Contract of Agency under the Indian Contract Act, 1872

Introduction
The concept of agency is a cornerstone of commercial law and plays a vital role in enabling
business operations. An agency relationship allows one person to act on behalf of another,
making it possible for organizations and individuals to operate efficiently across regions and
legal boundaries. The Indian Contract Act, 1872 governs the law of agency from Sections 182 to
238, detailing the formation, rights, duties, and termination of such relationships.

Definition and Meaning

Section 182 – Agent and Principal
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".
This relationship is based on fiduciary principles, meaning it is built on trust and confidence.

Essentials of a Valid Contract of Agency

 Existence of Two Parties (Principal and Agent)
Feature: A valid agency requires a principal (for whom acts are performed) and an agent (who
performs the acts).
Illustration: A business owner (principal) appoints a sales representative (agent) to market his
products.
Case Law: In Chairman, LIC v. Rajiv Kumar Bhaskar, the employer was held liable as an agent
even if disclaimers were attempted.
 Competency of the Principal
Feature: The principal must be competent (i.e. of majority and sound mind).
Illustration: An 18-year-old business owner can legally appoint an agent.
Legal Provision: Section 183 of the Act.
 No Competency Requirement for the Agent
Feature: Even minors or persons of unsound mind may be appointed as agents (although they
cannot be held personally liable).
Illustration: A parent may instruct a child to run errands; the contract binds the competent
principal.
Case Insight: Foreman v Great Western Railway Co. emphasized that an agent’s personal
capacity does not affect the principal’s liability.
 Absence of Consideration Requirement
Feature: Agency contracts are valid even if no consideration is given; remuneration is at the
discretion of the parties.
Illustration: A person acting as a volunteer agent to help complete a task.
Legal Provision: Section 185 of the Act.
 Creation by Express Agreement
Feature: The agency can be clearly created through explicit written or spoken words.
Illustration: A formal power of attorney authorizes a lawyer to represent a client.
Case Point: Express agreements were central in LIC v. Rajiv Kumar Bhaskar.
 Creation by Implied Agreement
Feature: An agency relationship may be inferred from conduct or circumstances.
Illustration: A shop manager who regularly orders supplies for the owner without a written
directive is acting as an agent.
Insight: Consistent conduct establishes the agency even without formal words.
 Agency by Necessity
Feature: When immediate action is needed to protect the principal’s interests, an agency
relationship arises even without prior appointment.
Illustration: A ship’s master securing urgent repairs at a port when the owner is unreachable.
Concept: This is typically recognized under emergency circumstances.
 Agency by Estoppel
Feature: If the principal’s conduct leads a third party to believe an agency exists, the principal is
bound by the agent’s acts.
Illustration: An employee is allowed to negotiate deals when the employer’s actions suggest he
is the authorized agent.
Case Law: In Watteau v Fenwick, the undisclosed principal was held liable when the agent acted
within the apparent authority.
 Agency by Ratification
Feature: If an agent acts without authority but the principal later approves the act, the agency is
formed retroactively.
Illustration: A representative makes a purchase without permission, and the principal later
confirms the transaction. Principle: The act is treated as if originally authorized.
 Agent’s Duty to Act in Good Faith
Feature: The agent must act honestly, diligently, and in the principal’s best interests.
Illustration: A broker must negotiate fair terms without using the information for personal gain.
Case Law/Principle: Foreman v Great Western Railway Co. underscores that an agent must
perform within prescribed bounds.
 Duty to Follow Principal’s Instructions
Feature: An agent is required to conduct business as per the directions received from the
principal (or by established trade practices in their absence).
Illustration: A sales agent must price goods as directed by the business owner. Legal Insight:
Non-compliance can result in liability for any resulting losses.
 Duty to Exercise Reasonable Skill and Care
Feature: An agent must use the degree of care and expertise generally expected in the particular
business or trade.
Illustration: An agent negotiating a contract must be knowledgeable about market conditions.
Result: Failure to exercise due care can lead to damages for negligence.
 Duty to Render Proper Accounts and Communicate
Feature: The agent must account for funds and operations conducted on the principal’s behalf
and keep the principal informed.
Illustration: A financial agent providing periodic reports to the company owner about
transactions. Legal Provision: Section 213 and 214 of the Act require proper accounting and
communication.
 Principal’s Liability for Acts of the Agent
Feature: The principal is legally bound by the agent’s acts if these are carried out within the
scope of authority.
Illustration: A contract signed by an authorized agent binds the business owner.
Doctrine: “Qui facit per alium, facit per se ipsum” – the principal is seen as having acted
themselves. Case Law: Watteau v Fenwick confirms that the principal is liable for the agent’s
actions.
 Termination of Agency
Feature: The agency may be terminated by revocation, renunciation, fulfillment of the objective,
or by operation of law (death, insanity, insolvency, etc.).
Illustration: An employer revokes the power of attorney when the specific task is completed, or
upon giving reasonable notice. Legal Reference: Sections 201–210 of the Indian Contract Act
detail the modes and effects of termination.

