CA Foundation Business Laws Unit 9: Agency Notes

Section 182Meaning of Agency

A relationship of agency is created when one person is authorised to act for another or represent another while dealing with third persons. The person acting is the agent. The person represented is the principal.

Definition

Agent means a person employed to do any act for another or to represent another in dealings with third persons. Principal means the person for whom such act is done or who is represented.

Core idea: The agent acts, but the legal effect falls on the principal.

Test of Agency

The name given to a person is not the final test. He may be called manager, broker, representative, purchase officer or salesman. The real test is whether he has authority to affect the legal position of the principal.

Can he bind the principal? This means: if he acts within authority, the principal becomes legally responsible for that act.
Can he create privity of contract? This means: though the agent deals with the third party, the final contract is between the principal and the third party.
If both answers are yes, the relationship is agency.

Master test: agency exists when one person has authority to create legal relations between the principal and a third party.

Simple Example

P authorises A to buy raw material from T. A places the order within authority. The contract is between P and T. P must pay T, and T must supply to P. A is only the connecting link. Therefore, A is an agent.

Not Every Worker Is Agent

A person who only carries goods, delivers a message, prepares paperwork or follows internal instructions may not be an agent. He becomes an agent only when he can legally represent the principal before a third party.

Important Maxim

Qui facit per alium, facit per se means: he who acts through another acts himself. In simple words, when the agent acts within authority, the law treats it as the principal’s own act.

Sections 183 to 185Appointment of Agents

The law separates two questions: who can appoint an agent, and who can become an agent.

Point	Rule	Exam Meaning
Who may appoint agent?	Only a major person of sound mind.	A minor or person of unsound mind cannot appoint an agent.
Who may become agent?	Any person may become an agent.	Even a minor can act as agent. The act can bind the principal, but the principal cannot sue the minor agent for compensation for misconduct because the agent is not legally competent.
Consideration	No consideration is necessary.	Acceptance of agency itself is enough.

Example

P appoints Q, a minor, to sell a car for not less than ₹2,50,000. Q sells it for ₹2,00,000. P is bound by the sale but cannot claim compensation from Q because Q is a minor.

Memory line: Principal must be legally competent because he becomes bound by the agent’s acts. Agent need not be competent because he is only the connecting person, but appointing an incompetent agent is risky.

Sections 186, 187 and 237Creation of Agency

Agency can be created in different ways. Sometimes the principal clearly appoints the agent. Sometimes authority is understood from conduct, business practice or emergency. In some cases, the law itself treats a person as an agent.

Simple test: agency is created whenever one person gets legal authority to represent another before third parties.

Express Agency

By spoken or written words

Authority is express when given clearly by words, orally or in writing. A power of attorney is the common written form.

Implied Agency

By conduct or circumstances

Authority is implied when it is inferred from conduct, ordinary course of dealing or circumstances.

By Estoppel

Principal cannot deny

If the principal by words or conduct makes a third party reasonably believe that someone has authority, the principal cannot later deny that authority after the third party acts on that belief.

By Necessity

Emergency authority

In a real emergency, an agent may take reasonable steps to protect the principal from loss when waiting for instructions is not practical.

Operation of Law

Law creates agency

Example: a partner is an agent of the firm for business of the firm.

Ratification

Later approval

If someone acts without authority but on behalf of another person, that person may later approve the act. After valid ratification, the act is treated as authorised from the beginning.

Example

A owns a shop managed by B. B regularly orders goods from C in A’s name and pays from A’s funds with A’s knowledge. B has implied authority to order goods for the shop.

Sections 196 to 200Ratification

Ratification means later approval of an act that was done without authority at the time. At first, the person had no authority to act as agent. Later, the principal accepts that act. Once the approval is valid, the law treats the act as if the agent had authority from the beginning. This is why ratification is like back-dated authority in simple language.

Simple Example

A, without authority, buys goods from T on behalf of P. P later accepts the goods and pays for them. P has ratified A’s act. Now the contract is treated as a contract between P and T.

Express or Implied — Section 197

Ratification may be done in two ways. It may be express, where the principal clearly says or writes that he accepts the unauthorised act. It may also be implied, where the principal does not say anything directly, but his conduct shows acceptance.

Example

A, without authority, buys goods for P. P later uses those goods in his business or sells them to customers. Even if P does not expressly say “I approve”, his conduct shows ratification.

