ICAI Notes- Unit 9: Agency | Business Laws for CA Foundation PDF Download

 Page 1


 
  
 
1.201 
 
BUSINESS LAWS  
 2.201 
LEARNING OUTCOMES 
UNIT–9: 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. 
? 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. 
? Terms ‘sub-agent’ and ‘substituted agent’ and to distinguish between 
the two. 
 
 
 
Agency 
Meaning
Appointment
Authority
Sub agents
Ratification
Revocation of Authority
Duties, Obligations and Rights  of Agent
Effect of agency on contract with third persons
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 2


 
  
 
1.201 
 
BUSINESS LAWS  
 2.201 
LEARNING OUTCOMES 
UNIT–9: 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. 
? 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. 
? Terms ‘sub-agent’ and ‘substituted agent’ and to distinguish between 
the two. 
 
 
 
Agency 
Meaning
Appointment
Authority
Sub agents
Ratification
Revocation of Authority
Duties, Obligations and Rights  of Agent
Effect of agency on contract with third persons
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 2.202 
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. 
9.1 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. 
© The Institute of Chartered Accountants of India
Page 3


 
  
 
1.201 
 
BUSINESS LAWS  
 2.201 
LEARNING OUTCOMES 
UNIT–9: 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. 
? 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. 
? Terms ‘sub-agent’ and ‘substituted agent’ and to distinguish between 
the two. 
 
 
 
Agency 
Meaning
Appointment
Authority
Sub agents
Ratification
Revocation of Authority
Duties, Obligations and Rights  of Agent
Effect of agency on contract with third persons
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 2.202 
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. 
9.1 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. 
© The Institute of Chartered Accountants of India
 
 
    
 2.203 
THE INDIAN CONTRACT ACT, 1872 
9.2 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.  
 
Who may be an agent:  
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. 
9.3 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 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.  
• major
• sound mind
Person qualified to 
appoint agent must be
© The Institute of Chartered Accountants of India
Page 4


 
  
 
1.201 
 
BUSINESS LAWS  
 2.201 
LEARNING OUTCOMES 
UNIT–9: 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. 
? 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. 
? Terms ‘sub-agent’ and ‘substituted agent’ and to distinguish between 
the two. 
 
 
 
Agency 
Meaning
Appointment
Authority
Sub agents
Ratification
Revocation of Authority
Duties, Obligations and Rights  of Agent
Effect of agency on contract with third persons
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 2.202 
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. 
9.1 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. 
© The Institute of Chartered Accountants of India
 
 
    
 2.203 
THE INDIAN CONTRACT ACT, 1872 
9.2 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.  
 
Who may be an agent:  
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. 
9.3 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 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.  
• major
• sound mind
Person qualified to 
appoint agent must be
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 2.204 
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. 
 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 authority from A to order 
goods from C in the name of A for the purposes of the shop. 
Implied Agency includes:- 
a. Agency by Estoppel [Section 237]:  Where the principal by his conduct or 
statement willfully induces another person to believe that a certain person is his 
agent, he is subsequently prevented or estopped from denying the fact of agency. 
 According to section 237 of the Contract Act, an agency by estoppel may be created 
when following essentials are fulfilled: 
1.  the principal must have made a representation;  
2. the representation may be express or implied; 
3.  The representation must state that the agent has an authority to do certain 
act although really he has no authority; 
4.  The principal must have induced the third person by such representation; and 
5.  The third person must have believed the representation and made the 
contract on the belief of such representation. 
Example 6: A consigns goods to B for sale and gives him instructions not to sell 
below a fixed price. C being ignorant of B's instruction enters into a contract with B 
to buy the goods at a price lower than the reserved price. A is bound by the contract. 
A cannot plead that he had given instructions to B to not sell the goods below 
certain price. An agency by estoppel is, consequently, deemed between A and B. 
© The Institute of Chartered Accountants of India
Page 5


 
  
 
1.201 
 
BUSINESS LAWS  
 2.201 
LEARNING OUTCOMES 
UNIT–9: 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. 
? 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. 
? Terms ‘sub-agent’ and ‘substituted agent’ and to distinguish between 
the two. 
 
