Indian Contract Act 1872 – LAW OF AGENCY

Agency is an arrangement that occurs where one person, i.e. the principal, designates another person, i.e. the agent and agents agree to work on his orders. The law that governs such arrangements or contracts is the law of agency or agency lawChapter X of the Indian Contract Act 1872, discusses Agency laws. Understanding the law relating to an agency is relevant since almost all business transactions worldwide are done through an agency.

Both companies, whether large or small, carry out their work by agency. Consequently, the law relating to the agency is a key area of business law.


Formation of an agency may require the following: 

  1. Express or implied contract– An agent can be hired indirectly or expressly by the principal. The contract can be in writing or oral.
  2. Necessity – a person acts in an emergency for another without express authority to do so.
  3. By ratification: either an action committed by someone who had no previous authority to act or an act that exceeded the authority given to an individual is given consent.
    Nevertheless, Ratification is not lawful in the following situations:
    If the person’s understanding of the facts of the case is skewed, and only half of them know items on which they ratify.
    An act committed by an agent on behalf of the principal has had an impact of damage or harm to the person or violated any of his rights.
  4. Through behavior or situation – estoppel – Whereby a person requires another to behave for him to such a degree that a third party fairly assumes an arrangement between the two develops.


In addition to the general essential elements provided for in the contract, the Act also sets down some particular standard and essential elements for the Agency’s contract:

Competency of the Principal

The majority, i.e. the Principal must have achieved the legal age in compliance with the applicable legislation. Sound mind, that is, the principal must be of sane mind, at least at the time the agent is named.
The underlying rule of thumb here is that the principal should be able to perform the activities that he needs his agent to do for him.
Therefore, any appointment by a minor or an unsound minded person to an agent is expressly declared void.

The Agent’s competency

The criteria regarding the agent’s competency have specific standards. Anyone, even a third party can become an agent, irrespective of their age or adequacy of mind. It recommends that any person can become an agent including a minor and an unsound person.
Nevertheless, the agent may not be accountable to the principal, till they are of sound mind and have reached the age of majority.

Consideration optional

Consideration is not an important element for establishing an law of Agency. These clauses shall not deprive the agent of his legitimate and reasonable remuneration unless expressly provided for in the contract.


Principal’s obligations to Agent

  • The Principal must reimburse his agent if he causes harm to him due to his incompetence or lack of skill.
  • An agent has the right to reimbursement by the Principal. It can be against any act of good faith, even though it ends up breaching third-party rights.
  • It is compulsory for the Principal to indemnify the agent in the exercise of his authority as an agent against any lawful actions that he performs.
  • The Principal shall not be liable to the Agent if the act is criminal. The agent will not be liable for any compensation from illegal actions in any circumstances.

Agent’s obligation to Principal

  • He has to perform the Principal’s business according to the Principal’s instructions.

An agent shall give the Principal the appropriate accounts as and when the Principal requests.

  • Unless the agent performs the business in the manner rather than on the Principal’s orders, the Principal can assert any profit from the agent which comes from the business.
  • An agent has the responsibility to convey any difficulties he might experience when doing business with the Principal. Where any particular fact fails, the Principal can waive his contract.


The Indian Contract Act 1872 lays out certain standards for the agency’s contract, but it can’t be considered exhaustive. Thus, several statutes also recommend additional formalities to avoid disputes later on.

  1. The Registration act specifies that an agent’s name must be in writing to register and carry out the document. 
  2. Registration of a lawyer acting for the client needs to be in writing only under the company’s common seal.
  3. Any person who is to attend a company meeting needs to complete the registration process in writing as per the company’s rules.

While Agency law is much more exhaustive, this will give an overview and basic knowledge as to what agency is and practical elements to look out for before executing a contract of agency.