CREATION OF AGENCY

In Kamlesh and ors. v. Jasbir Singh1, it was held that “an agency can be created either by
express appointment by the principal or by implication of law or by subsequent ratification
by the principal of the acts done on his behalf.

Creation of Agency

Express Implied Ratification Operation of Law

authority authority

By Estoppel By Holding Out By Human By Necessity

Relationship

An Agency may be created by the following ways –

1. Express authority
2. Implied authority
3. Agency by statute, and
4. Agency of ratification.
1. Agency by express authority: An agency expressly created either orally or by
agreement in writing. Generally, the authority given by a principal to his agent is an
express authority which enables the agent to bind the principal by the acts done
within the scope of his authority.

2. Agency by implied authority: Implied agency arises from the conduct, situation or
relationship of parties.

Sec. 187: Definitions of express and implied authority—An authority is said to be express
when it is given by words spoken or written. An authority is said to be implied when it is to

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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.

Illustration
A owns a shop in Serampore, living himself in Calcutta, and visiting the shop occasionally.
The shop is managed by B, and he is in the habit of ordering goods from C in the name of A
for the purposes of the shop, and of paying for them out of A‟s funds with A‟s knowledge.
B has an implied authority from A to order goods from C in the name of A for the purposes
of the shop.

An implied authority may be created by the following ways –

i. Agency by estoppel: When a person by his conduct or statement wilfully another

person to believe that a certain state of affairs of exists and induces him to act on
the belief, he is subsequently estopped from denying the fact of agency i.e., to
alter his previous position.

In other words, when a principal by his act places a person/agent in such a situation that any
other person of ordinary prudence is justified in presuming that such person has the authority
to perform a particular act on behalf of the principal, then the principal is stopped as against
third person from denying the agent’s authority.

Sec. 237 deal with ‘agency by estoppel’. The provision runs as,

Sec. 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.
Illustrations
A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C,
being ignorant of B’s instructions, enters into a contract with B to buy the goods at a price
lower than the reserved price. A is bound by the contract.
In Pickering v. Busk2, one person (principal) purchases some hemp and allowed it to remain
in the custody of the broker through whom he had bought it. The broker’s ordinary business
was to buy and sell hemp. The broker sold the hemp to another person and receive the price.

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The principal then cannot say that agent (broker) has no authority to do so. Hence, the
transaction was binding on the principal.

ii. Agency by holding out: Agency by holding out is a branch of agency by

estoppel. In this case, it occurs owing to some prior positive or affirmative acts
on the part of the principal. e.g., servant, etc.

Illustration:

A gives authority to B, his servant to purchase goods for him from C, a shopkeeper. A
had been paying for all goods bought by B for him (A) from C. If B misappropriates his
authority while purchasing goods from C, A will be liable to C to extent of loss occurred
due to B.

iii. Agency by human relationship: According to Hornby, “as long as people

continue to live in houses, the wife will normally do the household shopping and
husband will pay the bills …… The law of principal and agent will always cut
deeply into the law of husband and wife”.

A wife living with her husband has implied authority to bind her husband by her credit
purchases. But the wife’s implied authority to bind the husband is subjected to some
limitations –

(a) It is necessary that husband and wife should be living together. If living apart then
the wife can become agent only in case of necessity.
(b) There must be a domestic establishment of which the wife is in charge. The domestic
establishment is a must. The well-known principle was established in Debenham v.
Mellon.3
(c) The wife has the authority to pledge her husband credit only for ‘necessaries’.
(d) The husband will not be liable if he gives reasonable allowances to his wife for her
needs.

iv. Agency by necessity: According to Halsbury, “Agency of necessity arises

whenever a duty is imposed upon a person to act on behalf another apart from
contract and in circumstances of emergency, in order to prevent irreparable
injury. It may also arise where a person carries out the legal or moral duties of

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 another in absence of default of that other, or acts in his interest to preserve his
property from destruction.”

In Sims & Co. v. Midland Rly co.4, the plaintiff had consigned some quantity of butter with
defendant railway company and it was delay in transit due to a strike. The goods being
perishable, the defendant sold them. The sale was held binding on the owner because it was
not practicable to get instructions from the owner.

Conditions for application of agency by necessity:

(a) Inability to communicate with principal,

(b) Acts should be reasonable necessity,
(c) Acting bona fide in the interest of party concerned.

3. Agency by ratification: Ratification means subsequent acceptance of an act

originally done without authority or instruction. In other words, an act which the
principal confirms unauthorised acts of the agent. The doctrine of ratification gives
the person on whose behalf act is done without his authority, consent or knowledge,
an option either to ratify it or disown it.

Sections 196 and 197 of the Contract Act deals with ratification –

Sec. 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.

Sec. 197. Ratification may be expressed or implied—Ratification may be expressed or

may be implied in the conduct of the person on whose behalf the acts are done.

Illustrations:
(a) A, without authority, buys goods for B. Afterwards B sells them to C on his own
account; B‟s conduct implies a ratification of the purchase made for him by A.
(b) A, without B‟s authority, lends B‟s money to C. Afterwards B accepts interest on the
money from C. B‟s conduct implies a ratification of the loan.

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Requirement of a valid ratification –

i. It is necessary that the act in question must have been done on behalf of the person
who wants to ratify it.
ii. The principal should be existing and competent at the time of act, since ratification
relates back to the time when contract was originally made by the agent on behalf of
the principal.
iii. While adopting the act, Principal should have the full knowledge of act. No valid
ratification can be made by a person whose knowledge of fact is materially defective.

Sec. 198. Knowledge requisite for valid ratification—No valid ratification can be
made by a person whose knowledge of the facts of the case is materially defective.

iv. The principal must ratify the whole transaction and not part of it.

Sec. 199. Effect of ratifying unauthorized act forming part of a transaction—A

person ratifying any unauthorized act done on his behalf ratifies the whole of the
transaction of which such act formed a part.

v. Ratification can be made only of the lawful acts. Act or transaction should not be
injurious to third person. Section 200 clearly provides that –

Sec. 200. Ratification of unauthorized act cannot injure third person—An act done
by one person on behalf of another, without such other person’s authority, which, if done
with authority, would have the effect of subjecting a third person to damages, or of
terminating any right or interest of a third person, cannot, by ratification, be made to have
such effect.

Illustrations:
(a) A, not being authorized thereto by B, demands, on behalf of B, the delivery of a
chattel, the property of B, from C, who is in possession of it. This demand cannot be
ratified by B, so as to make C liable for damages for his refusal to deliver.
(b) A holds a lease from B, terminable on three months‟ notice. C, an unauthorized
person, gives notice of termination to A. The notice cannot be ratified by B, so as to be
binding on A.

vi. The ratification must be made within ‘reasonable time’ after a contract was entered
into by the agent.
vi. Ratification must be communicated to the party who is sought to be bound by the act
done by the agent.

4. Agency by operation of law: Sometimes an agency arises by operation of law. For

example, law of partnership is an extension of law of agency – a partner is the agent
is the agent of the firm and the acts of the partner binds the firm.

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