Creating an Agency
An agency relationship may be established in several ways. The prominent methods include:
A. Agency by Express Agreement
  What it Means:
The principal expressly appoints an agent through explicit words—either written or oral.
One common example is a Power of Attorney, which is a formal document granting
authority to a person (agent) to represent the principal in specified matters.
 Relevant Sections:
o Section 186: States that the agent’s authority may be expressed or implied.

o Section 187: Further explains that authority is said to be express when given by
words, either spoken or written.
 Illustration:
A business owner in Delhi issues a written Power of Attorney to a lawyer, authorizing the
lawyer to represent him in court proceedings. This written instrument clearly creates an
agency relationship.
 Case Reference:
In Chairman, LIC v. Rajiv Kumar Bhaskar, despite language in an acceptance letter, the
court focused on the actual conduct of the employer (agent) which bound the principal—
underscoring that express authority, once granted, creates a binding agency relationship.
B. Agency by Implied Agreement
 What it Means:
An agency relationship may be inferred from the conduct, circumstances, or the
established course of dealing between the parties. Even in the absence of express words,
the actions of both the principal and the agent imply consent.
 Types:
1. Implied Authority:
 Section 187 (implied part) provides that the agent may act in a way that is
usual in the business.
 Illustration:
A shop owner from Mumbai who lives away appoints a manager in Delhi.
The manager orders goods and makes purchases using funds provided by
the owner. Although no formal agreement was signed, the regular conduct
clearly implies an agency.
2. Agency by Estoppel (or Apparent Authority):
 Section 237 comes into play when the principal’s conduct leads a third
party to believe that a person is his agent. The principal is then estopped
from denying the agent’s authority.
  Illustration:
If a principal regularly lets a particular employee deal with suppliers and
does not object when the employee presents himself as an agent, third
parties who rely on this representation can hold the principal bound by the
transactions.
 Case Law:
In Watteau v. Fenwick, the court held that an undisclosed principal was
bound by the acts of an agent who, by his conduct, appeared to act with
authority.
3. Agency by Holding Out:
 This is similar to estoppel but involves a positive representation by the
principal (by words or conduct) that creates the appearance of an agency
relationship.
 Illustration:
A principal who routinely uses an employee to transact deals with clients
essentially “holds out” that employee as his agent. If the employee enters
into a deal, the principal is bound, even if no formal appointment exists.
C. Agency by Necessity
 What it Means:
Agency by necessity arises when an agent, in an emergency or in unforeseen
circumstances, takes actions on behalf of the principal to protect the principal’s interests,
even though the principal has not explicitly granted authority.
 Relevant Section:
o Section 189 of the Indian Contract Act provides that an agent may act in an
emergency (when it is not possible to communicate with the principal) if such
action is necessary to prevent loss.
 Illustration:
A ship’s master, whose owner is unreachable due to a storm, arranges for emergency
repairs to prevent damage to the ship and its cargo. Here, the master acts as an agent by
necessity, and the owner is bound by these actions.
 Case Law:
In Sims & Co. v. Midland Railways Co., where perishable goods (butter) needed to be
sold due to a delay and potential spoilage, the agent (railway company) acted out of
necessity, and the sale was held to be binding on the principal.
D. Agency by Ratification
  What it Means:
Ratification occurs when a principal, after an agent has acted without authority or
exceeded the scope of authority, chooses to accept or adopt the agent’s conduct. This
ratification makes the agent’s previous actions as though they were authorized from the
outset.
 Relevant Sections:
o Sections 196 to 200 cover the doctrine and essentials of ratification.

 Essentials of Valid Ratification:

1. The Act Must Be Done on Behalf of the Principal: The agent must have acted
or purported to act on behalf of the principal.
2. Existence and Competency of the Principal: The principal must exist and be
legally competent both at the time of the act and at the time of ratification.
3. Full Knowledge of Material Facts: The principal must have complete
knowledge of the facts relating to the transaction.
4. Ratification Must Be of the Whole Transaction: A partial ratification is not
allowed—the entire transaction must be ratified.
5. Ratification Must Be Made Within a Reasonable Time and Not Harm a
Third Party:
o Illustration:
Suppose an agent, without the principal’s prior authority, enters into a contract for
the sale of goods. Later, the principal, after learning of the transaction in full,
decides to adopt (ratify) the contract. The transaction is then treated as if it were
authorized from the outset.
 Case Law:
In Bolton Partners vs. Lambert (1889), the court held that a contract, once ratified by the
principal, binds the principal back to the time the agent originally contracted, thereby
“relating back” to the original date.
 Important Point:
The principal cannot ratify if ratification would adversely affect the rights or impose
damages on a third party. This safeguard is set out in Section 200.
E. Agency by Operation of Law
 What it Means:
In some instances, certain statutes or circumstances automatically give rise to an agency
 relationship even without any direct or implied appointment. For example, under the
Partnership Act every partner is deemed to be an agent for the partnership.
 Illustration:
In a partnership, each partner acts as an agent for the firm when dealing with third parties,
even though there might not be a separate agency contract.
 Additional Examples:
In cases involving promoters under the Companies Act, where a promoter’s actions prior
to incorporation can create obligations toward third parties, the law treats the promoter’s
actions as those of an agent for the company once it is formed.

Case Law:
Syed Abdul Khader v. Rami Reddy , The Supreme Court held that if a person is allowed to act as
an agent and third parties rely on it, the principal is bound.
Keighley Maxsted & Co. v. Durant, Ratification only applies when the act was done in the name
of the principal.

Authority of Agent
Section 188 – The agent must act within the authority; if he exceeds it, the principal is not bound
unless he ratifies the act.

