Methods of Creation of Agency

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Introduction

An agency is a relationship between two parties, where one party (the agent) is authorized to act on behalf of the other party (the principal) to create a legal relationship with a third party.
The Indian Contract Act, 1872 governs the law of agency in India.

There are various ways through which an agency can be created. Some agencies are formed by express agreement, while others may arise automatically due to actions, circumstances, or by law.

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Methods of Creation of Agency

The different methods by which an agency can be created are:

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1. Agency by Express Agreement

• Meaning:
  When the principal appoints an agent by clear words, either spoken (oral) or written, it is called agency by express agreement.

• Example:
  A person signs a power of attorney to authorize another person to act on their behalf.
  Orally telling someone, "You can sell my bike on my behalf," is also express agency.

• Legal Basis:
  Section 186 of the Indian Contract Act states that agency can be created expressly.

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2. Agency by Implied Agreement

• Meaning:
  Sometimes, no direct words are used. Instead, the agency relationship is created by the conduct of the parties or the circumstances. This is known as agency by implication.

• Example:
  A person regularly sends goods through a transporter without giving written authority. Over time, the transporter becomes an implied agent.

• Types of Implied Agency:

  • Agency by Estoppel

  • Agency by Holding Out

  • Agency by Necessity

We will briefly discuss these types below.

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(i) Agency by Estoppel

• Meaning:
  If a person by his words or actions makes a third party believe that another person is his agent, and the third party acts on that belief, the principal cannot later deny the agency.

• Example:
  If Mr. A allows Mr. B to act like his agent in front of others without stopping him, Mr. A cannot later deny that Mr. B was his agent.

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(ii) Agency by Holding Out

• Meaning:
  Agency by holding out happens when a person’s behavior continuously shows that another is acting as their agent, even though no formal appointment was made.

• Example:
  A businessman allows his employee to collect money from customers regularly. Here, customers can assume that the employee is authorized to collect money.

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(iii) Agency by Necessity

• Meaning:
  In some urgent situations where immediate action is required, and it is impossible to communicate with the principal, a person may act as an agent to protect the principal's interests.

• Example:
  A carrier of goods may sell perishable goods (like fruits) if they are in danger of getting spoiled and there is no time to consult the owner.

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3. Agency by Ratification

• Meaning:
  When someone acts without authority or beyond their authority, but later the principal approves the action, the agency is said to be created by ratification.

• Example:
  Without permission, a person sells goods on behalf of another. If the owner later accepts the sale, the agency is created by ratification.

• Legal Basis:
  Section 196 of the Indian Contract Act.

(Already explained this topic separately in the previous assignment.)

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4. Agency by Operation of Law

• Meaning:
  Sometimes, the law itself considers a person to be an agent of another even without any agreement, because of the relationship or situation.

• Example:

  • Partners in a firm are agents of each other (under the Indian Partnership Act, 1932).

  • Husband and wife: In some cases, the wife is considered the agent of the husband for purchasing household necessities.

• Key Point:
  No prior agreement is needed; the law automatically treats the relationship as agency.

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Summary Table: Methods of Creation of Agency

Method	Explanation	Example
Express Agreement	Clear appointment through words (oral or written)	Signing a Power of Attorney
Implied Agreement	Agency formed through conduct or circumstances	Regular dealing with a transporter
Agency by Estoppel	Principal’s behavior makes others believe in agency	Allowing someone to collect money
Agency by Holding Out	Long-term behavior showing someone as agent	Regular acceptance of services
Agency by Necessity	Emergency action to protect interests	Selling perishable goods
Agency by Ratification	Later approval of an unauthorized act	Accepting an unauthorized sale
Agency by Law	Law automatically treats relationship as agency	Partners in a firm

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Conclusion

Agency can be created in many ways, not just through a formal agreement.
It may arise through express words, actions, urgent situations, or even automatically under the law. Understanding the different ways agency can be created is important because once the agency is established, the principal becomes bound by the acts of the agent towards third parties.
Thus, both parties (principal and agent) should be careful about how they behave and the authority they exercise.