Model Answer
0 min readIntroduction
The concept of agency is fundamental to commercial transactions, allowing individuals and entities to act on behalf of others. Agency, in legal terms, is the relationship that exists when one person (the agent) is authorized to act on behalf of another (the principal) and bind the principal in legal relations with third parties. This relationship is governed by the Indian Contract Act, 1872, specifically sections 182 to 238. Understanding the essentials of agency, its creation, and termination is crucial for comprehending the legal framework surrounding business and contractual obligations. The efficient functioning of modern commerce heavily relies on the principles of agency.
Essentials of an Agency
For a valid agency to exist, the following essential elements must be present:
- Offer and Acceptance: There must be an offer by the principal to the agent, and an acceptance of that offer by the agent.
- Intention to Create Legal Relations: Both the principal and agent must intend to create a legally binding relationship. Social agreements do not constitute agency.
- Capacity of Parties: Both the principal and agent must be competent to contract, meaning they must be of the age of majority, of sound mind, and not disqualified from contracting by law.
- Authority: The agent must have the authority, either express or implied, to act on behalf of the principal.
- Consideration: While not always mandatory, consideration is generally present in agency relationships. The agent’s remuneration often serves as consideration.
- Principal must be competent: The principal must be competent to contract.
Creation of Agency
Agency can be created in several ways, as outlined in the Indian Contract Act, 1872:
1. By Express Agreement
This is the most common method. The principal explicitly appoints the agent through a written or oral agreement, defining the scope of the agent’s authority. For example, a power of attorney is a common instrument used for creating agency by express agreement.
2. By Implied Authority
Agency can arise from the conduct of the parties or the circumstances of the case. If a person habitually allows another to perform acts on their behalf, and the third party reasonably believes that the person has authority, an agency by implied authority is created. This is often seen in partnerships where partners have implied authority to bind the firm.
3. By Ratification
If a person acts on behalf of another without prior authority, the principal can subsequently ratify the act, thereby creating an agency. Ratification must be clear and unequivocal, and it must be done within a reasonable time. Section 149 of the Indian Contract Act deals with ratification.
4. By Necessity
In certain emergency situations, an agency can be created by necessity. This arises when it is impossible to communicate with the principal and immediate action is required to protect the principal’s interests. For example, if a ship captain needs to repair the ship while at sea and cannot contact the owner, they can act as an agent of necessity.
Termination of Agency
An agency relationship can be terminated in various ways:
1. By Performance
The agency is automatically terminated when the agent completes the task for which they were appointed. For instance, if an agent is hired to sell a specific property and successfully does so, the agency terminates upon completion of the sale.
2. By Expiration of Time
If the agency is created for a fixed period, it terminates automatically upon the expiry of that period.
3. By Revocation by the Principal
The principal can revoke the agent’s authority at any time, even if there is a contract between them, unless the revocation violates the terms of the contract (Section 203). However, the principal may be liable for damages if the revocation causes loss to the agent or third parties.
4. By Renunciation by the Agent
The agent can renounce the agency, but they must give reasonable notice to the principal. Failure to do so may make the agent liable for damages (Section 205).
5. By Death
The death of either the principal or the agent automatically terminates the agency (Section 207).
6. By Insolvency
The insolvency of either the principal or the agent results in the termination of the agency.
7. By Destruction of Subject Matter
If the subject matter of the agency is destroyed, the agency is terminated. For example, if an agent is appointed to sell a house that is destroyed by fire, the agency terminates.
| Mode of Creation | Mode of Termination |
|---|---|
| Express Agreement | By Performance |
| Implied Authority | Expiration of Time |
| Ratification | Revocation by Principal |
| Necessity | Renunciation by Agent |
| Death of Principal/Agent |
Conclusion
In conclusion, agency is a vital legal concept that underpins numerous commercial interactions. A valid agency requires specific essential elements, and its creation can occur through various means, ranging from explicit agreements to implied authority and ratification. Understanding the modes of termination is equally important, as it defines the limits of the agent’s authority and the principal’s liability. The provisions of the Indian Contract Act, 1872, provide a comprehensive framework for regulating agency relationships, ensuring clarity and predictability in commercial dealings.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.