1. Actual Authority
Actual authority is that power which a principal specifically confers on an agent to act on his
behalf. This authority can be given in an express manner (through written or oral instructions) or
it may be implied by circumstances that leave no doubt in the mind of the agent about his scope
of power.
How Actual Authority Works
 Express Actual Authority:
The principal clearly and unambiguously directs the agent by words or writing. For
example, a company may execute a power of attorney giving a lawyer explicit authority
to represent it in a litigation matter. Every act performed by the lawyer within this
authority—such as filing court documents or appearing in court—binds the company.
 Implied Actual Authority:
Even where express instructions are not given, the agent is sometimes understood to have
 the authority to take all measures necessary to carry out the principal’s express
instructions. For instance, if a principal instructs an agent to sell a piece of property, it is
implied that the agent has the authority to negotiate the sale price and to accept
reasonable offers as long as they fall within the spirit of the instructions.
Illustration
Imagine a business owner (Principal) in Mumbai who gives his sales manager (Agent) an oral
instruction to negotiate a contract for the sale of goods with a buyer. Although the instructions
are not in writing, the agent, by virtue of his position, is understood to have the actual authority
to represent the owner and conduct negotiations on his behalf. If the agent finalizes a deal within
the terms set by the owner, the owner is legally bound by that deal.
Relevant Legal Provisions
 Section 186, Indian Contract Act, 1872: States that an agent’s authority may be express
or implied.
 Section 187, Indian Contract Act, 1872: Clarifies that an authority is considered
express when given by words spoken or written.
Case Law Example
In Chairman, LIC v. Rajiv Kumar Bhaskar (2003 ACJ 86), the court examined the nature of
express authority in an agency relationship. Here, the employer (agent) had been expressly
appointed to act on behalf of the principal, and his actions, though partly qualified by certain
internal disclaimers, were held to be binding upon the principal. The case highlights that when
authority is clearly given—even verbally or in writing—the principal is bound by all acts of the
agent performed within that authority.

2. Apparent (Ostensible) Authority

Apparent authority arises when the principal’s words or conduct lead a third party to
reasonably believe that the agent is authorized to act on his behalf, even if no express or actual
authority has been granted. In other words, the principal is “held out” to the third party as having
delegated the power and, therefore, is bound by the agent’s actions.
How Apparent Authority Works
 Creation of the Appearance:
The principal’s conduct or representations (by words, actions, or silence) must give the
impression that the agent is empowered to act. If a third party enters into a contract with
the agent based on that belief, the principal is estopped (legally prevented) from denying
the agent’s authority.
  Reliance by Third Parties:
A key factor is that the third party must have reasonably relied on the principal’s
representation. If the third party, for instance, sees the agent performing duties or hears
the principal describe the agent as his representative, that reliance creates what is
commonly known as "ostensible authority."
Illustration
Consider a scenario where a company routinely allows one of its managers to negotiate with
suppliers and does not object or clarify the limits of this authority publicly. A supplier, dealing
with that manager, reasonably believes that he is authorized to negotiate and conclude contracts
on behalf of the company. Even if the manager had not been granted express authority to finalize
contracts, the company's conduct has given the supplier an impression of authority.
Consequently, the company becomes bound by the manager’s agreements because of apparent
(ostensible) authority.
Relevant Legal Provision
 Section 237, Indian Contract Act, 1872:
This section implies that if a principal’s conduct or words induce a third party to believe
that an agent possesses authority, then the principal is estopped from denying that
authority.
Case Law Example
The classical case of Watteau v. Fenwick is often cited to explain apparent authority. In that case,
the court held that even if an agent had not been expressly authorized, if a third party reasonably
believed that the agent had authority (based on the principal’s representations), then the principal
was bound by the agent’s actions. Although Watteau v. Fenwick originates from English law, its
principles have been influential in shaping the doctrine of apparent authority within the Indian
legal context as well.
In an Indian context, judges have similarly applied the principle of apparent authority in
numerous cases by ensuring that principals who hold out agents as their representatives cannot
later repudiate that representation if third parties have relied upon it.

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Types of Agents
A. Special Agent
Definition:
A special agent is appointed to perform a single, specific task or to deal in a particular transaction
on behalf of the principal.
Key Points:
 Authority: Limited strictly to the particular assignment.
 Usage: Common in situations like the sale of a property or executing a specific contract.
 Relevant Sections: While no specific section exclusively defines "special agent," the
principles are inferred from the general provisions of Sections 182, 183, and 185.
Illustration:
A property owner in Bangalore appoints an agent expressly to sell his house. The agent does not
have any further authority beyond negotiating and finalizing the sale of that specific property.
Case Reference:
In cases where an agent’s actions are confined to a specific transaction, courts have consistently
held that the principal is bound only for acts within that limited scope. Although there is no
landmark case solely on "special agent," decisions such as Syed Abdul Khader v. Rami Reddy
emphasize that the agent’s power is confined to the express terms of appointment.

B. General Agent
Definition:
A general agent is authorized to transact all affairs in a particular trade, business, or employment
on behalf of the principal.
Key Points:
 Authority: Broad and continuous; covers most or all acts relating to the specific
business.
 Usage: Often seen in managerial or operational roles where day-to-day decisions are
made.
 Relevant Sections: The general principles under Sections 182–185 govern these
relationships.
Illustration:
A manufacturer in Mumbai appoints a general agent to manage all its sales and distribution
operations across a region. This agent can negotiate sales, manage orders, and deal with various
customers within that territory.
Case Insight:
In Chairman, LIC v. Rajiv Kumar Bhaskar, although the case primarily dealt with express
authority, it underscored that where an agent operates with broad, ongoing authority (as in a
general agency relationship), the principal is bound by the agent’s transactions in the normal
course of business.

C. Universal Agent
Definition:
A universal agent is given unlimited authority to act on behalf of the principal in all matters,
without restriction to a particular task or business.
Key Points:
 Authority: Very broad; includes virtually all acts that the principal may perform
personally.
 Usage: Rare in commercial practice due to the extensive trust placed in the agent, but it
can occur in personal or family matters.
 Relevant Sections: While not specifically mentioned as “universal agent” in the Act, the
concept is derived from the overall discretionary powers given by the principal.
Illustration:
A senior businessperson might appoint an agent with universal powers to manage all aspects of
his financial affairs during an extended absence or incapacity. This authority covers investments,
property transactions, and legal representations—all without needing separate authorizations.

