Contract of Agency
Introduction
A contract of agency is a key concept in business law where one person acts on behalf of another. Most commercial transactions are carried out through agents, making this topic highly important for exams and practical understanding. The Indian Contract Act, 1872 governs agency relationships.
Meaning / Definition
A contract of agency is a relationship where one person (agent) is authorised to act on behalf of another person (principal) in dealings with third parties.
- Principal: Person who gives authority
- Agent: Person who acts on behalf of the principal
- Third Party: Person with whom the agent deals
The agent does not act for himself but represents the principal. The acts of the agent bind the principal if done within authority.
Modes or Types
Types of Agency
Express Agency
Created by clear words, spoken or written.
Implied Agency
Created by conduct (behaviour), situation, or relationship between parties.
Essentials of a Contract of Agency
Delegation of authority
The principal gives authority to the agent to act on his behalf.
Binding nature of acts
Acts done by the agent within authority bind the principal legally.
No consideration required (Section 185)
No payment or benefit is required to create an agency.
Capacity of Parties
Who can appoint an agent (Section 183)
- Must be major (above 18 years)
- Must be of sound mind
Who can be an agent (Section 184)
- Any person can be an agent
- Even a minor or person of unsound mind can act as an agent
However, such an agent is not personally liable to the principal.
Liability in Agency
Principal’s liability
The principal is liable for all lawful acts done by the agent within the scope of authority.
Agent’s liability
- Agent is generally responsible to the principal
- Minor or unsound agent is not personally liable
Sub-Agent
An agent can appoint a sub-agent if:
- allowed by the principal, or
- required by nature of work
If the agent is removed, the sub-agent is also automatically removed.
Practical Example
A asks B to purchase goods on his behalf.
- A is the principal
- B is the agent
- Seller is the third party
The contract made by B will bind A as if A himself made it.
Summary
- Agency is a relationship where one person acts for another
- Three parties: principal, agent, and third party
- Agent binds the principal through his acts within authority
- No consideration is required to create agency
- Only a major and sound person can appoint an agent
- Any person can act as an agent, but may not be liable
- Principal is liable for lawful acts of agent
- Sub-agent can be appointed with permission