 
 
Agency 
Meaning
Appointment
Authority
Sub agents
Ratification
Revocation of Authority
Duties, Obligations and Rights  of Agent
Effect of agency on contract with third persons
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 2.202 
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. 
9.1 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. 
© The Institute of Chartered Accountants of India
 
 
    
 2.203 
THE INDIAN CONTRACT ACT, 1872 
9.2 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.  
 
Who may be an agent:  
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. 
9.3 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 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.  
• major
• sound mind
Person qualified to 
appoint agent must be
© The Institute of Chartered Accountants of India
  
 
BUSINESS LAWS  
 2.204 
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. 
 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 authority from A to order 
goods from C in the name of A for the purposes of the shop. 
Implied Agency includes:- 
a. Agency by Estoppel [Section 237]:  Where the principal by his conduct or 
statement willfully induces another person to believe that a certain person is his 
agent, he is subsequently prevented or estopped from denying the fact of agency. 
 According to section 237 of the Contract Act, an agency by estoppel may be created 
when following essentials are fulfilled: 
1.  the principal must have made a representation;  
2. the representation may be express or implied; 
3.  The representation must state that the agent has an authority to do certain 
act although really he has no authority; 
4.  The principal must have induced the third person by such representation; and 
5.  The third person must have believed the representation and made the 
contract on the belief of such representation. 
Example 6: A consigns goods to B for sale and gives him instructions not to sell 
below a fixed price. C being ignorant of B's instruction enters into a contract with B 
to buy the goods at a price lower than the reserved price. A is bound by the contract. 
A cannot plead that he had given instructions to B to not sell the goods below 
certain price. An agency by estoppel is, consequently, deemed between A and B. 
© The Institute of Chartered Accountants of India
 
 
    
 2.205 
THE INDIAN CONTRACT ACT, 1872 
Example 7: If Piyal (the principal) has for several months permitted Sunil to buy 
goods on credit from Prasad and has paid for the goods bought by Sunil, Piyal 
cannot later refuse to pay Prasad who had supplied goods on credit to Sunil in the 
belief that he was Piyal’s agent and was buying the goods on behalf of Piyal. Piyal is 
estopped from now asserting that Sunil is not his agent because on earlier occasions 
he permitted Prasad to believe that Sunil was his agent and Prasad had acted in that 
belief. 
b. Agency by Necessity: An agency of necessity arises due to some emergent 
circumstances. In emergency a person is authorised to do what he cannot do in 
ordinary circumstances. Thus, where an agent is authorised to do certain act, and 
while doing such an act, an emergency arises, he acquires an extra-ordinary or 
special authority to prevent his principal from loss. 
Example 8: Raja has a large farm on which Shyam is the caretaker. When Raja is in 
Canada, there is a huge fire on the farm. Shyam becomes an agent of necessity for 
Raja so as to save the property from being destroyed by fire. Raja (the principal) will 
be liable for any expenses, Shyam (his agent of necessity) incurred to put out the fire 
and save the farm from destruction during Raja’s absence from the country. 
3. Agency by Operation of Law: When law treats one person as an agent of other. For 
example, a partner is the agent of the firm for the purposes of the business of the 
firm. 
4. Rights of person as to acts done for him without his authority, Effect of 
ratification [Section 196]: Where acts are done by one person on behalf of another, 
but without his knowledge or authority, he may elect to ratify or to disown such acts. 
If he ratifies them, the same effects will follow as if they had been performed by his 
authority. In simple words, “Ratification” means approving a previous act or 
transaction. Ratification may be express or implied by the conduct of the person on 
whose behalf the act was done. 
Example 9: X who is Y’s agent has on 10
th
 January 2022 purchases goods from Z on 
credit without Y’s permission. After the purchase, on 20
th
January 2022, Y tells X that 
he will accept responsibility to pay for the purchases although at the time of 
purchase the agent had no authority to buy on credit. Y’s subsequent statement on 
20
th
 January 2022 amounts to a ratification of the agent’s (X’s) purchase of goods on 
10
th
January 2022. 
  
© The Institute of Chartered Accountants of India