 (India).
  7. The Indian Contract Act, 1872, � 185, No.09, Acts of Parliament, 1872 (India).
  8. Carr v. Hunt, 651 S.W.2d 875 (Tex. App. 1983).
  9. The Indian Contract Act, 1872, � 186, No.09, Acts of Parliament, 1872 (India).
  10. The Indian Contract Act, 1872, � 187, No.09, Acts of Parliament, 1872 (India).
  11. Syed Abdulkhader v. Rami Reddy & Ors., 1979 AIR 553, 1979 SCC (2) 601.
  12. The Indian Contract Act, 1872, � 187, No.09, Acts of Parliament, 1872 (India).
  13. Read v. Anderson (1884), 13 Q.B.D. 779, at p. 783.
  14. Dingle V. Hare, (1859) 7 C.B. (N.S) 145.
  15. The Indian Contract Act, 1872, � 237, No.09, Acts of Parliament, 1872 (India).
  16. Freeman & Lockyer v. Buckhurs Park Properties., (1964) 2 QB 480.
  17. The Indian Contract Act, 1872, � 189, No.09, Acts of Parliament, 1872 (India).
  18. The Indian Contract Act, 1872, � 188, No.09, Acts of Parliament, 1872 (India).
  19. Great Northern Railway Company v. Swaffield, (1874) LR 9 Exch 132.
  20. The Indian Contract Act, 1872, � 196, No.09, Acts of Parliament, 1872 (India).
  21. The Indian Contract Act, 1872, � 197, No.09, Acts of Parliament, 1872 (India).
  22. The Indian Contract Act, 1872, � 198, No.09, Acts of Parliament, 1872 (India).
  23. The Indian Contract Act, 1872, � 199, No.09, Acts of Parliament, 1872 (India).
  24. The Indian Contract Act, 1872, � 200, No.09, Acts of Parliament, 1872 (India).
  25. Saunderson v. Griffiths, (1826) 5 B & C, 909.
  26. Keighley, Maxsted & Cp. V. Durant, (1901) A.C. 240; (1900-3) All. E.R. 40.
  27. Ashbury Railway carriage and Iron Co. Ltd. v. Riche, (1875) L.R. 7 H.L. 653.
  28. Irvine v. Union Bank of Australia, (1877) 3 cal. 280, at 285.
  29. Savery v. king, (1856) H.L.C. 627.
  30. Debenham v. Mellon, (1880) 6 A.C. 24.
  31. Jewsbury v. Newbold, (1857) L.J. Ex. 247
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