Agency: Notes | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


1.55 
AGENCY 
LEARNING OUTCOMES 
UNIT–3: AGENCY 
After studying this unit, you would be able to: 
? Understand the relationship between agent and principal and 
the intention behind adoption of such course of agency. 
? Understand rights and obligations of an agent as well as the 
circumstances under which the agent is personally liable for 
the acts done by him on behalf of the principal and the legal 
position of the agent, the principal and the third parties 
involved. 
? Identify with the terms ‘sub-agent’ and ‘substituted agent’ 
and to distinguish between the two. 
 
 
Page 2


1.55 
AGENCY 
LEARNING OUTCOMES 
UNIT–3: AGENCY 
After studying this unit, you would be able to: 
? Understand the relationship between agent and principal and 
the intention behind adoption of such course of agency. 
? Understand rights and obligations of an agent as well as the 
circumstances under which the agent is personally liable for 
the acts done by him on behalf of the principal and the legal 
position of the agent, the principal and the third parties 
involved. 
? Identify with the terms ‘sub-agent’ and ‘substituted agent’ 
and to distinguish between the two. 
 
 
 
 
1.56 CORPORATE AND OTHER LAWS 
 
 
A relationship of agency is established when one party (agent) is authorized by 
another party (principal) to act on his/ her behalf. Such relationships are initiated 
when one party desires to extend his/her activities beyond his/her present limits 
or capacity. In modern life, it would be impossible for a man to do everything by 
himself. Thus, he needs agents, to perform activities. A relationship of agency is 
commonly visible in all business transactions. These include hiring employees or 
retaining the services of other professionals such as an attorney, design 
professional, software developer etc.  An agent has the potential to form 
contracts on behalf of the principal and in doing so, will bind the principal. As a 
result, the relationship of agency is one of trust and confidence and an agent 
must perform his/her activities in a capable and conscientious manner. The law of 
agency is contained in sections 182 to 238 of the Indian Contract Act, 1872. 
Agency 
[Section 
182-238]
Meaning
Appointment
Authority
Sub agents
Ratification
Revocation of Authority
Duties, Obligations and 
Rights  of Agent
Effect of agency on contract 
with third persons
 
Page 3


1.55 
AGENCY 
LEARNING OUTCOMES 
UNIT–3: AGENCY 
After studying this unit, you would be able to: 
? Understand the relationship between agent and principal and 
the intention behind adoption of such course of agency. 
? Understand rights and obligations of an agent as well as the 
circumstances under which the agent is personally liable for 
the acts done by him on behalf of the principal and the legal 
position of the agent, the principal and the third parties 
involved. 
? Identify with the terms ‘sub-agent’ and ‘substituted agent’ 
and to distinguish between the two. 
 
 
 
 
1.56 CORPORATE AND OTHER LAWS 
 
 
A relationship of agency is established when one party (agent) is authorized by 
another party (principal) to act on his/ her behalf. Such relationships are initiated 
when one party desires to extend his/her activities beyond his/her present limits 
or capacity. In modern life, it would be impossible for a man to do everything by 
himself. Thus, he needs agents, to perform activities. A relationship of agency is 
commonly visible in all business transactions. These include hiring employees or 
retaining the services of other professionals such as an attorney, design 
professional, software developer etc.  An agent has the potential to form 
contracts on behalf of the principal and in doing so, will bind the principal. As a 
result, the relationship of agency is one of trust and confidence and an agent 
must perform his/her activities in a capable and conscientious manner. The law of 
agency is contained in sections 182 to 238 of the Indian Contract Act, 1872. 
Agency 
[Section 
182-238]
Meaning
Appointment
Authority
Sub agents
Ratification
Revocation of Authority
Duties, Obligations and 
Rights  of Agent
Effect of agency on contract 
with third persons
 
1.57 
AGENCY 
 1. WHAT IS AGENCY? 
The Indian Contract Act, 1872 does not define the 
word ‘Agency’. However, section 182 of the Indian 
Contract Act, 1872 defines Agent and Principal as: 
Agent: means a person employed to do any act for 
another or to represent another in dealing with the 
third persons and 
The principal: means a person for whom such act is done or who is so 
represented. 
Test of Agency 
(a) Whether the person has the capacity to bind the principal and make him 
answerable to the third party. 
(b) Whether he can establish privity of contract between the principal and third 
parties.   
If the answer to these questions is in affirmative (Yes), then there is a relationship 
of agency. 
Thus, ‘Agency’ is a comprehensive word used to describe the relationship 
between one person and another, where the first mentioned person brings the 
second mentioned person into legal relation with others. 
The Rule of Agency is based on the maxim “Qui facit per alium, facit per se” i.e., he 
who acts through an agent is himself acting. 
 2. APPOINTMENT AND AUTHORITY OF 
AGENTS  
Who may employ an agent: According to Section 183, “any person who has 
attained majority according to the law to which he is subject, and who is of sound 
mind, may employ an agent.” Thus, a minor or a person of unsound mind cannot 
appoint an agent.  
 