D. Commercial/Mercantile Agent
Definition:
A commercial or mercantile agent has authority to negotiate, buy, or sell goods and handle
transactions for the principal in the customary course of business. This category covers several
specific roles:
1. Auctioneer:
o Role: Sells goods at auction on behalf of the principal.

o Illustration: An auctioneer conducts a public sale of artworks and is only

authorized to sell on behalf of the owner, not to issue warranties unless expressly
empowered.
2. Broker:
 o Role: Facilitates the formation of contracts between parties without taking
possession of goods.
o Illustration: A stockbroker negotiates the purchase of securities on behalf of a
client.
3. Commission Agent:
o Role: Buys and sells goods on behalf of a principal, receiving a commission
based on the transaction value.
o Illustration: A commission agent is hired by a wholesaler to secure orders from
retailers.
4. Factor:
o Role: Receives and sells goods on behalf of the principal while having possession
of the goods.
o Illustration: A factor in a textile firm is given custody of the fabrics and sells
them while securing a lien over the unsold items.
5. Del Credere Agent:
o Role: Acts as a salesperson and concurrently guarantees the credit extended to the
buyer.
o Illustration: A del credere agent in a trade assures that the buyer will honor the
payment, thereby risking personal liability if default occurs.
Legal Provision:
The definition of a mercantile agent can be drawn from Section 2(9) of the Sales of Goods Act,
1930 (which interacts with the Contract Act by providing context for commercial agency).
Case Reference:
Although many cases focus on the specific duties of commercial agents, principles in cases like
Watteau v. Fenwick (regarding apparent authority) have been used to hold principals bound by
the acts of their commercial agents when third parties reasonably relied on the agent’s
representations.

E. Non-Mercantile Agent
Definition:
Non-mercantile agents are those who act on behalf of the principal in non-commercial matters.
These include legal representatives, attorneys, or other professionals (like insurance agents) who
provide services without engaging in buying or selling goods.
Key Points:
 Authority: Limited to providing professional services, advice, or representation.
 Illustration:
A client appoints a lawyer (non-mercantile agent) to represent him in legal proceedings.
The lawyer’s authority is confined to legal representation.
 Relevant Sections:
The same general provisions of Sections 182–185 apply; however, the nature of the
agent’s relationship is distinctly professional.
Case Reference:
While specific case laws relating solely to non-mercantile agents are less commonly cited, courts
have consistently applied the principle that an agent’s representation in legal and advisory roles
binds the principal, as seen in various rulings where fiduciary duty and professional obligations
are at issue.

F. Sub-Agent
Definition:
A sub-agent is appointed by the original agent, with (or sometimes without) the principal’s
consent, to perform certain tasks. However, the general rule (summarized in the Latin maxim
“delegatus non potest delegare”) holds that an agent should not delegate his authority unless
expressly permitted by the principal or by the usage of trade.
Key Points:
 Authority: A sub-agent acts under the original agent's control.
 Legal Provisions:
o Section 191 of the Indian Contract Act defines a sub-agent as a person employed
by and acting under the control of the original agent.
 Illustration:
A sales manager (agent) for a company delegates certain routine tasks to a junior
employee (sub-agent) to expedite order processing. However, the primary liability
remains with the sales manager unless the principal has directly authorized the sub-agent.
 Case Law:
In instances where a sub-agent’s acts cause loss, courts have held that the original agent is
responsible to the principal for the acts of the sub-agent unless there is express
authorization covering the sub-agency.
Distinction between agent and servant with illustration
The distinction between an agent and a servant lies primarily in the degree of control, scope of
authority, and the nature of the relationship with the employer or principal. Here's a detailed
comparison with illustrations:

1. Definition
 Agent: An agent is a person who is authorized to act on behalf of another (called the
principal) to create legal relations with third parties.
 Servant: A servant (or employee) is someone who works under the direct control and
supervision of an employer and does not have the authority to act on the employer’s
behalf legally.

2. Control
 Agent: Has more independence in how the work is done. The principal tells the agent
what to do but not how to do it.
 Servant: Works under the close direction and control of the master/employer, who can
dictate both what and how the work should be done.

3. Authority
 Agent: Can bind the principal in contracts and has legal authority to deal with third
parties.
 Servant: Cannot bind the employer in contracts or represent them legally unless
specifically authorized.

4. Legal Relationship with Third Parties

 Agent: Creates a direct legal relationship between the principal and the third party.
 Servant: Usually does not create such legal relationships unless given express authority.
5. Illustration
Agent Example:
Mr. Rao appoints Ms. Anita as his real estate agent to sell his house. Anita negotiates with
buyers, sets the price, and signs a sale agreement on behalf of Mr. Rao.
 Ms. Anita is an agent: She acts on Mr. Rao’s behalf, deals with third parties, and can
legally bind him in contracts.
Servant Example:
Mr. Rao hires Ramesh as a driver. Ramesh drives Mr. Rao to meetings, follows instructions, and
works on a fixed salary under Mr. Rao’s supervision.
 Ramesh is a servant: He works under Mr. Rao’s direct control and does not have
authority to act on behalf of Mr. Rao in legal matters.
1. Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad,
The Supreme Court distinguished between a servant and an agent by emphasizing the degree of
control. A servant works under the employer's direct supervision, whereas an agent has
more discretion in carrying out their duties.
2. Pannalal Jankidas v. Mohanlal,
The court held that the broker was an agent as he was authorized to negotiate and conclude
transactions on behalf of the principal. This differentiated him from a servant who would
not have such authority.
3. Syed Abdul Khader v. Rami Reddy,
The Supreme Court noted that an agent acts independently and has authority to make decisions
binding on the principal, whereas a servant works under close supervision.
4. Bhilai Electric Supply Co. Ltd. v. State of M.P,
The court distinguished the contractor as an independent entity with autonomy, ruling out the
status of a servant.
5. Ellis v. Sheffield Gas Consumers Co.,
The court highlighted that a contractor is not a servant because they act independently.
However, a servant acts under the employer's control, making the employer liable for their
actions.