Simple rule: words can ratify, but conduct can also ratify.

Full Knowledge — Section 198

Ratification is valid only when the principal knows the material facts of the transaction. Material facts means the important facts which would affect the principal’s decision to accept or reject the act.

If the principal approves without knowing the full truth, the approval is not a proper ratification. The law does not treat blind approval as real consent.

Example

A sells P’s goods without authority and hides the fact that the sale was made at a very low price. If P approves without knowing this fact, the ratification may not be valid.

Simple rule: no full knowledge, no valid ratification.

Whole Transaction — Section 199

The principal cannot pick only the beneficial part of the transaction and reject the loss or burden attached to it. Ratification must be of the entire transaction.

This prevents unfairness. A principal cannot say, “I accept the profit, but I will not accept the liability.” He must either accept the transaction as a whole or reject it as a whole.

Example

A, without authority, buys goods for P on credit. The goods are useful, but payment is also due to the seller. P cannot keep the goods and refuse to pay. If he ratifies, he must accept both benefit and liability.

Simple rule: ratification is all or nothing.

No Injury to Third Party — Section 200

Ratification cannot be used in a way that harms a third party whose rights have already arisen before the ratification. The principal’s later approval cannot be used to take away rights that another person has already acquired.

This is important because ratification normally relates back to the date of the original act. But that back-dated effect is not allowed if it would unfairly damage a third party.

Example

A does an unauthorised act on behalf of P. Before P ratifies it, T acquires a legal right in the matter. P cannot later ratify A’s act in a way that destroys T’s already acquired right.

Simple rule: later approval cannot be used to injure existing third-party rights.

Reasonable Time and Communication

Ratification should be done within a reasonable time. The principal cannot wait indefinitely, watch the market or situation change, and then decide only after seeing whether the transaction is profitable.

The ratification should also be communicated clearly to the concerned party. Until the other party knows that the principal has accepted the act, uncertainty remains.

Example

A enters into an unauthorised purchase of raw material for P. If P waits for months and approves only after prices rise, that may not be treated as proper ratification.

Simple rule: ratification must be timely and clear.

Act Must Be Valid

Only an act which could have been lawfully authorised in the first place can be ratified later. Ratification cannot make an illegal, void or criminal act valid.

If the law does not permit the act, later approval by the principal is useless. Ratification can cure lack of authority, but it cannot cure illegality.

Example

If A enters into an illegal transaction in P’s name, P cannot make it valid by saying later that he approves it.

Simple rule: ratification can fix absence of authority, not absence of legality.

Exam trap: Ratification is not a magic cure. The principal must know the material facts, must accept the whole transaction, and cannot ratify an illegal or void act.

Sections 188 and 189Extent of Agent’s Authority

An agent’s authority is not restricted only to the exact words used by the principal. It also includes normal, lawful and necessary acts required to complete the authorised work. But it does not cover careless, illegal or clearly unauthorised acts.

Simple rule: if the main work is authorised, the usual and necessary steps for doing that work are also authorised, unless the principal has clearly restricted them.

Normal Authority — Section 188

An agent authorised to do an act may do every lawful thing necessary for that act. An agent authorised to carry on a business may do usual lawful acts needed in that business.

Example

A appoints B to recover a debt. B may adopt legal processes needed to recover it and give valid discharge.

Emergency Authority — Section 189

In emergency, an agent may do all acts necessary to protect the principal from loss, as a person of ordinary prudence would do in his own case.

Example

B is asked to send perishable goods to C. If the goods begin to perish before reaching destination, B may sell them to prevent loss.

Conditions for Emergency Authority

Emergency authority is not available merely because the agent thinks another option is better. It applies only when quick action is needed to protect the principal from loss.

There is no reasonable opportunity to communicate with the principal.
There is real commercial necessity to act immediately.
The agent acts honestly and for the principal’s benefit.
The agent acts like a prudent person would act in his own matter.
The agent’s action is limited to protecting the property or business from loss.

Sections 190 to 193Sub-Agents

The normal rule is delegatus non potest delegare: a person who is trusted with authority cannot simply pass that authority to someone else. The principal chose that particular agent because of trust, skill or confidence. So the agent cannot appoint another person to do the agency work unless delegation is permitted.

Simple meaning: an agent cannot say, “I was appointed by you, but I will send someone else in my place,” unless the law, contract, trade custom or emergency allows it.

