S.N.D.

T WOMEN’S UNIVERSITY LAW SCHOOL

3RD YEAR B.B.A LL.B SEMESTER VI

A.Y. 2024-2025

NAME: JANHVI VILAS SHINDE

ROLL NO.: 29

SUBJECT: CONTRACT - II

NAME OF THE TOPIC: ESSENTIALS OF A CONTRACT OF

AGENCY

SUBMITTED TO: MS. DEEPTI KANORIA

SUBMISSION DATE: 26TH MARCH 2025

SIGNATURE

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 ACKNOWLEDGEMENT

I would like to express my heartfelt gratitude to all those who have supported and contributed

to the completion of this project on ‘Essentials of Contract of Agency’

First and foremost, I would like to extend my sincere thanks to my Contract Law teacher

‘Ms. Deepti Kanoria’ for her invaluable guidance, unwavering support, and valuable insights

throughout the research and writing process. Her expertise and encouragement have been

instrumental in shaping this project.

I am also deeply thankful to the Department Head ‘Mr. Rajesh Wankhede’ for their assistance

in accessing the necessary resources and reference materials required for this project. Their

cooperation and willingness to assist students have greatly facilitated my research.

I am grateful to my friends and peers who provided me with motivation and encouragement,

as well as engaging in meaningful discussions on the topic, which enriched my understanding

of the subject matter.

I would like to acknowledge the contributions of the authors of the various textbooks, articles,

and research papers that I consulted during my research. Their work helped me throughout the

project.

This project would not have been possible without the collective efforts and support of all these

individuals and institutions. I am deeply appreciative of their contributions.

Thankyou.

Sincerely,

Janhvi Shinde

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 INDEX

Sr No. Content Pg No.

1. Introduction 4
2. Importance of Agency 6
3. Essentials of a Contract of Agency 6-9
4. Types of Agents 10-12
5. Modes of Creation of Agency 12-14
6. Rights and Duties of an Agent 14-15
7. Rights and Duties of Principal 15-16
8. Termination of Agency 16-18

9. Case Study 18-19

10. Conclusion 19
11. References 20

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INTRODUCTION

In the modern business world, individuals and companies frequently delegate tasks and
responsibilities to others to enhance efficiency and productivity. The legal relationship that
arises when one person (the agent) is authorized to act on behalf of another (the principal) is
known as the Contract of Agency. This legal concept plays a crucial role in commercial
transactions, employment relations, and legal matters, allowing businesses and individuals to
conduct operations through representatives.

Agency law ensures smooth transactions, defines the rights and responsibilities of agents and
principals, and establishes accountability in business dealings. Understanding the essentials of
the contract of agency is fundamental for anyone involved in business or law.

Definition of Agency

Agency is a legal relationship in which one party, known as the principal, appoints another
party, known as the agent, to act on their behalf in business dealings, legal matters, or other
transactions. The actions and decisions taken by the agent, within the scope of their authority,
are considered legally binding on the principal.

Legal Definition

According to 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. The person for whom such act is done, or who is so represented, is called
the principal."

Key Features of Agency

 There must be a principal who delegates authority.

 There must be an agent who acts on behalf of the principal.

 The agent’s actions, within their given authority, legally bind the principal.

 Agency may be express, implied, or created by law.

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Meaning of an Agent:

According to section 182 of 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 thus an agent establishes
a contract between the principal and third party.

Section 184 talks about who may be an agent. Anybody can be an agent as he is only
representing the principal with the third party. It is immaterial whether the agent has the
capacity to enter into a contract or not, therefore, a minor or a person of unsound mind can also
become an agent.

An agent who is age of majority & of sound mind is responsible to his principal. An agent who
is minor or person of unsound mind cannot be liable to the person.

Meaning of Principal:

Principal is a person from whom act is done by an agent or who is represented in dealings with
third persons by an agent.

Sec 183 talks about who may be a principal. Any person competent to contract that is of sound
mind and who has attained the age of majority can be a principal by appointing someone to act
on his behalf. However, the act must not be of personal nature.

According to section 185 consideration is not necessary to create an agency thus, a contract of
agency constitutes an exception to the general rule no consideration no contract. This means
that there can be a gratuitous contract of agency and the gratuitous agent will be as much bound
by his act as a paid agent.

Illustration

 If a company appoints a lawyer to negotiate a contract with another firm, the lawyer
acts as an agent and has legal authority to bind the company.

