Contract of Agency Under Contract Act

Agency is defined as a relationship between two people in which one person has the authority to act on behalf of another, thereby entitling him or her to a legal relationship with the third party. In an agency contract, there are two parties: the principal and the agent. The agency contract is based on the fact that one person cannot perform all transactions; thus, he can appoint someone else to do or act on his behalf.

In an agency contract, the agent is not only the bridge between the principal and the third party, but he may also hold the principal accountable for the acts he does. It must be noted here that the agent works in the capacity of the principal while acting for the principal.


According to Section 182 of the Indian Contract Act, the "principal" is the person for whom such an act is done or who is so represented. As a result, the person to whom authority has been delegated will be the principal.

The principal is any person who employs another person to perform an act and is represented by another person in dealings with a third party.


Section 182 of the Indian Contract Act of 1872 defines an "Agent" as "a person employed to do any act for another or to represent another in dealing with third people."

An agent is a person engaged by the principal to act on his behalf, represent him in dealings with third parties, and bring him into a contractual relationship with the third party.

Competence of the Parties to Enter into a Contract of Agency

The person employing the agent must have the legal capacity or be competent to do the act for which he employs the agency. A minor or a person of unsound mind cannot appoint an agent to represent them legally (Sec. 183). Even so, an agent so appointed does not have to be competent to contact (Sec. 184), and thus a minor or an insane person can be appointed as an agent, trying to bring about legal relations between the principal and the third party, but such an incompetent agent cannot be held personally liable to the principal.

Characteristics of Contract of Agency

Sections 183 to 185 of the Indian Contract Act explain the features or characteristics of an agency contract. A brief discussion of the characteristics of an agency contract is provided below.

The Capacity of the Principal [Section 183]

The principal must be competent to create a contract in order to form an agency contract. That is, he must be of age of majority (18+) and of sound mind. Because the agent creates a contractual relationship between the principal and a third party in an agency contract, they must be contract competent.

The Capacity of the Agent [Section 184]

The capacity of an agent in an agency contract is immaterial. Anybody can act as an agent between the principal and the third party. In other words, any person, whether a minor or otherwise unable to contract, is able to create a valid contract between his principal and a third party. However, if an agent is unable to enter into a contract, he is not liable to the principal.

Consideration Is Not Required [Section 185]

The law makes no requirement or mandate for any regard to be given to the validity of an agency contract. An agent is often compensated by commission for services provided. Yet, no consideration is provided to him at the time of his appointment.

Legal Binding

The principal is legally bound by the acts of the agent in the same way that he is legally bound by his own acts.

Formation or Creation of Agency

The agency can be formed or created in the following ways −

Actual Power is Granted to the Agent to act on Behalf of the Principal

By conferring authority on the agent, a contract of agency can be created. Such authority might be express or implied.

  • Express Authority − Express authority is provided to the agent directly by words, either spoken or written.

  • Implied Authority − The agency is said to be formed implicitly when the authority granted to the agent may be deduced from the circumstances or necessity of the case or situations of the parties.

Agent’s Authority to act in a Situation of Emergency

According to Section 189 of the Indian Contract Act, an agent has the ability to do whatever is necessary to protect his principal from any type of loss during an emergency. For example, an agent can get the goods repaired and pass them on to the buyer in order to complete the sale.

Agency by the Law of Estoppel

Sometimes the agent lacks the authority to act on behalf of the principal. Even though, the principal develops a mental picture of the third party, he recognizes that the agent has authority to act on his behalf. In such instances, the principal is liable for the acts of the agent on behalf of the third party. This is known as agency creation by estoppel.

By Ratification

When an act is done on behalf of the principal by an agent who lacks the capacity to act, the principal can either refuse to perform the liability or ratify (authorize, give formal consent) the same. When the principal ratifies the act, that is, when he approves an act done without his authority but on his behalf, he is bound by it. As a result of the two ratifying each other, an agency is created.


Contracts establishing an agency relationship are very common in business law. They can be either implied or express. A contract of agency is formed under the Indian Contract Act when a person delegated his authority to another person, appointing them to do a specific job or a number of them in specified areas of work. The establishment of a principal-agent relationship gives both parties duties and rights. Insurance agencies, advertising agencies, travel agencies, factors, brokers, and so on are all examples of such a relationship.

Frequently Asked Questions (FAQ)

Q1. What is the agency contract?

Ans. The Indian Contract Act, 1872, governs agency contracts and explains the legal relationship between the principal and agent. In India, the relationship between agent and principal is contractual in nature and therefore regulated by the terms and conditions of their contract.

Q2. What are the features of an agency contract?

Ans. The contract of agency can be created orally, expressly in writing, or impliedly by conduct. A contract of this type can also form as a result of necessity, a party, or a situation. For example, if a third party believes B is A's agent due to his conduct, B is legally deemed to be A's agent.

Q3. What is the basis of the agency contract?

Ans. The agency contract is based on the fact that one person cannot perform all transactions, thus he can appoint another person to carry out or act on his behalf.

Q4. How a contract of agency is formed?

Ans. When the principal appoints the agent by express agreement with the agent, an agency is created. A clear agreement between the principal and the agent may be oral or written.

Updated on: 03-Apr-2023


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