Duties of an Agent (Sections 211–221)

In agency law, 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 is called the principal. The
Indian Contract Act, 1872, lays down the rights and duties of agents and principals in Sections
211 to 221.

These duties ensure that the agent acts in the best interests of the principal and within the scope
of authority given to them.

1. Duty to Conduct Principal’s Business (Section 211)

The agent must conduct the business of the principal according to the directions given by the
principal and in absence of such directions, according to the customary practices of the business.

Illustration: If a principal instructs the agent to sell goods at a minimum price, and the agent sells
below that, the agent is liable for the difference.
Case Law: Pannalal Jankidas v. Mohanlal, AIR 1951 SC 144
The Supreme Court held that an agent is bound to follow the instructions of the principal strictly.

2. Duty to Follow Instructions (Section 211)

An agent is duty-bound to obey the reasonable instructions given by the principal. If they act
contrary, they may be held liable for any loss.

3. Duty to Exercise Skill and Diligence (Section 212)

The agent must exercise the level of skill and diligence expected from someone in their
profession. If they lack such skill, they must still act with reasonable care.
Case Law: Keppel v. Wheeler (1927)
The agent failed to inform the principal of a better offer after already receiving one. Held: agent
was liable for loss due to negligence.

4. Duty to Render Proper Accounts (Section 213)

An agent is bound to render proper accounts to the principal when demanded.
Illustration: An agent managing properties must keep records of rent collected and expenses
incurred.

5. Duty to Communicate (Section 214)

In situations of difficulty, the agent must use reasonable diligence to communicate with the
principal and seek instructions.

6. Duty Not to Deal on His Own Account (Section 215)

If an agent deals on their own account without the principal’s knowledge or consent, the
principal can repudiate the transaction if:
The agent dishonestly concealed material facts, or
The deal was disadvantageous to the principal.
Case Law: Armstrong v. Jackson (1917)
A broker sold his own shares to a principal without disclosing. Held: Principal could repudiate
the contract.

7. Principal’s Right to Benefit Gained by Agent (Section 216)

If the agent gains any benefit from the agency without the principal’s knowledge, the principal
may claim that benefit.

Illustration: An agent purchases property secretly for themselves while negotiating it for the
principal. The principal can claim the property or its benefits.

8. Duty Not to Misuse Information or Position

Though not explicitly stated in Sections 211–221, under common law principles, an agent must
not misuse confidential information or position for personal gain.

9. Agent’s Duty on Termination of Agency (Section 217)

On termination, the agent must account for all property, money, or documents belonging to the
principal.
10. Right of Retainer (Section 217)
An agent may retain sums received on behalf of the principal to the extent of advances made,
expenses incurred, and remuneration due.

11. Duty Not to Set Up Adverse Title (Section 221)

An agent cannot, while acting as an agent, set up their own or a third party's interest adverse to
the principal in the property involved.

Case Law: Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954
The agent must act in utmost good faith and cannot work against the interests of the principal.

Rights of an Agent

An agent is a person employed to act on behalf of another, called the principal, in dealings with
third parties. While the agent has duties to perform, the law also ensures that agents have specific
rights for protection, support, and remuneration. The Indian Contract Act, 1872 outlines these
rights under various sections, particularly from Sections 217 to 221.

Understanding these rights is crucial as they form the foundation of a balanced principal-agent
relationship.

1. Right to Remuneration (Section 219)

An agent has the right to receive agreed remuneration upon completion of the task, unless the
contract provides otherwise.

 Key Point: If no amount is fixed, the agent is entitled to reasonable remuneration.

 Illustration: A engages B to sell his house for ₹10 lakhs and promises 2% commission.
On successful sale, B is entitled to ₹20,000.
 Case Law: Secretary of State v. K.P. Krishnaswami Aiyer (1927)
The court held that the agent is entitled to remuneration even if the amount is not
specifically agreed, as long as services are rendered.
2. Right of Retainer (Section 217)

An agent may retain, out of sums received on behalf of the principal, all amounts due to them
for:

 Advances made
 Expenses properly incurred
 Remuneration
 Illustration: An agent collects ₹50,000 from a third party on behalf of the principal. If
₹5,000 is due as commission and ₹2,000 was spent on travel, the agent can retain
₹7,000.

3. Right to Lien on Principal’s Property (Section 221)

The agent has the right to retain goods, papers, and other property of the principal until the
agent's dues are paid.

 This is a form of particular lien.

 Case Law: P.S.N. Somasundaram Chettiar v. K.M. Subramanian (1954)
The court recognized the agent’s right to retain documents until remuneration is paid.

4. Right to Indemnity (Section 222 & 223)

 Section 222: Agent is entitled to be indemnified against consequences of all lawful acts
done in the exercise of authority.
 Section 223: Agent is also entitled to indemnity for acts done in good faith, even if it
turns out to be harmful.
 Illustration: A, an agent, sues a third party on behalf of B and incurs court expenses.
Even if the suit fails, B must indemnify A if it was done in good faith.
 Case Law: Ramanathan Chettiar v. Pulicat Borough Municipality
The court held that the principal is bound to indemnify the agent for losses incurred while
acting in good faith.