 If the company hires a driver to transport goods, the driver is a servant because they
do not have authority to enter into contracts on behalf of the company.

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IMPORTANCE OF CONTRACT OF AGENCY:

Agency plays a vital role in commercial, financial, and legal operations. The concept of
agency enables individuals and businesses to operate efficiently by delegating
responsibilities. Some key benefits include:

1. Facilitates Business Operations

 Large businesses, corporations, and organizations rely on agents such as managers,

employees, brokers, and representatives to handle different business functions like
sales, contracts, and negotiations.

2. Enables Delegation of Authority

 Agency allows a principal to delegate tasks to an agent who has expertise in a specific
area, ensuring efficient and professional management of business affairs.

3. Ensures Legal Representation

 In legal matters, lawyers act as agents for their clients, representing them in courts and
legal dealings. This ensures that legal rights and responsibilities are upheld.

4. Supports International Trade and Transactions

 Businesses operating in different geographical locations use agents to conduct trade and
business negotiations on their behalf. This is common in import-export businesses
where local agents help in dealing with legal requirements.

5. Reduces Workload and Enhances Efficiency

 By appointing agents, business owners and corporate leaders can focus on decision-
making and growth strategies while agents handle day-to-day operations.

ESSENTIALS OF A CONTRACT OF AGENCY

The Contract of Agency is a legal relationship where one party (the principal) authorizes
another party (the agent) to act on their behalf. This contract enables businesses and individuals

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to delegate tasks and responsibilities while ensuring legally binding transactions. For a valid
agency relationship to exist, certain essential elements must be fulfilled.

[Link] and Agent Relationship:

The foundation of an agency contract lies in the relationship between the principal and the
agent. The principal is the person who grants authority, and the agent is the person who acts
on behalf of the principal in business or legal matters.

a) Who Can Be a Principal?

A person must meet the following criteria to be a principal:

 They must be competent to contract (as per Section 183 of the Indian Contract Act,
1872).

 They must be of sound mind and of legal age (majority).

 An entity such as a corporation or a company can also act as a principal, provided it

is legally registered and recognized by law.

Example: A company appointing a sales representative to negotiate contracts with customers.

b) Who Can Be an Agent?

Unlike a principal, any person can become an agent, including minors or persons of unsound
mind, as long as they can perform the assigned tasks effectively.

 An agent does not need contractual capacity (as per Section 184 of the Indian
Contract Act).

 The agent's role is to act on behalf of the principal, meaning their competency is
judged by their ability to perform the assigned duties rather than their legal capacity.

Example: A 17-year-old can be a delivery agent for an e-commerce company, but they cannot
enter into a legal contract themselves.

c) Legal Capacity of Both Parties

 The principal must be legally competent (major and of sound mind).

 The agent can be any person who has the capability to act effectively on behalf of the
principal.(sound mind)

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2. Mutual Consent:

For an agency relationship to exist, there must be mutual consent between the principal and
the agent. However, agency does not always require a formal agreement.

a) No Need for a Formal Agreement

A contract of agency can be:

 Express – Created through a written or oral agreement.

 Implied – Established through conduct, relationship, or necessity.

Example: A businessman regularly sending his assistant to sign contracts on his behalf without
any written authorization. Over time, this becomes an implied agency.

b) Express or Implied Consent

 Express Agency: When both parties explicitly agree (either orally or in writing).

 Implied Agency: When an agent’s authority is inferred from the principal’s conduct or
circumstances.

Example: A shop owner allowing their manager to make purchases for the store, even without
a written agreement, constitutes an implied agency.

3. Consideration is Not Necessary:

Unlike other contracts, a contract of agency does not require consideration. The agent may
or may not be paid, yet the relationship remains valid.

 Other contracts require consideration (money or benefit) for validity.

 In an agency contract, consideration is not mandatory, as long as the agent agrees

to act on behalf of the principal.

Example: A friend authorizing another to buy property on their behalf without payment. Even
if the agent is unpaid, the contract is still legally binding.

4. Competency of the Principal:

For a contract of agency to be valid, the principal must be competent as per contract law.

a) A Minor Cannot Be a Principal

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  Since a minor cannot enter into contracts, they cannot appoint an agent.

 If a minor appoints an agent, the contract of agency is void.

Example: A 16-year-old cannot legally authorize an agent to sell property on their behalf.

b) Agent’s Competency in Performing the Assigned Duties

 While an agent does not need to be legally competent, they must be capable of
carrying out assigned tasks.