• major
• sound mind
Person qualified to 
appoint agent must be
Page 4


1.55 
AGENCY 
LEARNING OUTCOMES 
UNIT–3: AGENCY 
After studying this unit, you would be able to: 
? Understand the relationship between agent and principal and 
the intention behind adoption of such course of agency. 
? Understand rights and obligations of an agent as well as the 
circumstances under which the agent is personally liable for 
the acts done by him on behalf of the principal and the legal 
position of the agent, the principal and the third parties 
involved. 
? Identify with the terms ‘sub-agent’ and ‘substituted agent’ 
and to distinguish between the two. 
 
 
 
 
1.56 CORPORATE AND OTHER LAWS 
 
 
A relationship of agency is established when one party (agent) is authorized by 
another party (principal) to act on his/ her behalf. Such relationships are initiated 
when one party desires to extend his/her activities beyond his/her present limits 
or capacity. In modern life, it would be impossible for a man to do everything by 
himself. Thus, he needs agents, to perform activities. A relationship of agency is 
commonly visible in all business transactions. These include hiring employees or 
retaining the services of other professionals such as an attorney, design 
professional, software developer etc.  An agent has the potential to form 
contracts on behalf of the principal and in doing so, will bind the principal. As a 
result, the relationship of agency is one of trust and confidence and an agent 
must perform his/her activities in a capable and conscientious manner. The law of 
agency is contained in sections 182 to 238 of the Indian Contract Act, 1872. 
Agency 
[Section 
182-238]
Meaning
Appointment
Authority
Sub agents
Ratification
Revocation of Authority
Duties, Obligations and 
Rights  of Agent
Effect of agency on contract 
with third persons
 
1.57 
AGENCY 
 1. WHAT IS AGENCY? 
The Indian Contract Act, 1872 does not define the 
word ‘Agency’. However, section 182 of the Indian 
Contract Act, 1872 defines Agent and Principal as: 
Agent: means a person employed to do any act for 
another or to represent another in dealing with the 
third persons and 
The principal: means a person for whom such act is done or who is so 
represented. 
Test of Agency 
(a) Whether the person has the capacity to bind the principal and make him 
answerable to the third party. 
(b) Whether he can establish privity of contract between the principal and third 
parties.   
If the answer to these questions is in affirmative (Yes), then there is a relationship 
of agency. 
Thus, ‘Agency’ is a comprehensive word used to describe the relationship 
between one person and another, where the first mentioned person brings the 
second mentioned person into legal relation with others. 
The Rule of Agency is based on the maxim “Qui facit per alium, facit per se” i.e., he 
who acts through an agent is himself acting. 
 2. APPOINTMENT AND AUTHORITY OF 
AGENTS  
Who may employ an agent: According to Section 183, “any person who has 
attained majority according to the law to which he is subject, and who is of sound 
mind, may employ an agent.” Thus, a minor or a person of unsound mind cannot 
appoint an agent.  
 
• major
• sound mind
Person qualified to 
appoint agent must be
 
 
1.58 CORPORATE AND OTHER LAWS 
Who may be an agent: Section 184 provides that “as between the principal and 
third persons any person may become an agent, but no person who is not of the 
age of majority and of sound mind can become an agent, so as to be responsible 
to his principal according to the provisions in that behalf herein contained”.  
Thus, according to Section 184 of the Act any person may become an agent i.e. 
even a minor or a person of unsound mind may become an agent and the 
principal shall be bound by his acts. But as a rule of caution, a minor or a person 
of unsound mind should not be appointed as an agent because he is incompetent 
to contract and in case of his misconduct or negligence, the principal shall not be 
able to proceed against him. 
Example 1: 
P appoints Q, a minor, to sell his car for not less than ` 2,50,000. Q sells it for  
` 2,00,000. P will be held bound by the transaction and further shall have no right 
against Q for claiming the compensation for having not obeyed the instructions, 
since Q is a minor and a contract with a minor is ‘void-ab-initio’. 
Consideration not necessary: According to Section 185, no consideration is 
necessary to create an agency.  The acceptance of the office of an agent is 
regarded as a sufficient consideration for the appointment. 
 3. CREATION OF AGENCY 
In the words of Desai J, of the Supreme Court of India “The relation of agency 
arises whenever one person called the agent has the authority to act on behalf of 
another called the principal and consents to act. The relationship has genesis in a 
contract” 
The relationship of the principal and the agent may be created in any of the 
following ways — 
© The Institute of Chartered Accountants of India
Page 5


1.55 
AGENCY 
LEARNING OUTCOMES 
UNIT–3: AGENCY 
After studying this unit, you would be able to: 
? Understand the relationship between agent and principal and 
the intention behind adoption of such course of agency. 
? Understand rights and obligations of an agent as well as the 
circumstances under which the agent is personally liable for 
the acts done by him on behalf of the principal and the legal 
position of the agent, the principal and the third parties 
involved. 
? Identify with the terms ‘sub-agent’ and ‘substituted agent’ 
and to distinguish between the two. 
 
