IndiaFilings » Learn » Contract of Agency

Contract of Agency


Contract of Agency

Contract of the agency is a legal relationship, where one person appoints another to perform on the transactions on his behalf. The person who appoints the other to take care of his transactions is the principal. Whereas, the person who looks after the transaction of the principal is the agent. The Contract of the agency is a special contract under the Indian Contract Act, 1872.

Essential Requirements of Agency

There are certain requirements that are necessary for an agency. The following are the requirements:

Principal Must be Competent to Contract

Any person of sound mind and with the age of majority by law can employ an agent.

Competence of Agent is not Mandatory

Any person can become an agent between the principal and the third person. Generally, an agent does not have any personal liabilities towards the principal while contracting. Therefore the agent doesn’t need to be competent to contract.

No Consideration is Necessary

No remuneration is necessary while appointing an agent. The agent receives payment by the way commission for the rendered services.

Creation of Agency

The following are the ways to create an agency:


Any competent principal person can appoint an agent as his representative through a contract. The appointment contract can be in oral or also in written form.


The principal person can appoint an agent indirectly, and an implied agency will be created. The formation of the implied agency can be through relationships or certain situations.

By Subsequent Ratification of Unauthorised Act

If the principal does not authorise the act of the agent initially bu later the agent authorises it, then the principal accepts the act as done on behalf of him. Such authorisation is the ratification.

Types of Agent

The word agent describes many kinds of activities. There are certain types of agents in the business world. A Broker is a mercantile agent. The principal appoints him to make contracts by negotiating for the purchase and sale of the property. However, the does not receive the possession. The Factor is also a mercantile agent. But he receives the possession to sell the goods. Del credere is a special type of mercantile agent. The agent agrees for extra commission for him to be liable to the principal if the third party fails to perform the contract. But in general, an agent drops out after negotiating the principal and the third party. He will not be liable for the third party’s failure to perform.

Duties of an Agent

The agent has to fulfil certain duties in the contract of agency. The following are the duties of an agent:

Conduct the Principal’s Business

The agent must conduct his principal’s business. He should conduct it according to the directions of the principal. If the agent contradicts by not following the directions of the principal, then he must make it good with the principal. If any profit comes from contradicting the principal, then he must account it to the principal.

Reasonable Skill and Diligence

The agent has to act diligently and skillfully if not he has to compensate to the principal for his negligence and want of skill. The compensation does not include the damage or loss caused by the negligence.

Communicate with Principal

Communicating with the principal and acting according to his directions is one of the most important duties of the agent.

Render Accounts

When the principal demands for the accounts, the agent has to render the proper accounts.

Avoid Conflict of Interest

If the agent deal on his own without the consent of the principal and gives the material circumstances from such a deal, then the principal can reject the transactions for certain reasons. The following are the reasons:

  • If the agent has given the materials in a dishonest way
  • If the principal has a disadvantage of such a dealing

Not to Make Secret Profit

The principal can claim the benefit arising for the dealings, which he acts without the consent of the principal.

Remit Sums

The agent must remit all the sums received on behalf of the principal. However, he has the right to deduct his lawful charges from the sum.

Not to Delegate

The agent has no right to lawfully employ another person to perform his duties that are implied on him. The lawfully delegated person by the agent is the sub-agent. The agent can employ the sub-agent only for the following circumstances:

  • Consent of principal
  • Ministerial action
  • Trade custom
  • Nature of work

The principal is responsible and bound for the acts of the properly appointed sub-agent just like that of the agent. If the sub-agent appoints another person to perform the act, then such a person becomes an agent to the principal. He will be a substituted agent.

Rights of Agent

The agent has certain rights in the contract of agency. The following are his rights:


The agent has the right to the agreed payment. The payment for the performance will not become due until the completion of the act. He can detain the money of the sold goods if the sale is incomplete. If the agent causes any misconduct in the business, then he will not receive any payment.

Retain the Received Sums on Principal’s Account

The agent has the right to retain the sums received by the principal on account of business agency, all the due money in respect to advances or the expenses to conduct the business. He can also retain the payment for being an agent.

Lien on Principal’s Property

If the agent does not receive his commission and disbursement, then he can retain the papers, goods and other property of principal which were received by him until he gets his due. The Right of lien has two conditions and the following are the conditions:

  • The agent should entitle himself lawfully to the principal to receive the money for services in the agency, commission or disbursement
  • To exercise the right of the lien, the property should belong to the principal. The property should come under the possession of the agent while exercising his duties

Indemnity against Consequences of Lawful Acts

The principal must compensate the agent against the consequences of all the lawful acts done by the agent.

Non-liability of Employer of Agent to do Criminal Act

If a principal employs an agent to do a criminal act, then the principal will not compensate for the agent for the damages.

Authority of an Agent

The agent has certain authority in the contract of agency. Express authority is the authority given in the words, writing or speaking. Implied authority is the one concluding from the circumstances of the case.


If a person performs an act for another person without their knowledge or authority, then the other person can disown or ratify such acts. After ratification of such an act, the same effect will follow even for the performance of acts by his authority.

Requirements of Valid Ratification

  • A person must perform the act on behalf of someone to ratify the act
  • The ratification relates to the date of the contract. It is necessary for the principal to be existent at the time of the act and to be competent to contract
  • To ratify an act, it should be lawful
  • If a person’s knowledge of the act is materially defective, then the ratification will be invalid
  • If a person ratifies an unauthorised act performed on his behalf, then he is ratifying the whole transaction of which such an act is just a part
  • There is a reasonable time to ratify an act

Ratification of Unauthorised Act cannot Injure the Third Person

If a person performs an act on behalf of another without their authority, then such an act with authority will have the following effect:

  • Subjecting the third person to the damages
  • Terminating the interest or right of the third person

Such an act cannot have an effect by ratification.

Termination of Agency

The termination of an agency can take place through the following ways:

Revocation of Authority

The principal can revoke the authority of the agent. This ends the authority before even exercising the authority. The important principles relating to the revocation of authority are the following:

  • The agent has an interest due in the property which is the subject matter of the agency; then the agency cannot terminate such an interest of the debt
  • The principal cannot revoke the authority of the agent if the agent has exercised the act halfway.
  • If there is an implied or express contract stating the continuation of the agency for a period of time, then the agent to the principal or the principal to the agent should compensate for the revocation
  • There should be reasonable notice of the revocation, if not, then the principal or the agent must compensate the other for the damages.

Renunciation by the Agent

The agent can similarly renounce the agency business to that of the principal revoking it. The agent or the principal can express or imply the renunciation or revocation, respectively.

Completion of Business

Only after the completion of the business, the contract of agency comes to an end.

Death or Insanity

If the principal or the agent becomes insane or dies, then the contract of agency terminates automatically.

Principal’s Insolvency

If the principal becomes bankrupt, then the agency terminates itself.

Expiry of Term

If the appointment of the agent was for a certain period, then there will be an automatic termination of the agency. The agency will be terminated even if the work is not completed.

Effects of Termination

The termination of the authority comes to effect only when the agent or the third person becomes aware of it. The termination of the authority occurs at once when the agent becomes aware of termination. But for the third person, the termination takes place only when the third person becomes aware of the facts of the termination.