 If an agent is incompetent in fulfilling their duties, the principal can revoke their
authority.

Example: A person who does not understand banking laws cannot act as an agent for financial
transactions.

5. Legality of the Object:

The purpose of the agency must be lawful for the contract to be enforceable. If the objective is
illegal, the agency contract is void.

a) The Purpose of the Agency Must Be Lawful

 The agent cannot be appointed to conduct illegal or unethical transactions.

 Any act that violates the law will make the contract null and void.

Example: Hiring an agent to smuggle goods is not a valid agency contract, as the purpose is
illegal.

b) Any Illegal or Fraudulent Acts Render the Contract Void

 If the agent engages in fraudulent activities on behalf of the principal, the contract can
be terminated, and legal action may be taken.

Example: If a business hires an agent to counterfeit currency, the contract is not legally
enforceable.

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TYPES OF AGENTS
1. General Agent

A general agent is an agent who is authorized to conduct all business of a particular kind on
behalf of the principal. They have broad authority to perform tasks related to a specific area of
the principal’s business.

Characteristics:

 Has continuous authority for a particular business or trade.

 Can make binding decisions for the principal within the scope of their duties.

 Their authority is not limited to a single transaction.

Example:

 A business manager hired to run a store on behalf of the owner.

 A company’s legal advisor who handles all legal matters for the firm.

2. Special Agent

A special agent is appointed for a specific task or transaction and has limited authority. Once
the task is completed, the agency relationship ends.

Characteristics:

 Can only perform specific duties assigned by the principal.

 Does not have the authority to make decisions beyond the assigned task.

 Their role ends once the task is completed.

Example:

 A real estate agent hired to sell a particular property.

 A lawyer hired to represent a client in one particular case.

3. Sub-Agent

A sub-agent is a person appointed by an agent to assist in performing their duties under the
authority of the principal. However, the appointment of a sub-agent must be authorized by the
principal or necessary for the agency work.

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Characteristics:

 Works under the original agent but ultimately reports to the principal.

 Their actions are binding on the principal if the sub-agency is valid.

 If the original agent appoints a sub-agent without authority, the principal is not bound
by their actions.

Example:

 A real estate agent appointing a junior agent to assist in property sales.

 A law firm partner assigning a junior lawyer to work on a case for a client.

Legal Rule:

As per Section 191 of the Indian Contract Act, 1872, a sub-agent is liable to the original
agent and not directly to the principal unless the principal has approved their appointment.

4. Co-Agent

When multiple agents are appointed jointly to perform a particular task, they are known as co-
agents. They must act together unless specified otherwise by the principal.

Characteristics:

 They have equal authority and must work in coordination.

 They are collectively responsible for carrying out their duties.

 If the principal specifies different roles, they act accordingly.

Example:

 A company appoints two directors to manage different operations jointly.

 A law firm appoints multiple lawyers to handle a high-profile case together.

5. Broker

A broker is an independent agent who acts as an intermediary between buyers and sellers to
negotiate and finalize transactions. They do not have possession of the goods or services they
deal in.

Characteristics:

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  Their primary role is to connect buyers and sellers.

 They earn a commission based on the successful transaction.

 They do not have authority to bind the principal unless expressly authorized.

Example:

 Stockbrokers who buy and sell stocks on behalf of investors.

 Real estate brokers who find buyers and sellers for properties.

6. Factor

A factor is an agent who is entrusted with the possession of goods to sell on behalf of the
principal. Unlike brokers, factors have the authority to sell goods and can even pledge them for
securing loans.

Characteristics:

 They have actual possession of the goods.

 They can sell goods in their own name and even provide credit to buyers.

 They have a lien on the goods for their commission and expenses.

Example:

 A wholesale dealer entrusted with selling imported goods on behalf of the

manufacturer.

 A commission agent selling agricultural produce in a local market.

MODES OF CREATION OF AGENCY

1. By Express Agreement (Written or Oral)

 An agency can be created through a formal agreement between the principal and the
agent.

 This agreement can be written (such as a contract) or oral (where the principal gives
verbal authority).

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  Example: A company appoints a sales representative through a signed contract.

2. By Implied Agreement (Conduct, Relationship, or Necessity)

 Agency may arise based on the conduct of the parties or their relationship.

 Even without a formal agreement, if the principal’s actions suggest they have given
authority, an agency is implied.

