Contract of Agency

Contract of Agency is a legal relationship where one person (agent) is authorized to act on behalf of another (principal) to create legal obligations with a third party. The agent acts as an intermediary, and the acts performed by the agent bind the principal as if the principal had done them personally.

Definition (Section 182 of the Indian Contract Act, 1872)

“An agent is a person employed to do any act for another or to represent another in dealings with third persons.”

• Principal – The person who authorizes the agent.
• Agent – The person who acts on behalf of the principal.

Features of Contract of Agency:

• Legal Relationship Between Principal and Agent

The contract of agency establishes a legal relationship between the principal and the agent. The agent is legally authorized to act on behalf of the principal in dealings with third parties. Any act performed by the agent within the scope of authority binds the principal as though the principal had acted personally. This legal recognition is crucial in creating enforceable obligations and ensuring that actions of agents are treated as actions of the principal under the law.

• Authority to Bind the Principal

A key feature of agency is that the agent has authority to bind the principal in contracts with third parties. This authority may be express (clearly stated) or implied (derived from conduct or circumstance). When an agent enters into a contract within the scope of their authority, the contract is legally binding on the principal. This ensures that the agent can transact efficiently while safeguarding the legal rights and responsibilities of the principal.

• Involves Two Parties: Principal and Agent

A contract of agency always involves two parties – the principal, who delegates authority, and the agent, who accepts the responsibility to act on behalf of the principal. Both must be legally capable of entering into a contract. The agent must act in accordance with the instructions or interests of the principal, and the principal is legally accountable for the actions of the agent within the scope of their authority.

• No Consideration Required

Unlike other types of contracts, a contract of agency can be created without consideration. This means that the agent can agree to act on behalf of the principal without receiving any payment or reward. Although agents often receive commissions or remuneration, it is not a legal requirement for the formation of a valid agency relationship. This makes agency flexible and especially useful in informal or trust-based relationships like family or charitable arrangements.

• Creation Can Be Express or Implied

A contract of agency may be formed expressly (in writing or spoken) or impliedly (by conduct, necessity, or situation). For example, if a person repeatedly manages another’s affairs with their knowledge and consent, an implied agency may be established. In emergencies, an agency by necessity can arise even without prior approval. This flexibility in formation allows agency relationships to adapt to various commercial, legal, and personal situations.

• Principal is Liable for Agent’s Acts

When an agent acts within the scope of authority, the principal is liable for those acts and any obligations arising from them. This includes liability towards third parties and responsibility for fulfilling contracts entered into by the agent. Even if the agent acts wrongly or negligently, the principal may still be liable, provided the act was authorized. This feature is fundamental in delegation of authority and ensures trust in commercial transactions.

• Fiduciary Relationship

The contract of agency is based on trust and confidence, making it a fiduciary relationship. The agent must act in the best interests of the principal, avoiding conflicts of interest and maintaining confidentiality. Any personal gain made by the agent in the course of agency duties must be disclosed and surrendered to the principal. This fiduciary duty helps maintain ethical conduct, transparency, and accountability in the principal-agent relationship.

• Subject to Termination

An agency contract can be terminated by mutual agreement, revocation by the principal, renunciation by the agent, or operation of law (such as death, insanity, or insolvency). Additionally, agency ends once its objective is achieved. Termination must follow legal norms, and the agent must be notified properly to avoid unauthorized acts. This feature ensures that the principal retains control and the relationship remains relevant and lawful throughout its duration.

Essentials of a Valid Agency Contract:

• Existence of a Principal and an Agent

A valid contract of agency requires two legally distinct persons — a principal and an agent. The principal authorizes the agent to act on their behalf, while the agent agrees to do so. The relationship is established to carry out legal transactions with third parties. The principal must be competent to contract, although the agent need not be. This distinct relationship forms the basis for transferring authority to act legally on another’s behalf.

• Mutual Consent Between Parties

There must be mutual consent between the principal and the agent to create an agency. Both parties must willingly agree to enter into the agency relationship. Consent can be express (oral or written) or implied through conduct. The principal delegates authority, and the agent accepts it. Without clear mutual agreement, the agency contract is not valid, as legal obligations cannot be imposed on parties without free and informed consent.

• Intention to Create Legal Relationship

A valid agency contract must have the intention to create legal obligations between the principal and the agent. The agent must act on behalf of the principal in such a manner that legal consequences affect the principal. Mere advice or casual services do not form a contract of agency. The acts done by the agent should be capable of binding the principal in legal obligations with third parties.

• Lawful Purpose and Acts

The agency must be formed to carry out a lawful purpose. An agency contract cannot be created to perform illegal, immoral, or unethical acts. If the object of the agency is unlawful (e.g., smuggling or fraud), the agency is void and unenforceable in the eyes of law. This essential ensures that the agency relationship operates within the framework of legal and public policy standards set by the Indian Contract Act, 1872.

• Competency of Principal

The principal must be a person who is legally competent to contract under Section 11 of the Indian Contract Act. This means the principal must be of sound mind, not a minor, and not disqualified by law. Since the agent acts on behalf of the principal, the acts must be legally valid, and therefore, the principal must possess contractual capacity. An incompetent principal renders the agency relationship void.

• Agent’s Authority to Act

A valid agency requires that the agent has clear authority to act on behalf of the principal. The authority may be express (written or oral) or implied (based on conduct or circumstances). This authority defines the scope of the agent’s powers, and only actions within this scope are binding on the principal. If the agent exceeds authority, the principal may deny liability, unless the act is later ratified.

• Consideration Not Essential

A valid contract of agency can be formed without consideration. As per Section 185 of the Indian Contract Act, no consideration is necessary to create an agency. The agent may act gratuitously (without reward) or for remuneration. This makes agency contracts flexible and convenient in both formal and informal situations, especially where trust or duty rather than payment is the basis of the relationship, such as in family or emergency cases.

• Legal Capacity of Agent Not Mandatory

Unlike the principal, the agent need not be competent to contract. Even a minor or person of unsound mind may act as an agent, provided the acts performed are within their understanding and ability. However, such agents cannot be held personally liable for any negligence or misconduct. The law focuses on the agent’s capacity to represent, rather than their legal responsibility, since liability falls on the principal in most cases.

Duties of Agent:

• Act in good faith and interest of principal.
• Follow lawful instructions.
• Maintain accounts and secrecy.
• Avoid conflict of interest.
• Deliver all receipts and accounts to the principal.

Duties of Principal:

• Pay remuneration or commission.
• Indemnify agent for lawful acts.
• Not prevent agent from performing lawful duties.
• Recognize acts done within authority.

Rights of Agent:

• Right to remuneration.
• Right of lien on principal’s property.
• Right to be indemnified for legal acts.
• Right to compensation for injury due to principal’s negligence.

Rights of Principal:

• Right to dismiss agent for breach of duty.
• Right to recover damages for misconduct.
• Right to profits earned secretly by agent.
• Right to terminate agency in certain cases.

Termination of Agency:

An agency can end in the following ways:

1. Pannalal Jankidas v. Mohanlal (1951)

Held that a principal is liable for acts done by the agent within the scope of authority.

2. State Bank of India v. Shyama Devi (1978)

Established that the principal is not liable if the agent acts beyond authority and the third party is unaware.

Key Differences Table