The contract of agency is a contract whereby a person employs another person to represent him or to act on his behalf to deal with any third person. The person who employs another person to act on his behalf is known as the principal, and the person who is employed to act on behalf of the principal is known as an agent. The act of the agent binds the principal in the same manner as he himself has done the act.
In this contract of agency note, first, let us understand who is an agent and who is the principal. And after that, we will learn about the characteristics, formation, and termination of the contract of agency.
Definition of Agent and Principal
As per section 182 of the Indian Contract Act, an agent is such a person who is employed to do any act or to represent any person in dealings with a third person. And, the principal is a person who is represented. The principal can authorise an agent to act on his behalf either expressly or impliedly. An agent is simply a connecting link between his principal and the third person.
Note: Although the agent is acting on behalf of the principal, he has the capacity of the principal.
The owner acts as principal. The person he hires for his representation is the agent. Two examples of principals and agents in the real world are:
- LIC company is the principal. LIC agent is an agent.
- The flat owner is the principal. Auctioneer and broker are agents.
Characteristics of Contract of Agency
The features or characteristics of a contract of agency can be learnt from sections 183 to 185 of the Indian Contract Act. A brief discussion about the characteristics of a contract of agency is given below.
1. Section 183: The Capacity of the Principal.
For the contract of agency, the principal should be competent to form a contract. That is, he must be of the age of majority (18+) and must be of sound mind. Since in a contract of agency, the agent builds a contractual relationship between the principal and the third person, it is necessary for them to be competent to contract. Read section 183 Contract Act.
2. Section 184: The Capacity of the Agent.
The capacity of an agent in the contract of agency is immaterial. Any person can become an agent between the principal and the third person. In other words, any person, minor or otherwise incompetent to contract, is competent to create a valid contract between his principal and the third person. However, an agent is not responsible to the principal if he is not competent to contract. Read section 184 Contract Act.
3. Section 185: Consideration Is Not Required.
The law does not require or mandate any consideration for the validity of a contract of agency.
An agent is generally compensated by giving commission for services provided by him. But no consideration is provided immediately at the time of his appointment. Read section 185 Contract Act.
4. Legal Binding.
The principal is legally bound to the acts done by the agent in the same manner as he has done that act himself.
Formation or Creation of Agency
The agency can be formed or created in the following ways:
- Actual power is granted to the agent to act on behalf of the principal.
- Agent’s authority to act in a situation of emergency.
- Agency by the law of estoppel.
- By ratification.
Let us learn more about the above four points.
1. Actual Power Is Granted to the Agent to Act on Behalf of the Principal.
A contract of agency may be created by conferring authority to the agent. Such authority can be either express or implied.
(a) Express authority: An express authority is directly granted to the agent by words, spoken or written.
(b) Implied authority: When the authority granted to the agent can be determined from the circumstances or necessity of the case or situations of the parties, the agency is said to be formed impliedly.
2. Agent’s Authority to Act in a Situation of Emergency.
According to section 189 of the Indian Contract Act, an agent has the authority to do every such act that is necessary for protecting his principal from any kind of loss at the time of emergency. For example, an agent for completing the sale can get the goods repaired for passing on to the buyer.
3. Agency by the Law of Estoppel.
Sometimes the agent does not have any authority to do an act on behalf of the principal. However, the principal develops a thought in the mind of the third person that the agent has the authority to act on his behalf. And, in such cases, the principal is liable for the acts done by the agent for the third person. This is known as the creation of agency by estoppel.
4. By Ratification.
When an act is done by the agent on behalf of the principal, without the authority to act, the principal can either refuse from performing the liability or can ratify (authorise, give formal consent) the same. When the principal ratifies the act i.e. approves an act done without his authority, but on his behalf, he is bound towards such an act. And consequently, this creates an agency by ratification between the two.
Termination of Agency
There are various methods for the termination of the agency of an agent. These are mentioned under section 201 of the Indian Contract Act. As per this section, the agency can be terminated in the following ways:
- By revocation of the agent’s authority by the principal.
- By renunciation of the business of agency by the agent.
- By the completion of the business of the agency.
- By the death of the principal or the agent or when they become of unsound mind.
- By insolvency of the principal.
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