Essential framework for principal–agent relationships and liability allocation under Indian Contract Act 1872.
## Core concept
Agency is a contractual relationship where one person (agent) is authorized to act on behalf of another (principal) in dealing with third parties. The agent bridges the principal and the external world—creating legal relations that bind the principal.
Key distinction: Unlike guarantee (personal promise to pay debtor's debt) or indemnity (promise to compensate loss), agency is about *representation and authority*, not personal liability for another's debt.
Definition (Section 182, ICA 1872): An agent is a person employed to do any act for another, or to represent another in dealings with third parties.
## Types of authority
| Type | Meaning | Exam note | |----------|-----------|--------------| | Actual (Express) | Explicitly given in writing or verbally | Most common in contracts | | Actual (Implied) | Arises from nature of position, usage of trade, or conduct | Agent can bind principal within scope | | Apparent/Ostensible | Third party reasonably believes agent has authority (based on principal's conduct) | Principal liable even without actual authority | | Customary | Based on trade usage/custom (e.g., broker collecting freight) | Section 186 recognizes this |
Exam focus: Apparent authority questions test whether the principal's *conduct* (not words) led the third party to believe the agent could bind them.
## Agent's duties and principal's liability
Agent's duties (Section 211–226): - Act within the scope of authority (Section 211) - Exercise due diligence and skill (Section 212) - Disclose principal's existence before contracting (Section 213) - Account for money/property received (Section 213A) - Not make secret profit (Section 214)
Principal liable when: - Agent acts within actual/apparent/customary authority - Agent discloses principal (Section 226) - Principal ratifies unauthorized act (Section 196)
Principal NOT liable when: - Agent acts beyond authority and principal does not ratify - Agent commits fraud/criminal act without principal's knowledge (general rule)
## Formula / rule
When does an act bind the principal?
- Within actual authority? → Principal bound (Sections 182–187)
- Within apparent authority? → Principal bound if third party reasonably relied on it (Section 189)
- Unauthorized, but ratified? → Principal bound retroactively (Section 196)
- If none of above → Only agent liable; principal not bound
Ratification (Section 196–199): - Principal must ratify *entire* contract - Must occur within reasonable time - Retroacts to date of original act - Cannot ratify if it would injure innocent third party
## Common exam applications
- Salesman offering discount beyond limit: Is the discount binding? Check if salesman had apparent authority (based on past conduct).
2. Manager signing cheque beyond sanctioned amount: Binding if board routinely approved higher amounts (implied authority); not binding if clearly unauthorized and third party knew this.
3. Broker selling goods without stock: Agent liable for loss if acting beyond authority; principal not liable unless ratification occurs.
4. Partner acting in partnership business: Each partner is agent of partnership (Section 9, Indian Partnership Act 1932)—acts within scope bind the firm.
## Common mistakes
- Confusing agency with employment: An employee is an agent only when specifically authorized to contract on employer's behalf. Not all employees are agents.
- Assuming apparent authority requires explicit permission: No—it arises from the *principal's conduct* leading third party to believe authority exists.
- Forgetting disclosure requirement: If agent discloses the principal's *identity*, principal is liable. If agent conceals principal (undisclosed agency), both agent and principal may be liable.
- Mixing with guarantee: "I'll be responsible if he defaults" = guarantee (Section 126), not agency.
- Ratification without knowledge: Principal cannot ratify what they don't know happened—ratification requires conscious acceptance.
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Worked example: Ram appoints Sharma as salesman with authority to sell goods at ₹100 per unit. Sharma consistently sells at ₹90 with Ram's knowledge and tacit approval. One day, Sharma sells to Patel at ₹80. Is Ram bound? Answer: Yes—Sharma had *apparent authority* (based on course of dealing). Patel reasonably believed ₹80 was within Sharma's authority. Ram must be bound (Section 189).