Various Methods of Creation of Agency

By | April 23, 2020
Creation of Agency

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In the commercial world, the agency plays a crucial role in extending the Principal’s arms into areas which are not in his or her reach. To initiate this relationship, there are various methods established by law and practise which have been followed for long. In the present article, Various Methods of Creation of Agency would be examined and explained.

Introduction

In the framework of Principal-Agent relationship, the prime responsibility of an agent is to be the link between the Principal and the Third Person.

  • 182 of the Indian Contract Act[1] provides for an agent to represent another into dealings with the third person on behalf of another. Under § 183 of the same act[2], a person of majority and sound mind can employ an agent. However, §184[3] provide for “any” person can be an agent.

The link between these two sections, one for Principal and other for the Agent, is provided through the modes in which the Principal establishes the relationship of agency.

I. Creation of Agency

Suppose, A likes the way B works professionally and wants that B should sell his products in the market. He makes an express announcement of B’s appointment s A’s agent and gets it publicised across the town. B also gets to know through one of the hoardings that he has been appointed by A as his agent.

If it could have been that simple to have an agent, the concept would not have required legal nuance. The most important element in this relationship is consent. The consent must come from both the parties, whereby their intention to enter into the relationship is clear.[4] There must also be a claim or exercise of control by one party, i.e., the Principal over the other.[5]

Thus, the will and act are the two important elements that go into the creation of an agency.

II. Methods of Creation of Agency

Primarily, there are four main methods of creation of agency:

  1. Agency by Express agreement.
  2. Agency by Operation of law.
  3. Agency by Ratification.
  4. Agency by Implied authority.
    1. Agency by Necessity
    2. Agency by Estoppel

1. Agency by Express Agreement

This is the most obvious and simple method by which the agency can be created. The express word implies directly and firmly.[6] Thus, there is a clear, categorical statement of intention by both the parties, Principal as well as the Agent, to enter into the relationship.

This leads to the express authority being vested in the agent. By virtue of §186[7], the authority of the agent can be express and implied. The implied authority would be discussed later. The express authority is given by words spoken or written.[8] Hence, there come two types in which this express agency can be created- Oral or Documentary.

This creates actual authority which empowers the agent to act on behalf of the Principal, this transforms into an express authority when express words are being used by the Principal to establish the relationship.[9]

The usage of words in the agreement is very crucial and important to filter out this actual authority of the agent. In Alwie Handoyo v. Tjong Very Sumito[10], there was a usage of the phrase “for and behalf of” in the vendor agreement. The Court of Appeal reaffirmed the requirement of consent in the relationship of agent and Principal and usage of clear terms in the agreement.[11]

 2. Agency by Operation of Law

Law also creates the relationships of Principal and Agent without reference to any specific agreement and any legal requirement to enter into any formalities. The best example is that of the Partnership Act, where each Partner acts as an agent of the firm.[12]

There is an automatic creation of fiduciary duty when the contract of partnership is being entered into. It becomes the duty of each partner to manage the firm’s business for its benefit and account for its transactions. If there is any failure on such fronts on the partner’s part, it amount to breach of such fiduciary duty.[13]

3. Agency by Ratification

Agency can be established after the completion of the task required. This happens in the case of ratification whereby, the Principal approves of the act of the person done on his behalf. This approval or ratification can be express or implied.[14]

  • 196[15] provides for Rights of the Person as to the acts done for him without his authority. This provides an option to the Principal of election whereby he or she can either ratify or disown such acts.

The examples as provided in the Indian Contract Act, are as follows-

  1. A, without authority, buys goods for B. Afterwards B sells them to C on his own account; B‟s conduct implies a ratification of the purchase made for him by A.
  2. A, without B‟s authority, lends B‟s money to C. Afterwards B accepts interest on the money from C. B‟s conduct implies a ratification of the loan.

It shows that, when the act was being performed by the agent, he did not have the knowledge about the Principal nor his approval or satisfaction. The concept of ratification has been subject of various scholarly discussions. Friedman explained this concept in the following manner –

What the ‘agent’ does on behalf of the ‘principal’ is done at a time when the relation of principal and agent does not exist: (hence the use in this sentence, but not in subsequent ones, of inverted commas). The agent, in fact, has no authority to do what he does at the time he does it. Subsequently, however, the principal, on whose behalf, though without whose authority, the agent has acted, accepts the agent’s act, and adopts it, just as if there had been a prior authorisation by the principal to do exactly what the agent has done.

The interesting point, which has given rise to considerable difficulty and dispute, is that ratification by the principal does not merely give validity to the agent’s unauthorised act as from the date of the ratification: it is antedated so as to take effect from the time of the agent’s act. Hence the agent is treated as having been authorised from the outset to act as he did. Ratification is ‘equivalent to an antecedent authority’.”[16]

Thus, though the act when was performed did not have any authority or backing from the Principal due to the deeming effect of ratification, the act becomes duly authorised.

