Creation of Agency

CREATION OF AGENCY

An “agent” is a person employed to do any act for another or to represent another in dealings with their person. The person for whom such act is done, or who is so represented, is called the “Principle”.
In an agency one person (principle) employs another person (agent) to represent him or to act on his behalf, in dealings with a third person. The act of the agent binds the principle in the same manner in which he would be bound if he does that act himself.

Establishing Agency:

Use of the word “agent” for a person is not conclusive proof of that there is agency in law between the partied.

“The Court must examine the true nature of the agreement and the subsequent dealings between the parties and then decide whether it established a relationship of agency under the law.

It is common experience that the word ‘agent’ is frequently used to describe a relationship which is not an agency in law.

In Loon Karan v.John and Co it has been held that conferring a licence on a person by the Government of Assam to have the exclusive right to purchase yarn and sell it to the consumers, did not make such a person as Government’s agent even though he had been described as such in the agreement. In this case, it was found that in fact the person so authorized was acting solely in his own name, and there was no indication to suggest that he was an agent, even by implication.

In Sakthi Sugars Ltd. V. Union of India that the State Trading Corporation, which is a legal entity, when permitted to export sugar, does not become the agent of Union of India, while exercising that commercial function.

Its position is just like that of an individual, who, when authorized to export some goods, has the position only of a licensee rather than an agent of the Union of India.

Agency as is well settled, is a legal concept, which is employed by the Court when it becomes necessary to explain and resolve the problems created by certain fact situation.

Modes of Creation of Agency:

An act done by an agent in behalf of the principle binds the principal towards a third person. The relationship of Principal and Agent between the person represented and the person representing has to exist in order that the Principal’s liability towards the third person, arises.

In the following situations, the principal is bound the acts of the agent, in such situations, the agent has the power to bind his principal:

• By actual authority being conferred on the agent to act on behalf of the principal. Such authority may be either express or implied
• By agent’s authority to act on behalf of the principle in a situation of ‘Emergency’
• By the conduct of the principal, which created an agency on the basis of the Law of Estoppel
• By ratification of the agent’s act by the principal, even though the same has been done without the principal’s prior authority
• By presumption of agency in Husband-Wife relationship.

1) Acts done with Principal’s Actual Authority:

A Principal is bound by the acts done by his agent with his authority. The authority of an agent may be expressed or implied Section 187 defines express and implied authority as under:

Express Authority:
An authority is said to be express when it is given by words spoken or written.

Implied Authority:

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.

Extent of Implied Authority:

Section 188 explains the extent of the authority of an agent as follows:
188 Extent of agent’s authority – An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act.

An agent having an authority to carry on business has authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business.

2) Agent’s authority in an Emergency (Section 189)

Section 189 explains an agent’s authority in an emergency, as under:
“189. Agent’s authority in an emergency – An agent has authority in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence in his own case, under similar circumstances.

3) Principal bound by Estoppel

Sometimes the agent has neither express nor implied authority to do an act on behalf of the principal, but the principal by his conduct creates an impression in the mind of the third person that the agent has an authority to act on his behalf.
“237 Liability of principal inducing belief that 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.

4) Principal bound by Ratification:

It has been noted above that a principal is bound by acts done by the agent with his authority which may be express or implied. He is also bound by acts done in emergency. In addition, he is bound on grounds of estoppel when there is apparent or ostensible authority vested in the agent. It has also been noted that when the agent does an act for which he does not have any authority, the principal is not bound for the same.

To this there is an exception when the principal may be bound even for acts done without any authority. If the principal retifies, accords subsequent approval to an act done without his authority, But on his behalf, the principal would be bound in respect of such act.
Retification (Sections 196-200)

Section 196 makes the following provision regarding the right of a person to ratify an act which has been done on his behalf, and also regarding the effect of ratification:

“196. Right of person as to acts done for him without his authority. Effect of ratification – 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.

When an acts has been done by one person on behalf of another, though without his authority or knowledge, the person on whose behalf the act is done has the following options
Either
(1) to disown the act; or
(2) to ratify the same

Author: R. Shanmuga Sundaram,
Chettinad School of Law