5. Right to Compensation for Injury Caused by Principal’s Neglect (Section 225)

If the principal neglects or fails to perform duties that cause injury to the agent, the agent is
entitled to compensation.
  Illustration: A asks B to store hazardous chemicals without informing him of their
nature. B suffers injury due to explosion. B can claim compensation.

6. Right to Act According to Customs (Section 211 – Inverted Right)

While this is primarily a duty, it supports a right: if the principal gives no specific instructions,
the agent can act according to customary trade practices, and will not be liable if loss occurs.

7. Right to Be Reimbursed for Expenses Incurred (Section 222)

In connection with the business, any legitimate expense incurred by the agent must be
reimbursed by the principal.

Rights of Principal under the Contract of Agency

In a contract of agency, the principal is the person who authorizes the agent to act on their
behalf in dealings with third parties. While agents have rights and duties, the principal also
enjoys specific rights to ensure that the agency relationship is executed fairly and in good faith.
The Indian Contract Act, 1872, primarily through Sections 215 to 221, outlines the rights of
the principal.

These rights protect the principal from any misconduct, negligence, or fraud on the part of the
agent.

1. Right to Repudiate Agent’s Dealings in Case of Misconduct (Section 215)

If the agent, without the principal’s knowledge, deals in the business on their own account
without disclosing material facts, or if the transaction is disadvantageous, the principal has the
right to repudiate the transaction.

 Illustration: A instructs B to buy a plot of land. B buys it in his own name without telling
A. Later, the price rises. A can repudiate the purchase and claim the benefit.
 Case Law: Armstrong v. Jackson (1917)
The agent sold his own shares to the principal without disclosing the fact. The court
allowed the principal to repudiate the contract.
2. Right to Claim Benefit Gained by Agent (Section 216)

If the agent gains any benefit from the agency business without the knowledge of the principal,
the principal has the right to claim such benefit.

 Illustration: A instructs B to negotiate a deal. B receives a secret commission. A can

claim the amount from B.
 Case Law: Panorama Developments v. Fidelis Furnishing Fabrics (1971)
The court held that any secret profit made by the agent belongs to the principal.

3. Right to Compensation for Agent’s Misconduct (Section 220)

If the agent is guilty of misconduct, they forfeit the right to remuneration and the principal can
also claim compensation for any loss resulting from such misconduct.

 Illustration: If an agent insures goods below their actual value against the principal’s
instructions, the principal can deny commission and claim loss.

4. Right to Demand Accounts (Section 213)

The principal has the right to inspect and demand proper accounts of the business handled by
the agent.

 Case Law: G.F. Hussey v. Horne-Payne (1879)

It was held that the principal has a right to examine how the agent managed the business.

5. Right to Be Indemnified Against Loss Caused by Agent (Section 224)

The principal has the right to be indemnified for any loss caused to them by the negligence,
fraud, or improper conduct of the agent.

 Illustration: If an agent commits fraud in a transaction with a third party and the
principal suffers loss, the agent must indemnify the principal.
 Case Law: Lilley v. Doubleday (1881)
The court held that the principal is entitled to recover losses caused by an agent’s fraud.
6. Right to Dismiss Agent for Misconduct (General Principle)

Though not codified in a single section, a principal has the inherent right to terminate the
agency if the agent acts against instructions, is dishonest, or behaves in a way that causes a
breach of trust.

 Case Law: De Bussche v. Alt (1878)

Held that the principal can revoke authority in case of breach of duty by the agent.

7. Right to Agent’s Lien Over Principal’s Property (Section 221 – In Reverse)

While Section 221 grants the agent a lien, the principal retains ownership and can demand
return of goods or property after settling dues.

Duties of the Principal Under the Contract of Agency

A contract of agency creates a fiduciary relationship between two parties: the principal, who
authorizes, and the agent, who acts on the principal’s behalf. While agents are required to act
with diligence and good faith, the principal also has legal obligations toward the agent. These
are codified in the Indian Contract Act, 1872, particularly in Sections 222 to 225.

These duties are essential to ensure a fair and balanced relationship where both parties are
accountable for their roles.

1. Duty to Indemnify the Agent for Lawful Acts (Section 222)

The principal is bound to indemnify the agent against the consequences of all lawful acts done
by the agent in the exercise of authority granted to them.

 Illustration: A instructs B to buy goods from C on credit. B buys the goods, but later A
refuses to pay. If C sues B, A must indemnify B.
 Case Law: Adamson v. Jarvis (1827)
The agent sold goods under instructions and was later sued by the real owner. The court
held the principal liable to indemnify the agent.
2. Duty to Indemnify for Acts Done in Good Faith (Section 223)

Even if the act turns out to be harmful, the principal must indemnify the agent if it was done in
good faith on the principal’s behalf.

 Illustration: A directs B to file a lawsuit. B does so in good faith but loses. A must
reimburse B for legal costs.
 Case Law: Ramanathan Chettiar v. Pulicat Borough Municipality (1927)
The court held that the principal is bound to indemnify the agent for acts done in good
faith even if the principal suffers loss.

3. Duty Not to Indemnify for Criminal Acts (Section 224)

The principal is not bound to indemnify the agent for consequences of criminal or illegal acts,
even if they were authorized.

 Illustration: A hires B to smuggle goods. B gets caught and fined. A is not liable to
compensate B.

4. Duty to Pay Remuneration (Section 219)

The principal is bound to pay the agent reasonable remuneration for services rendered, unless
there is a contract to the contrary.