 Example: A manager regularly negotiating contracts for the company without formal
appointment.

Implied agency includes (a) agency by estoppel, (b) agency by holding out, and (c) agency
by necessity

a) By Estoppel (Principal’s Representation to Third Party)

 If the principal allows a third party to believe that someone is their agent, they cannot
later deny the agency relationship.

 The principal is estopped (prevented) from denying the agent’s authority.

 Example: A business owner lets a person negotiate deals on their behalf. If the third
party relies on this, the business owner is bound by the agent’s actions.

b) By Holding Out

 Agency by holding out is a branch of the agency by estoppel. In this case, a prior
positive or affirmative act on the part of the principal is necessary to establish agency
subsequently. The principal will be bound by the acts of the agent if on an earlier
occasion he has given other person to believe that such acts are done with his authority.
 Example: 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.

c) Agency by necessity

 Agency by necessity arises in emergency situations where urgent action is required, and
it is not possible to obtain the principal's instructions. The agent acts out of necessity to
protect the principal's interests.

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  Example: When A goes out of town, locking his house and the house catches fire and
B, his neighbour, engages a number of servants to remove the things from the house
and put out the fire. A becomes liable to the servants engaged by B for their wages and
this is because B acted as agent of A for this purpose and an agency is implied in law
from the necessities of the case.

4. By Ratification (Principal Approves Agent’s Previous Unauthorized Act)

 If an agent acts without authority but the principal later approves the act, the agency
is created by ratification.

 The approval can be express (direct approval) or implied (accepting benefits from
the act).

 Example: An employee purchases supplies for the company without permission. If the
company later pays for them, it ratifies the transaction.

5. By Operation of Law (Legal Obligation, e.g., in Necessity)

 In some cases, agency is created automatically due to legal obligations or emergencies.

 Example: If a ship captain buys essential goods during a voyage due to an emergency,
the shipowner is liable for the payment.

RIGHTS AND DUTIES OF AN AGENT

Rights of an Agent

An agent enjoys several rights, including:

1. Remuneration: The agent has the right to receive remuneration as per the agreement.
If there is any misconduct in the activities of the agent, he would not get any
remuneration.
2. Right to Retention: The agent has the right to retain the amount of money received on
account of the principal, the entire outstanding balance regarding advances, or the
expenditures to run the business.

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 3. Right to lien: If commission and disbursement are not received by the agent, then he
has the right to lien on the property of the principal until he receives his due, subject to
some conditions.
4. Indemnity: The compensation shall be provided to the agent by the principal against
the outcomes of the entire legal activities performed by them.
5. Right to compensation: For any losses or damages faced by the agent because of the
lack of competency of the principal, compensation shall be provided to the agent.

Duties of an Agent

An agent has several duties towards the principal, including:

1. Carry out the business of the principal: The business of the principal shall be
conducted by the agent as per the guidance provided by them.
2. Reasonable knowledge and diligence: It is the duty of the agent to carry out activities
by using reasonable skills and diligence.
3. Communication: The agent must communicate with the principal and carry out
activities according to the directions provided by the principal.
4. Provide Accounts: As per the demand of the principal, the agent shall provide the
appropriate accounts.
5. Evade conflict of interest: If the agent performs activities without the permission of
the principal, then the principal could reject the transaction if the agent significantly
performs activities in a dishonest way or if it is disadvantageous for the principal.
6. Remittance of sum: It is the duty of the agent to transfer the entire amount of money
received on behalf of the principal.

RIGHTS AND DUTIES OF PRINCIPAL

Rights of Principal

1. Right to Demand Proper Performance

o The principal has the right to expect the agent to carry out their duties with care, skill,
and diligence.
o The agent must act within the authority given and follow the principal’s instructions
properly.

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 o If the agent fails to perform their duties correctly, the principal can take legal action.

2. Right to Recover Loss Due to Agent’s Negligence

o If the agent acts negligently, dishonestly, or beyond their authority, causing financial
loss to the principal, the principal has the right to claim compensation.
o The agent is legally responsible for any damages caused due to breach of duty.

Duties of a Principal

1. Duty to Pay Commission or Salary

o The principal must compensate the agent for their services as agreed upon in
the contract.

o This could be in the form of a fixed salary, commission, or any other

remuneration.

o If no specific amount is agreed upon, the principal should pay a reasonable

amount based on industry standards.