Thus, this retrospective application of validity to an act done in the past even can legitimise an act which was wrongful against the Principal. Hence Bowstead has said-

Every act whether lawful or unlawful, which is capable of being done by means of an agent (except an act which is in its inception void) is capable of ratification by the person in whose name or on whose behalf it is done…. The words ‘lawful or unlawful’, however, are included primarily to indicate that the doctrine can apply to torts. From them it would follow that a principal by ratification may retrospectively turn what was previously an act wrongful against the principle, e.g. an unauthorised sale, or against a third party, e.g. a wrongful distress, into a legitimate one; or become liable for the tort of another by ratifying.[17]

This does not mean in any circumstance that an illegal act can be ratified. But, this usage of phraseology by Bowstead shows the wide amplitude of the concept of ratification. This is also called as subsequent ratification[18]and is one of the most popular methods of creation of agency.

4. Agency by Implied Authority

Now, it becomes important to revisit §187[19], which explains what is implied authority. It provides that “an authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.

The illustration as provided in the Act itself provides that-

A owns a shop in Serampore, living himself in Calcutta, 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.

This shows that the conduct of the parties is very important to be considered. Only then, can the relationship of the Principal and agent be ascertained.  Hence, implied authority becomes a species of the actual authority.[20]

In Hely-Hutchinson and Freeman & Lockyer[21] Case, the chairman of the company was held to be impliedly responsible as an agent of the company to give the indemnity. It was due to the conduct of the Board to appoint him as the managing director.

Thus, implied authority becomes an antithesis of apparent authority.[22] In apparent authority, the third person is by words made to believe that a particular person is the agent of the Principal.[23] It (apparent authority) is also referred to as an ostensible authority.[24]

4.1 Agency by Necessity

The implied authority also arises in the cases of emergency, whereby, an agent gets empowered to do such acts that “can protect his Principal from loss”.[25] Anyways, the extent of the agent’s authority extends to do every lawful thing that is necessary in order to do such an act.[26]

4.2 Agency by Estoppel

237. Liability of principal inducing belief that an agent’s unauthorized acts were authorized. – When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his Principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent‟s authority.

Illustrations

  1. A consigns goods to B for sale and gives him instructions not to sell under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract.
  2. A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private orders from A. The sale is good.

Thus, the Principal cannot preclude himself or herself from the fact which was represented as a fact earlier by him or her only. This concept arose for discussion in the case of Bunga Melati[27], where the court held-

Where the principal, having notice of [a belief that the agent was authorised] and that this belief might induce others to change their position, did not take (often after the operative transaction) reasonable steps to notify those others of the facts.

Thus, when the normal course of action is being changed on account of this belief that X is the agent of P, later on, P cannot deny his responsibilities and duties that X is his agent.

In order to create such estoppel, the duty to speak arises where “silence would create an erroneous impression which leads the prospective representee to alter his position for the worse”.[28]

Conclusion: Various Methods of Creation of Agency

The different methodologies of the creation of agency throw light on the creativity and ingenuity in which Principals can establish this relationship of agency. It depends on the choice of method by each person depending upon the availability of resources like time, money and energy.


[1] Indian Contract Act. 1872.

[2] Id.

[3] Id.

[4] Carr v. Hunt, 651 S.W.2d 875 (Tex. App. Dallas 1983).

[5] Id.

[6] Merrian Webster Dictionary, https://www.merriam-webster.com/dictionary/express.

[7] Indian Contract Act, 1872.

[8] §187, Indian Contract Act, 1872.

[9] Hely-Hutchinson v. Brayhead Ltd., [1968] 1 QB 549 (583).

[10] Alwie Handoyo v. Tjong Very Sumito, [2013] 4 SLR 308.

[11] Id.

[12] §18, Indian Partnership Act, 1932.

[13] Ang Tin Gee v. Pang Teck Guan, [2011] SGHC 259.

[14] §197, Indian Contract Act, 1872.

[15] Indian Contract Act, 1872

[16] Friedman’s Law of Agency (5th Edn.) Chapter 5 at p. 73.

[17] Bowstead on Agency (14th Edn.) at p. 39.

[18] Laxman Sadashiv Pandre v. Janabai Rajaramji Ambagade, 1985 SCC OnLine Bom 236 : 1986 Mah LJ 75 at page 78.

[19] Indian Contract Act, 1872.

[20] Hely-Hutchinson and Freeman & Lockyer v. Buckhurst Part Properties (Mangal) Ltd., [1964] 2 QB 480.

[21] Id.

[22] Ian Brown, “Authority and Necessity in the Law of Agency” (1992) 55 MLR 414 at 416.

[23] Singapore Salvage Engineers Pte Ltd. v. North Sea Drilling Singapore Pte Ltd., [2016] SGHC 5.

[24] Lord Justice Diplock, Hely-Hutchinson and Freeman & Lockyer v. Buckhurst Part Properties (Mangal) Ltd., [1964] 2 QB 480, at Page  503.

[25] §189, Indian Contract Act, 1872.

[26] §188, Indian Contract Act, 1872.

[27] The Bunga Melati 5, [2015] SGHC 190.

[28] Everbright Commercial Enterprises Pte Ltd. v. AXA Insurance Singapore Pte Ltd., [2000] 2 SLR(R) 287 at [66].


  1. Agency: Concept and Definition