 Illustration: If A hires B to sell goods and doesn’t fix commission but B sells them
successfully, B is entitled to reasonable commission.
 Case Law: K.P. Krishnaswami Aiyer v. Secretary of State (1927)
The court held that if services are rendered by an agent, the principal must pay reasonable
remuneration even in the absence of express agreement.

5. Duty Not to Prevent Agent’s Lien (Section 221)

If the agent has incurred expenses or is owed remuneration, the principal cannot demand return
of goods or property until the agent is paid. This is indirectly a duty to honor the agent’s lien.

 Case Law: P.S.N. Somasundaram Chettiar v. K.M. Subramanian (1954)

It was held that the principal must respect the agent’s right to retain goods until dues are
settled.
6. Duty to Compensate Agent for Injury Caused by Negligence (Section 225)

If the principal’s neglect or lack of skill causes injury or loss to the agent, the principal is liable
to compensate the agent.

 Illustration: A asks B to transport chemicals without warning of their explosive nature. B

is injured. A must compensate B.

Relation of principal with third party

The relationship between the principal and the third party is crucial as the agent acts as a link
between them.

Principal’s Liability to Third Parties

Authority of the Agent (Section 186–189):The agent can bind the principal to third parties
when acting within their actual or apparent authority.

Example: If the agent buys goods on behalf of the principal and within their
authority, the principal is liable to pay the third party.

Undisclosed Principal (Section 231): When the agent acts without disclosing the principal,
the principal can still be held liable to third parties, provided the agent acted within their
authority.

Fraud and Misrepresentation (Section 238): If an agent commits fraud or misrepresentation in

matters they were authorized to handle, the principal is bound unless the third party had
direct knowledge of the agent exceeding their authority.

Agent Acting Without Authority (Section 196–197): If an agent acts beyond their authority,
the principal is not bound unless the act is ratified by the principal.

Relation of principal with third party

1. Vicarious Liability: The principal can be held vicariously liable for wrongful acts
committed by the agent within their scope of authority.

2. Third Party’s Rights: A third party can directly sue the principal for the actions of the
agent within their authority. If the agent acts without authority, the third party can
claim damages for breach of implied warranty of authority.
 3. Limitation of Liability: The principal may not be liable for acts done by the agent outside
their authority unless ratified. However, if the third party acted in good faith believing the
agent had authority, the principal might still be bound.

1. Chairman, LIC v. Rajiv Kumar Bhasker

This case emphasized that the principal is bound by the agent's acts within their
authority, even if the agent commits fraud unless the third party is aware of the fraud.
2. Syed Abdul Khader v. Rami Reddy,
Held that a principal is liable for acts of the agent within their apparent authority, even if
there are private restrictions on the agent's power unknown to the third party.
3. Watteau v. Fenwick
(English Case, followed in India) The court held that the principal was liable for the acts of
the agent that were usual in the business, even though the agent was expressly prohibited
from performing them.
4. Keighley, Maxsted & Co. v. Durant
Established that an undisclosed principal can enforce and be bound by contracts entered into
by the agent, provided the agent acted within their authority.
5. Union of India v. A.L. Rallia Ram
Highlighted that the principal is not bound by acts of the agent outside their authority unless
explicitly ratified.

Personal Liability of Agent

The personal liability of an agent under the Indian Contract Act, 1872 is primarily covered
under Sections 230–233. While the general rule is that an agent is not personally liable for
contracts entered into on behalf of a disclosed principal, there are specific exceptions where the
agent may be held personally liable.
1. General Rule: No Personal Liability of Agent (Section 230) As per Section 230, an agent is not
personally liable if: They act within the scope of their authority. They disclose the existence and
identity of the principal.
Illustration:
A, an agent, contracts on behalf of P, a disclosed principal, with T, a third party. T can only hold
P liable, not A.
2. Exceptions: When an Agent is Personally Liable
 a. When the Agent Acts for an Undisclosed Principal (Section 231) If an agent does not disclose
the identity of the principal, the agent is personally liable. However, if the principal is later
disclosed, the third party may choose to hold either the agent or the principal liable.
Case Law:
Haddock v. Rodway , The agent was held personally liable because the principal's identity
was undisclosed at the time of the contract.
b. When the Agent Acts for a Foreign Principal (Section 230 Proviso) An agent acting on behalf
of a foreign principal is personally liable because it is difficult for the third party to enforce
claims against a foreign entity.
Paterson v. Gandasequi ,The agent was held liable because the foreign principal's identity and
financial standing were unknown to the third party.
c. Express Agreement of Personal Liability (Section 230 Proviso) When a contract explicitly
states that the agent shall be personally liable, the agent is bound by those terms.
Chand Bhawan v. Jamuna Dass, The court held the agent personally Liable because the
contract specifically mentioned that the agent would be responsible.
d. Agent Exceeds Authority (Section 233) If an agent exceeds their authority and the principal
does not ratify the act, the agent is personally liable for any resulting loss to the third party.
Pannalal Jankidas v. Mohanlal , The agent was held liable for damageswhen he acted beyond
his authority in insuring goods, which were later destroyed.