Section 191

A sub-agent is a person employed by, and acting under the control of, the original agent in the business of the agency.

Situation	Effect
Properly appointed sub-agent	Principal is liable to third parties for sub-agent’s acts. Agent is responsible to principal. Sub-agent is responsible to agent, and to principal only for fraud or wilful wrong.
Improperly appointed sub-agent	Agent is responsible both to principal and third parties. Principal is not responsible for sub-agent’s acts. Sub-agent is answerable only to agent.

Example

A carrier accepts goods for transport and without authority appoints another carrier. If goods are damaged, A remains liable because the delegation was not proper.

Sections 194 and 195Substituted Agent

A substituted agent is different from a sub-agent. Here, the original agent does not delegate his own work. He only selects or names another person who will directly act for the principal. Once properly selected, that person becomes the principal’s agent.

Simple difference: a sub-agent works under the original agent. A substituted agent works directly for the principal after being properly selected.

Meaning

A substituted agent is appointed by the agent but acts directly for the principal, with the principal’s authority or consent.

Agent’s Duty — Section 195

While selecting such person, the agent must use the same discretion as a man of ordinary prudence would use in his own case.

Effect

If the agent selects carefully, he is not responsible for the substituted agent’s later acts or negligence.

Example

A asks B, his solicitor, to sell an estate and employ an auctioneer. B appoints C as auctioneer. C is A’s substituted agent for the sale, not B’s sub-agent.

ComparisonSub-Agent vs Substituted Agent

Basis	Sub-Agent	Substituted Agent
Appointment	Appointed by original agent to work under him.	Named by agent to act for the principal.
Control	Acts under control of original agent.	Acts under principal after appointment.
Legal Position	Agent of the agent.	Agent of the principal.
Privity	No direct privity with principal, except fraud/wilful wrong.	Direct privity with principal.
Responsibility of Original Agent	Responsible for sub-agent’s acts.	Responsible only for proper selection, not for acts after proper selection.

Memory line: Sub-agent is under the agent. Substituted agent replaces the agent for that part of work and becomes principal’s agent.

Sections 211 to 218Duties of an Agent

Agency is a fiduciary relationship. This means the agent is placed in a position of trust. He must protect the principal’s interest and must not secretly benefit at the principal’s cost.

Simple rule: because the agent can bind the principal, the agent must act honestly, carefully and loyally.

Follow Instructions — Section 211

Agent must conduct business according to principal’s directions. If no directions exist, he must follow trade custom.

Skill and Diligence — Section 212

Agent must act with reasonable skill, care and diligence, and compensate the principal for direct loss caused by neglect or misconduct.

Render Accounts — Section 213

Agent must provide proper accounts to the principal when demanded.

Communicate — Section 214

In difficulty, agent must use reasonable diligence to communicate with principal and seek instructions.

No Self-Dealing — Sections 215 and 216

Agent must not deal on his own account without principal’s consent. Principal may repudiate the transaction or claim the benefit gained by agent.

No Secret Profit

Agent must not earn hidden profit from agency work. Any extra benefit made because of his position belongs to the principal.

No Delegation — Section 190

Agent cannot delegate personal duties unless permitted by contract, custom, nature of agency or emergency.

Pay Sums Received — Section 218

After proper deductions, agent must pay the principal all amounts received on principal’s account.

Protect Confidential Information

Agent must not misuse confidential information obtained during agency against the principal.

Sections 217 to 225Rights of an Agent

The law also protects the agent. Since the agent acts for the principal, he may spend money, incur liability or suffer loss while doing authorised work. Therefore, he gets certain rights against the principal.

Simple rule: if the agent acts lawfully and within authority, the principal must not leave him unpaid or exposed to loss.

Right of Retainer — Section 217

Agent may retain from amounts received for principal: advances made, proper expenses and remuneration payable to him.

Right to Remuneration — Sections 219 and 220

Agent is entitled to agreed or usual remuneration. But he loses remuneration for the part of business where he is guilty of misconduct.

Lien — Section 221

Agent may retain principal’s goods, papers and property until commission, disbursements and service charges due to him are paid, unless contract says otherwise.

Indemnity for Lawful Acts — Section 222

Principal must indemnify agent for consequences of lawful acts done within authority.

Indemnity for Good Faith Acts — Section 223

If agent acts in good faith on principal’s instructions, principal must indemnify him for loss suffered.

No Indemnity for Criminal Act — Section 224

Principal is not liable to indemnify agent for consequences of a criminal act.

