Understanding Agency
In modern commerce, it is almost impossible for one person to manage all aspects of business personally. This is where agency becomes an essential legal concept. An agency is a relationship in which one person, called the agent, is authorized to act on behalf of another person, called the principal, in dealings with third parties. The relationship is governed by the Indian Contract Act, 1872, primarily under Sections 182 to 238.
The creation of agency is fundamental because it determines the rights, obligations, and liabilities of both principal and agent. Agency enables business efficiency, risk management, and smooth transactions. There are multiple methods through which an agency can be created, and each method has specific legal implications. Understanding these methods is crucial for both legal practitioners and business professionals.
1. Agency by Express Agreement
Definition and Legal Basis
An agency can be created expressly, either orally or in writing, by an agreement between the principal and the agent. In an express agency, the principal clearly authorizes the agent to act on his behalf in performing specific acts.
According to Section 185 of the Indian Contract Act, 1872, such an express agreement establishes the rights and obligations of both parties and forms the foundation of a lawful agency. The scope of authority, remuneration, and duties are usually specified in the agreement.
Example
If a business owner appoints a sales manager to sell goods in a particular territory, and a written agreement specifies the sales targets, commission, and duration, this constitutes an agency by express agreement. The sales manager (agent) has the authority to enter into contracts with customers on behalf of the principal, as per the terms agreed upon.
2. Agency by Implied Agreement
Definition and Legal Basis
An agency can also arise by implication from the conduct, situation, or circumstances of the parties. Unlike express agency, no explicit words or document are required. Implied agency is inferred from facts or necessity, or from a previous course of dealing.
Sections 186 and 187 of the Indian Contract Act recognize implied agency, especially in cases where the agent’s authority is necessary to carry out the principal’s business.
Example
A company regularly sends goods to a market through a local agent. Even without a written agreement, the agent’s authority to sell and deliver goods is implied by the company’s previous conduct and established practices. Similarly, in emergencies, if a principal is unavailable, an agent acting in good faith may have implied authority to perform necessary acts.
3. Agency by Ratification
Definition and Legal Basis
An agency by ratification occurs when a person (the principal) approves an act done by another person (agent) without prior authority. According to Section 196 of the Indian Contract Act, such ratification retroactively validates the act as if the agent had authority from the outset.
This method is often used when the agent acts beyond the original authority or the principal was initially unaware of the act.
Example
Suppose an employee signs a contract on behalf of a company without prior authorization. Later, the company decides to approve the contract. By this ratification, the employee’s act becomes legally binding as if he had authority from the beginning. Ratification must be express or implied, and it must occur before the third party withdraws from the contract.
4. Agency by Necessity
Definition and Legal Basis
Agency by necessity arises in situations of urgency or emergency, where the agent acts to protect the principal’s interests without prior consent. This is recognized under Section 187 of the Indian Contract Act.
The key conditions for such agency include:
- Urgent necessity for acting without prior consent,
- Protection of principal’s property or interest, and
- No undue benefit to the agent.
Example
If a ship carrying goods encounters a storm, and the captain must sell perishable goods at a nearby port to avoid total loss, the captain acts as an agent by necessity. The principal is legally bound to honor the sale since the action was necessary to protect the principal’s interest.
5. Agency by Estoppel (Agency by Representation)
Definition and Legal Basis
Agency by estoppel, also called apparent authority, arises when a principal’s conduct leads a third party to reasonably believe that someone is acting as their agent. According to Section 226, the principal cannot deny the agency if the third party acts in reliance on such representation.
This method protects third parties who rely on the apparent authority of the agent.
Example
If a company allows a manager to negotiate contracts publicly and regularly deals with customers in that capacity, the company cannot later deny that the manager had authority to act. The principal is estopped from denying agency because their conduct created reliance by the third party.
6. Agency by Operation of Law
Definition and Legal Basis
In certain situations, agency arises automatically by operation of law, without the need for consent or agreement. This happens to protect the interests of a minor, a bankrupt person, or in emergency situations recognized by law.
Example
A guardian managing the property of a minor automatically acts as an agent of the minor. Similarly, in the case of court-appointed receivers or executors of estates, the law imposes agency duties for legal and commercial purposes.
7. Agency by Partnership or Employment
Definition and Legal Basis
Every partner in a firm is considered an agent of the firm for the purposes of conducting its business, as per Section 182 and Section 19 of the Indian Partnership Act, 1932. Similarly, employees may act as agents in carrying out their employment duties.
Example
If a partner in a trading firm orders goods from a supplier, the firm is bound by the partner’s act, as the partner is acting as an agent of the firm. Likewise, a sales manager signing contracts within the scope of his employment acts as an agent.
Real-Life Example: Multiple Methods in Practice
Consider an e-commerce company:
- A regional sales manager has an express authority to negotiate with retailers.
- In emergencies, the manager may sell goods under agency by necessity to prevent spoilage.
- Occasionally, junior staff may sign small supply contracts without express authority, later ratified by management.
- The company cannot deny authority to the manager who regularly interacts with suppliers under agency by estoppel.
This demonstrates how multiple agency creation methods coexist in modern business operations.
Mnemonic to Remember Methods of Creation of Agency — “E.I.R.N.E.O.P.”
Use the mnemonic “E.I.R.N.E.O.P.” to recall the main methods:
- E – Express agreement
- I – Implied agreement
- R – Ratification
- N – Necessity
- E – Estoppel (Apparent authority)
- O – Operation of law
- P – Partnership/Employment
Mnemonic Sentence:
“Every Intelligent Representative Needs Every Opportunity Properly.”
This helps students and professionals remember all seven methods of agency creation efficiently.
About lawgnan:
Master the concept of Agency under the Indian Contract Act, 1872 with simplified explanations, real-life examples, and easy mnemonics at Lawgnan.in. Learn how agencies are created through express, implied, or legal means and understand their impact on business and commercial transactions. Lawgnan provides comprehensive LLB notes, case studies, and exam-focused materials designed to help law students and professionals grasp complex legal principles with clarity. Explore expert-written articles covering every aspect of contract and commercial law to strengthen your legal foundation. Visit Lawgnan.in today — your reliable source for quality legal education and study resources.
