Various Modes of Creation of Agency under Indian Contract Act 1872

In agency, an act done by an agent on behalf of the principal binds the principal towards a third person. The relationship of Principal and Agent between the person represented and the person representing has to exist in order that the principal’s liability towards the third person, arises. In the following situations, the principal is bound by the acts of the agent, i.e., in such situations, the agent has the power to bind his principal:

(1) By actual authority being conferred on the agent to act on behalf of the principal. Such authority may be either express or implied;

(2) By agent’s authority to act on behalf of the principal in a situation of ‘Emergency’;

(3) By the conduct of the principal, which creates an agency on the basis of the Law of Estoppel;

(4) By ratification of the agent’s act by the principal, even though the same has been done without the principal’s prior authority;

(5) By presumption of agency in Husband-Wife relationship.

(1) Acts done with Principal’s Actual Authority

A principal is bound by the acts done by his agent with his authority. The authority of an agent may be expressed or implied.(Section 186)

Section 187 defines express and implied authority as under:

Express Authority

An authority is said to be express when it is given by words spoken or written.

Implied Authority

An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.

For instance:- A owns a shop in Serampore, living himself in Calcutta, and visiting the shop occasionally. The shop is managed by B, and he is in the habit of ordering goods from C in the name of A for the purpose of the shop and of paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods (on credit) from C in the name of A for the purposes of the shop.

Extent of Implied Authority

Section 188 explains the extent of the authority of an agent as follows:

“188. Extent of agent’s authority-An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act.

An agent having an authority to carry on business has authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business.


(a) A is employed by B, residing in London, to recover at Bombay a debt due to B. A may adopt any legal process necessary for the purpose of recovering the debt, and may
give a valid discharge for the same.

(b) A constitutes B his agent to carry on his business of a ship builder. B may purchase timber and other materials, and hire workmen for the purpose of carrying on the business.”

Implied authority of an agent means such authority which has not been conferred by the express words, but which can be inferred from the circumstances of the case, or the course of dealing between the parties, or the usage of the particular trade. An agent employed to sell a horse has an implied authority to give a warranty that the horse is sound, an agent having authority to receive goods on behalf of the principal has an implied authority to acknowledge the payment due, an agent having an authority to make a bet has an implied authority to make the payment if the bet is lost, or an agent having been authorized to sell artificial manure has an implied authority to warrant as to the proportion of its ingredients.

The agent’s implied authority depends on the nature of business which the agent has been authorized to transact. When the agent exercises the authority vested in him, the principal is bound thereby. In Ishaq v. Madanlal A.I.R. 1965 All. 34, the plaintiff, a wholesale dealer of potatoes at Fatehgarh in U.P., sold and dispatched wagon of potatoes to the defendant, a dealer of potatoes at Khandwa in Madhya Pradesh. The defendant refused to take delivery of the goods. The plaintiff then sent, his munim (agent) to Khandwa authorizing the munim to take delivery of the potatoes and sell them there “at any price he chooses.” The munim contacted the defendant and other dealers in the trade. The offer made by the defendant for this consignment was the highest, but this amount was Rs. 700 less than what the defendant had originally agreed to pay. The munim accepted this payment and gave in writing that this payment was a full settlement of the claim of the plaintiff against the defendant. The
plaintiff accepted this money but brought an action to recover the balance of Rs. 700 from the defendant. The question which had arisen in this case was, did the agent in this case have an implied authority to accept smaller amount in cash from the defendant in settlement of the whole claim? It was held that in this case the agent has an implied authority under Section 188 to accept smaller amount of ready cash together with abandonment of a claim for money by the principal against the purchaser. The plaintiff’s action failed. It was observed that in a case like this, “the person with whom the agent deals will be entitled to presume that the agent has implied authority to accept any consideration from the fact that the agent is armed with the power to take delivery of the goods and to dispose of them, and the fact that the agent accepts the particular terms offered, it is not necessary for the purchaser, in these circumstances, to make inquiries from the principal about the extent of the authority of the agent.”

If an agent has implied authority to do an act, the principal is bound towards the third person when the agent exercises such authority. The principal continues to be bound for the same even if he has prohibited or restricted the agent from doing the act, unless the third person knows of the restriction. The termination of authority of an agent does not have effect as regards third persons until it becomes known to them.(Section 208)

If an L.I.C. agent in his letter of appointment has been expressly prohibited from collecting premium on behalf of the L.I.C., and the rules also prohibited an agent from collecting any premium, it cannot be said that the collection of the premium was necessary for or incidental to the effective execution of the express authority granted
to an L.I.C. agent.( Harshad J. Shah v. L.I.C., A.I.R. 1997 S.C. 2459)

Also Read Define Agency. What are the different kinds of Agents? What are the essential features of a contract of Agency?