 
 
 
1.56 CORPORATE AND OTHER LAWS 
 
 
A relationship of agency is established when one party (agent) is authorized by 
another party (principal) to act on his/ her behalf. Such relationships are initiated 
when one party desires to extend his/her activities beyond his/her present limits 
or capacity. In modern life, it would be impossible for a man to do everything by 
himself. Thus, he needs agents, to perform activities. A relationship of agency is 
commonly visible in all business transactions. These include hiring employees or 
retaining the services of other professionals such as an attorney, design 
professional, software developer etc.  An agent has the potential to form 
contracts on behalf of the principal and in doing so, will bind the principal. As a 
result, the relationship of agency is one of trust and confidence and an agent 
must perform his/her activities in a capable and conscientious manner. The law of 
agency is contained in sections 182 to 238 of the Indian Contract Act, 1872. 
Agency 
[Section 
182-238]
Meaning
Appointment
Authority
Sub agents
Ratification
Revocation of Authority
Duties, Obligations and 
Rights  of Agent
Effect of agency on contract 
with third persons
 
1.57 
AGENCY 
 1. WHAT IS AGENCY? 
The Indian Contract Act, 1872 does not define the 
word ‘Agency’. However, section 182 of the Indian 
Contract Act, 1872 defines Agent and Principal as: 
Agent: means a person employed to do any act for 
another or to represent another in dealing with the 
third persons and 
The principal: means a person for whom such act is done or who is so 
represented. 
Test of Agency 
(a) Whether the person has the capacity to bind the principal and make him 
answerable to the third party. 
(b) Whether he can establish privity of contract between the principal and third 
parties.   
If the answer to these questions is in affirmative (Yes), then there is a relationship 
of agency. 
Thus, ‘Agency’ is a comprehensive word used to describe the relationship 
between one person and another, where the first mentioned person brings the 
second mentioned person into legal relation with others. 
The Rule of Agency is based on the maxim “Qui facit per alium, facit per se” i.e., he 
who acts through an agent is himself acting. 
 2. APPOINTMENT AND AUTHORITY OF 
AGENTS  
Who may employ an agent: According to Section 183, “any person who has 
attained majority according to the law to which he is subject, and who is of sound 
mind, may employ an agent.” Thus, a minor or a person of unsound mind cannot 
appoint an agent.  
 
• major
• sound mind
Person qualified to 
appoint agent must be
 
 
1.58 CORPORATE AND OTHER LAWS 
Who may be an agent: Section 184 provides that “as between the principal and 
third persons any person may become an agent, but no person who is not of the 
age of majority and of sound mind can become an agent, so as to be responsible 
to his principal according to the provisions in that behalf herein contained”.  
Thus, according to Section 184 of the Act any person may become an agent i.e. 
even a minor or a person of unsound mind may become an agent and the 
principal shall be bound by his acts. But as a rule of caution, a minor or a person 
of unsound mind should not be appointed as an agent because he is incompetent 
to contract and in case of his misconduct or negligence, the principal shall not be 
able to proceed against him. 
Example 1: 
P appoints Q, a minor, to sell his car for not less than ` 2,50,000. Q sells it for  
` 2,00,000. P will be held bound by the transaction and further shall have no right 
against Q for claiming the compensation for having not obeyed the instructions, 
since Q is a minor and a contract with a minor is ‘void-ab-initio’. 
Consideration not necessary: According to Section 185, no consideration is 
necessary to create an agency.  The acceptance of the office of an agent is 
regarded as a sufficient consideration for the appointment. 
 3. CREATION OF AGENCY 
In the words of Desai J, of the Supreme Court of India “The relation of agency 
arises whenever one person called the agent has the authority to act on behalf of 
another called the principal and consents to act. The relationship has genesis in a 
contract” 
The relationship of the principal and the agent may be created in any of the 
following ways — 
© The Institute of Chartered Accountants of India
 
 
1.59 
 
AGENCY 
 
The authority may be express or implied: According to Section 186, the 
authority of an agent may be express or implied.  
1. Definitions of express and implied authority [Section 187] 
 Express Authority: An authority is said to be express when it is given by 
words, spoken or written.  
Example 2: A is residing in Delhi and he has a house in Kolkata. A 
authorizes B under a power of attorney, as caretaker of his house. Agency is 
created by express agreement.  
 Example 3: If a customer of a bank wishes to transact his banking business 
through an agent, the bank will require written evidence of the appointment 
of the agent and will normally ask to see the registered power of attorney 
appointing the agent. 
2. Implied Authority: An authority is said to be implied when it is to be 
inferred from the circumstances of the case, conduct of the parties and 
things spoken or written, or in the ordinary course of dealing, may be 
accounted from the circumstances of the case. 
 Example 4: If a person realises rent and gives it to the landlord, he 
impliedly acts for the landlord as an agent. 
 Example 5: A owns a shop in Selampur, living himself in Kolkata 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 purposes of the shop, and 
of paying for them out of A’s funds with A’s knowledge. B has an implied 
Modes of Creation of Agency
Express 
appointment
words
Spoken
written
Implied 
appointment
Necessity
Estoppel/ 
holding out
Agency by 
ratification