Extent of Agents authority

The extent of an agent’s authority under the Indian Contract Act, 1872 determines the
powers granted to the agent to act on behalf of the principal. The agent’s authority can be either
express or implied, and it governs the legal validity of the agent's actions and their binding
effect on the principal. These provisions are mainly outlined in Sections 186 to 189.
1. Acts Within Authority (Section 188) An agent’s authority extends to doing all lawful acts
necessary to achieve the purpose of the agency.
Case Law: Gopalchandra Mukherji v. Shuklal Karnani (1925) It was held that an agent's
authority is limited to the tasks entrusted to them and the necessary means to accomplish those
tasks.
2. Authority to Bind the Principal (Section 226) If the agent acts within their authority, the
principal is bound by the agent’s actions.
Case Law: Hely-Hutchinson v. Brayhead Ltd., An agent with implied authority was found to
have validly bound the principal.
3. Limits on Authority (Section 227) If an agent exceeds their authority, the principal is bound
only to the extent of the agent’s actual authority. Beyond that, the principal is not liable unless
they ratify the act.
Case Law: State of Andhra Pradesh v. T. Suryachandra Rao, It was held that an agent must act
within their authority for the principal to be bound by the contract.
4. Unauthorized Acts (Section 228) When an agent performs acts not within their authority, the
principal is not bound by them.
Case Law: Syed Abdul Khader v. Rami Reddy, The Supreme Court held that an unauthorized
act cannot bind the principal unless subsequently ratified.
5. Authority in Usual Course of Business (Section 188) An agent has the authority to do all acts
that are necessary or incidental to their assigned role.
Example: A broker has authority to negotiate prices but not to finalize sales without explicit
approval from the principal.
Case Law: Watteau v. Fenwick Even if the agent exceeds actual authority, the principal is bound
if the act was usual for an agent of that type.
6. Emergency Authority (Section 189) An agent can act beyond their authority in
emergencies to protect the principal’s interests.
Case Law: Prager v. Blatspiel, Stamp & Heacock Ltd., It was held that an agent acted
reasonably in selling goods during wartime when communication with the principal was
impossible.

Termination of Agency (Sections 201–210)

An agency is a fiduciary relationship where the agent acts on behalf of the principal. However,
this relationship is not permanent and can be terminated under certain conditions. The Indian
Contract Act, 1872, in Sections 201 to 210, outlines the various modes of termination, the
effects of termination, and the obligations of the parties after termination.

Modes of Termination of Agency (Section 201)

According to Section 201, an agency is terminated by:

1. By Revocation by the Principal

The principal may revoke the authority of the agent at any time before the authority is
exercised, subject to some conditions.

 Case Law: Pannalal Jankidas v. Mohanlal, AIR 1951 SC 144

It was held that revocation must be communicated properly and done before the authority
is exercised.

2. By Renunciation by the Agent

The agent may also resign or renounce the agency by giving reasonable notice.

 Section 206 requires the agent to give reasonable notice, or else they are liable to
compensate for any loss caused to the principal.
 Illustration: If A appoints B to manage his business and B suddenly quits without notice,
B is liable for losses caused due to abrupt discontinuation.

3. By Completion of the Business

Once the purpose for which the agency was created is completed, the agency automatically
comes to an end.

 Illustration: A appoints B to buy a machine. Once B purchases it, the agency ends.

4. By Expiry of Time

If the agency was created for a fixed period, it ends when the time period expires.

5. By Death or Insanity of Principal or Agent

The agency terminates automatically on the death or insanity of either the principal or the
agent.
(Section 201)

 Case Law: Dharam Vir v. CIT, AIR 1973

Death of the principal terminates the agent’s authority instantly.
6. By Insolvency of the Principal (Section 201)

If the principal is declared insolvent, the agency comes to an end.

Sections Governing Effects and Notice of Termination

Section 202: Irrevocable Agency

When the agent has an interest in the subject matter, the agency cannot be terminated without
the agent’s consent.

 Case Law: Smart v. Sanders (1848)

If the agent has advanced money and has an interest in the property, the agency becomes
irrevocable.
 Illustration: A appoints B to sell goods and repay himself from the proceeds. A cannot
revoke this agency without B’s consent.

Section 203: Revocation Must Be Before Authority is Exercised

The principal cannot revoke the agent’s authority after it has been partly exercised.

 Illustration: A appoints B to sell 1,000 bags of rice. B sells 400 and is informed of
revocation. The revocation is valid only for the unsold 600.

Section 205: Compensation for Premature Revocation

If the agency is for a fixed term and revoked without sufficient cause, the principal must
compensate the agent.

 Case Law: Hindustan Steel Works v. Tarapore & Co. (1996)

Terminating agency without justification or notice made the principal liable for damages.

Section 207: Notice of Termination

The termination must be communicated to the agent or third parties for it to take effect.
  Illustration: If A cancels B’s authority but B is unaware and continues transactions, those
transactions may still bind A.

Section 208: Termination as to Third Parties

Termination becomes effective only when third parties dealing with the agent get notice of the
termination.

Section 209–210: Agent’s Duty on Termination

The agent must:

 On termination, take reasonable steps to protect the interests of the principal (Section
209).
 Continue to act in good faith during winding-up of agency matters (Section 210).

Illustration

A directs B to buy 100 tons of wheat on his behalf. B enters into a contract with a seller and signs
the agreement as A’s agent. Even though A was not physically present, he is bound by the
contract made by B, since B acted within his authority.
Case Laws

1. Pannalal Jankidas v. Mohanlal

Held that an agent must act with due diligence; failure to do so results in liability.

2. State of Nagaland v. Ratan Singh

Dealt with implied authority and reasonable actions expected from an agent.

3. Irving v. Motley
If an agent acts outside authority and the principal does not ratify, the principal is not bound.
Conclusion
The Contract of Agency facilitates business by allowing one person to act on behalf of another.
This relationship is built on trust, authority, and accountability. The Indian Contract Act provides
a detailed legal framework to govern agency, balancing the rights and obligations of both the
principal and the agent, and ensuring protection for third parties who deal with agents in good
faith.