Compensation — Section 225

Principal must compensate agent for injury caused by principal’s neglect or lack of skill.

Sections 226 to 229 and 237Principal’s Liability to Third Parties

When an agent acts within authority, the principal is bound as if he had acted personally. This is the main commercial purpose of agency: business can be carried on through authorised persons.

Simple rule: authorised act of agent = act of principal.

Acts of Agent — Section 226

Contracts made through an agent and obligations arising from such acts have the same legal effect as if made or done by the principal himself.

Agent Exceeds Authority — Section 227

If authorised and unauthorised parts can be separated, the principal is bound only by the authorised part.

Cannot Separate — Section 228

If authorised and unauthorised parts cannot be separated, principal is not bound by the transaction.

Notice to Agent — Section 229

Notice or information given to the agent in the course of business is treated as notice to principal.

Holding Out — Section 237

If the principal by words or conduct causes third party to believe the agent has authority, the principal may be liable for acts done on that belief.

Commercial logic: third parties must be able to rely on the apparent authority created by the principal’s conduct.

Sections 230 to 235Personal Liability of Agent

The normal rule is simple: when an agent clearly acts for a known principal and acts within his authority, the principal is liable, not the agent personally. The agent is only the connecting link between the principal and the third party.

Master rule: Disclosed principal + authorised act = principal liable, agent not personally liable. Personal liability arises only in exceptional situations.

The reason is practical. The third party is really contracting with the principal. But in some cases, the third party may not know the principal, may not be able to sue the principal, or may have trusted the agent personally. In such cases, the law may make the agent personally liable.

Situation	Who may be liable?	Clear Explanation
Contract says agent is personally liable	Agent	If the agreement itself says that the agent will be personally responsible, the agent cannot later avoid liability by saying that he acted for someone else. Contract terms can expressly create personal liability.
Foreign principal	Agent presumed liable	Where the principal resides abroad, the law may presume that the local agent is personally liable unless the contract clearly says otherwise. This protects the third party because suing a foreign principal may be difficult, costly or impractical.
Undisclosed principal	Agent and principal possibilities arise	If the agent does not reveal that he is acting for a principal, the third party initially believes that the agent himself is the real contracting party. Later, when the real principal is discovered, special rules apply regarding who can be sued and who can enforce the contract.
Principal cannot be sued	Agent may be liable	If the so-called principal is legally incapable of being sued, or does not legally exist, the third party may hold the agent personally liable. Example: an agent contracts on behalf of a non-existent company or an incompetent principal.
Agent acts without authority	Agent liable for breach of warranty of authority	If a person claims to be an authorised agent when he has no authority, he misleads the third party. If the alleged principal does not ratify the act, the false agent must compensate the third party for the loss caused.

Undisclosed Principal — Section 231

An undisclosed principal situation arises when the agent contracts in his own name without revealing that he is actually acting for someone else.

Later, if the real principal is discovered, the third party may be able to hold the principal liable. But this right is not automatic in every case. It depends on whether the circumstances allow the real principal to step into the contract.

Example

A buys goods from B without saying that he is buying for P. Later B discovers that P was the real principal. Depending on the circumstances, B may claim payment from P, because A was actually acting on P's behalf.

Supposed Principal — Section 232

If the third party would not have entered into the contract had he known the real principal, then the real principal cannot force the third party to perform the contract.

This protects the third party's choice. A person may be willing to contract with X but not with Y because of creditworthiness, reputation, past disputes or business policy.

Simple idea: the hidden principal cannot unfairly force himself into a contract where the third party never intended to deal with him.

Election — Sections 233 and 234

In some cases, the third party may have a choice to proceed against either the agent or the principal. This is called election.

But once the third party clearly chooses one party and acts on that choice, he may lose the right to proceed against the other. The law does not normally allow double recovery for the same claim.

Example

If B first sues A as the contracting party and obtains satisfaction, B cannot again recover the same amount from P after discovering that P was the principal.

False Authority — Section 235

If a person represents that he has authority to act as agent, but actually has no authority, he gives an implied promise to the third party that such authority exists.

If the alleged principal refuses to ratify the transaction, the person who falsely claimed authority must compensate the third party. This is known as breach of warranty of authority.

Exam line: A false agent is liable because he made the third party believe that valid authority existed.