2. Duty to Reimburse Lawful Expenses

o If the agent incurs expenses while performing their duties (e.g., travel costs,
business expenses), the principal is required to reimburse these costs.

o However, only lawful and necessary expenses related to the agency's work will
be reimbursed.

TERMINATION OF AGENCY

Termination of agency refers to the end of the legal relationship between the principal and the
agent, where the agent's authority to act on behalf of the principal ceases.

The termination can occur through various means, each with specific legal implications. Below
is a detailed exploration of the different methods and circumstances under which an agency
can be terminated, as outlined in the provided content.

1. By Revocation by the Principal (Section 201)

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The principal has the right to revoke the authority given to the agent at any time, provided
sufficient notice is given to the agent. This revocation can be for any reason, but it must be
communicated effectively to the agent.

Conditions:

 Single Act Agency: If the agency is for a single act, the principal can revoke the
authority at any time before the commencement of that act.

 Continuous Agency: For continuous agencies, the principal must notify both the agent
and any third parties who have acted on the agency with the principal's knowledge.

 Fixed Period Agency: If the agency is for a fixed period, revocation without sufficient
cause may require the principal to compensate the agent (Section 205).

Exceptions:

 Agency Coupled with Interest: An agency coupled with interest cannot be revoked to
the detriment of that interest unless there is an express contract to the contrary (Section
202).

 Partly Exercised Authority: The principal cannot revoke the authority after it has been
partly exercised concerning acts and obligations arising from acts already done in the
agency (Section 204).

2. On the Expiry of Fixed Period of Time

When an agency is established for a specific period, it automatically terminates upon the expiry
of that period.

Example: A contract of agency for six months: The agency ends automatically after six months,
regardless of whether the tasks assigned have been completed.

3. On the Performance of the Specific Purpose

If the agency is created for a specific purpose, it terminates once that purpose is accomplished
or becomes impossible to perform.

Example: A is appointed to sell a particular property: The agency ends once the property is
sold or if selling the property becomes impossible due to legal or physical reasons.

4. Insanity or Death of the Principal or the Agent (Section 209)

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The agency relationship automatically terminates if either the principal or the agent becomes
insane or dies.

Agent's Duty: In the event of the principal's death or insanity, the agent must take all
reasonable steps to protect and preserve the interests and property entrusted to him on behalf
of the principal or the principal's legal representatives.

5. When the Subject Matter is Either Destroyed or Rendered Unlawful

The agency terminates if the subject matter of the agency is destroyed or if the purpose of the
agency becomes unlawful.

Example: A is appointed to sell a specific car: If the car is destroyed in an accident, the agency
terminates.

6. Insolvency of the Principal

The agency terminates if the principal becomes insolvent. However, the insolvency of the agent
does not terminate the agency.

Example: P, a business owner, becomes insolvent: The agency relationship with A, who was
managing P's business, ends.

CASE STUDY

1. Sheikh Farid Baksh vs Hasgulal Singh:

Background:

Hargulal Singh sued for Rs. 179 as commission for arranging the sale of Farid Bakhsh’s shop
in June 1932. He claimed he found a buyer (Shanti Sarup) and finalized the deal, with earnest
money paid on July 15, 1932. The sale was settled Customer had also paid advance money.
But sale was not completed cause customer was not able to pay full money. A letter from Farid
Bakhsh (dated July 14, 1932) confirmed a 3% commission agreement.

But, agent was entitled to remuneration for successfully finding a buyer for the principal's
property.

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Court’s Decision

The letter was genuine and signed by Farid Bakhsh. The contract required only that Hargulal
Singh find a willing buyer, not ensure the sale’s completion. As Hargulal fulfilled his duty,
he was entitled to commission, even if the deal later fell through.

CONCLUSION

The Essentials of a Contract of Agency play a crucial role in defining the legal relationship
between a principal and an agent. A valid agency contract requires key elements such as mutual
consent, the capacity of the parties, lawful consideration, and a legally enforceable purpose.
Through this project, we have explored the fundamental principles governing agency
relationships, the rights and duties of both parties, and the implications of their actions.

Understanding these essentials is vital as agency contracts form the backbone of commercial
transactions, partnerships, and business dealings worldwide. The legal framework ensures
accountability, efficiency, and smooth delegation of responsibilities, ultimately fostering trust
and cooperation in business and professional relationships.

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 REFERENCES

Webliography:

 [Link]
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