(2) Agent’s authority in an Emergency (Section 189)

Section 189 explains an agent’s authority in an emergency, as under :

“189. Agent’s authority in an emergency.-An agent has authority in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person
of ordinary prudence in his own case, under similar circumstances.


(a) An agent for sale may have goods repaired if it be necessary.

(b) A consigns provisions to B at Calcutta, with directions to send them immediately to C at Cuttack. B may sell the provisions at Calcutta if they will not bear the journey to Cuttack without spoiling.”

(3) Principal bound by Estoppel

Sometimes the agent has neither express nor implied authority to do an act on behalf of the principal, but the principal by his conduct creates an impression in the mind of the third person that the agent has an authority to act on his behalf. In such a case, the principal is liable towards the third person for the acts done by the agent, on the ground of the application of the law of estoppel. The basis of the action is what appears to the third person to be an authority, i.e., apparent or ostensible authority conferred on the agent. Section 237 contains the following provision in this regard :

“237. Liability of principal inducing belief that agent’s unauthorized acts were authorized.-When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority.”

The provision has been explained by the following illustrations:

(a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to buy the goods
at a price lower than the reserved price. A is bound by the contract.

(b) A entrusts C with negotiable instruments endorsed in blank. B sells them to C in violation of private orders from A. The sale is good.

The House of Lords in Armagas Ltd. v. Mundogas S.A. (1986) A.C. 717, stated:

….. Ostensible authority comes about where the principal by words or conduct has represented that the agent has the requisite actual authority, and the party dealing with the agent has entered into a contract with him in reliance on that representation. The principal in these circumstances is estopped from denying that actual authority existed. In the commonly encountered case, the ostensible authority is general in character, arising when the principal has placed the agent in a position which in the outside world is generally regarded as carrying authority to enter into transactions of the kind in question. Ostensible authority may also arise where the agent has had a course of dealing with a particular contractor and the principal has acquiesced in this course of dealing and honoured transactions arising out of it.

In Gurtner v. Beaton (1993) 2 Lloyd’s Rep. 369, their Lordship quoted with approval the following observations from Freeman and Lockyer v. Buckhurst Park Properties (1964) 2 Q.B. 480 :

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.

(4) Principal bound by Ratification

It has been noted above that a principal is bound by acts done by the agent with his authority which may be express or implied. He is also bound by acts done in emergency. In addition, he is bound on grounds of estoppel when there is apparent or ostensible authority vested in the agent. It has also been noted that when the agent does an act for which he does not have any authority, the principal is not bound for the same. To this there is an exception when the principal may be bound even for acts done without any authority. If the principal ratifies, i.e., accords subsequent approval to an act done without his authority, but on his behalf, the principal would be bound in respect of such act. Section 196 to 200 cover law dealing the principal bound by ratification.

The act should be done on behalf of another person. (Section 196).

The principal should be in existence, and competent to contract when the act is done.

Ratification may be express or implied. (Section 197).

Ratification should be with full knowledge of the facts. (Section 198).

Ratification should be of the whole transaction. (Section 199).

Ratified acts should not be injurious to third person. (Section 200).

Ratification should be made within a reasonable time.

(5) Agency in Husband-Wife relationship

Agency by Co-habitation

A married woman cohabiting with her husband is presumed to have the power to pledge the credit of her husband for necessaries. She may receive the supply of goods and services which may be required for the domestic use or which may be of use to her husband, herself or the children. If such goods or services are necessary, according to the condition of life of that family, the husband becomes bound to pay for them. 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.( Debenham v. Mellon, (1880) 6 A.C. 24)

The implied authority to the wife to bind the husband arises when the husband and wife are cohabiting. If they are living separately, there is presumed to be no such authority in wife to pledge the credit of her husband. It is further necessary that the husband and wife must be living in a domestic establishment. If the husband and wife are living in a hotel, where they have been working as manager and manageress respectively, i.e., when the two are not living in a domestic establishment, the husband cannot be made liable for the purchases made by the wife.(Jewsbury v. Newbold, (1857) 26 L.J. Ex. 247)

If the third person gives credit to the wife only, or when the husband revokes the authority by giving a notice to a third person, he is not bound by the wife’s act.

Agency of Necessity

Even though the husband and wife were not living together, for instance, when either the husband deserted his wife, or the wife started living separately because of some justifiable reason, the common law recognized the right of the wife to pledge the credit of the husband in respect of necessaries suitable to the style of living to which she was accustomed. Such agency was presumed to exist when the husband was neither supporting her, nor she had her own sufficient means to support herself. Since 1970, the Courts have been empowered by the Matrimonial Proceedings and Property Act, 1970, to order the maintenance of wife and children if the husband willfully neglects to maintain them, and, therefore, the wife’s agency of necessity has been abolished.

There is no agency of necessity in respect of husband-wife relationship, in India, because the right of maintenance of the wife is governed by the personal law applicable to the parties.

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