Agency system is very popular in the current business scenario. There are two parties in the agency system one is the principal and another the agent. An agent is a person acting on behalf of his principal. It’s a connecting link between the principal and the third party. Herein we will discuss the creation of agency under the Indian Contract Act, 1872.
Creation of Agency
A contract of agency may be express or implied. Consideration is not an essential element in the agency contract. Agency contract may also arise by estoppel, necessity or ratification.
Types of an Agency Contract
1. Express Agency
A contract of agency can be made orally or in writing. Example of a written contract of agency is the Power of Attorney that gives a right to an agency to act on behalf of his principal in accordance with the terms and conditions therein.
A power of attorney can be general or giving many powers to the agent or some special powers, giving authority to the agent for transacting a single act.
2. Implied Agency
Implied agency arises when there is any conduct, the situation of parties or is necessary for the case.
a. Agency by Estoppel (Section 237)
Estoppel arises when you are precluded from denying the truth of anything which you have represented as a fact, although it is not a fact.
Thus, where P allows third parties to believe that A is acting as his authorized agent, he will be estopped from denying the agency if such third-parties relying on it make a contract with an even when A had no authority at all.
b. Wife as Agent
Where a husband and wife are living together, we presume that the wife has her husband’s authority to pledge his credit for the purchase of necessaries of life suitable to their standard of living. But the husband will not be liable if he shows that:
(i) he had expressly warned the tradesman not to supply goods on credit to his wife; or
(ii) he had expressly forbidden the wife to use his credit; or
(iii) he already sufficiently supplies his wife with the articles in question; or
(iv) he supplies his wife with a sufficient allowance.
Similarly, where any person is held out by another as his agent, the third-party can hold that person liable for the acts of the ostensible agent, or the agent by holding out. Partners are each other’s agents for making contracts in the ordinary course of the partnership business.
Learn more about Types of Contract based on Performance.
c. Agency of Necessity (Sections 188 and 189):
In certain circumstances, a person who has been entrusted with another’s property may have to incur unauthorized expenses to protect or preserve it. This is called an agency of necessity.
For example, a sent a horse by railway. On its arrival at the destination, there was no one to receive it. The railway company, is bound to take reasonable steps to keep the horse alive, was an agent of the necessity of A.
A wife deserted by her husband and thus forced to live separate from him can pledge her husband’s credit to buy all necessaries of life according to the position of the husband even against his wishes.
d. Agency by Ratification (Sections 169-200):
Where a person not having any authority act as agent, or act beyond its authority, then the principal is not bound by the contract with the agent in respect of such authority. But the principal can ratify the agent’s transaction and accept liability. In this way, an agency by ratification arises.
This is ex post facto agency— agency arising after the event. By this ratification, the contract is binding on principal as if the agent had been authorized before. Ratification will have an effect on the original contract and so the agency will have effect from the original contract and not on ratification.
Solved Example on Creation of Agency
What are the conditions that need to be satisfied for ratification to be effective?
Following are the conditions for ratification to be effective:
(a) The agent must expressly contract as agent for a principal who is in existence and competent to contract.
(b) The principal must be competent to contract not only at the time the agent acts but also when he ratifies the agent’s act.
(c) The principal at the time of ratification has full knowledge of the material facts and must ratify the whole contract, within a reasonable time.
(d) Ratification cannot be made so as to subject a third-party to damages, or terminate any right or interest of a third person.
(e) Only lawful acts can be ratified.