Exam Trap

Do not write that an agent is always liable. The correct rule is the opposite: agent is normally not personally liable. First mention the general rule, then mention the exceptions.

Keighley, Maxsted & Co. v. Durant

Undisclosed Principal

Facts An agent bought wheat in his own name. Later, the alleged principal tried to enforce the contract.

Issue Could the principal enforce a contract where the agent appeared to contract personally?

Held The principal could not enforce the contract because, in the circumstances, the contract was intended only with the apparent buyer.

Principle An undisclosed principal has rights only where the facts and intention of the contract allow him to step in. A hidden principal cannot always force himself into the contract.

Collen v. Wright

False Representation of Authority

Facts A person falsely claimed that he had authority to act for another. The authority did not actually exist, and the other party suffered loss.

Issue Is a person liable when he wrongly represents that he has authority as agent?

Held Yes. The false agent had to compensate the other party.

Principle A person who claims to be an authorised agent gives an implied warranty that authority exists. If it does not exist, he is liable for breach of warranty of authority. This supports the idea behind Section 235.

Montgomerie v. United Kingdom Steamship Association

Personal Liability of Agent

Point This case is remembered for the rule that an agent is generally not personally liable when acting for a disclosed principal.

Exception Personal liability may arise where the contract says so, the principal is foreign, the principal is undisclosed, or the principal cannot be sued.

Principle Section 230 gives the general rule and its exceptions: agent normally escapes personal liability, but the law protects the third party in special situations.

Quick Answer Format for Exam

In a problem question, write the answer in this order:

First, identify whether the principal was disclosed or undisclosed.
Second, check whether the agent acted within authority.
Third, check whether any exception to Section 230 applies.
Fourth, decide whether the principal, agent, or both may be liable.

Sections 201 to 210Revocation and Termination

Agency can end either because the parties end it, or because the law treats it as ended due to events like death, insanity, insolvency or completion of work. But termination does not automatically wipe out acts already validly done.

Simple rule: agency may end for the future, but valid acts already done within authority generally remain binding.

Modes — Section 201

Principal revokes authority.
Agent renounces agency.
Business of agency is completed.
Principal or agent dies or becomes of unsound mind.
Principal is adjudicated insolvent.

Agency Coupled with Interest — Section 202

Where the agent has himself an interest in the property forming the subject matter of agency, the agency cannot normally be terminated to the prejudice of that interest.

Revocation by Principal — Sections 203 and 204

Principal may revoke before authority is exercised. But he cannot revoke after authority has been partly exercised so far as acts already done bind him.

Compensation and Notice — Sections 205 and 206

Premature revocation or renunciation without sufficient cause may require compensation. Reasonable notice must be given.

Express or Implied — Section 207

Revocation and renunciation may happen by words or by conduct.

When Termination Takes Effect — Section 208

Termination is effective against agent when known to him, and against third parties when known to them.

Death or Insanity — Section 209

On principal’s death or insanity, agent must take reasonable steps to protect and preserve interests entrusted to him.

Sub-Agent — Section 210

Termination of agent’s authority also terminates the authority of sub-agent appointed by him.

Before ExamQuick Revision Points

Agency is tested by power to bind principal and create privity with third party.
Principal must be major and of sound mind; any person may become agent.
No consideration is required to create agency.
Authority may be express or implied.
Agency by estoppel depends on representation, belief and action by third party.
Ratification means later approval of an unauthorised act, but requires full knowledge and whole transaction approval.
Agent’s normal authority includes lawful acts necessary for authorised work.
In emergency, agent may act like a prudent person to protect principal from loss.
Agent cannot delegate unless contract, custom, nature of agency or emergency permits.
Sub-agent works under original agent; substituted agent becomes principal’s agent.
Agent must follow instructions, use skill, account, communicate, avoid secret profit and pay sums received.
Agent has rights of retainer, remuneration, lien, indemnity and compensation.
Principal is liable for authorised acts of agent.
Agent is normally not personally liable, but exceptions exist.
Agency may end by revocation, renunciation, completion, death, insanity or insolvency.

Summary Infographic

Unit 9 Memory Map

Read agency as a triangle: Principal gives authority → Agent acts → Third party gets legal relation with principal.

1. Meaning

Section 182.
Agent acts for principal.
Principal is represented before third party.
Authority is central.

2. Creation

Express.
Implied.
Estoppel.
Necessity.
Operation of law.
Ratification.

Master Question: Was the act authorised originally, impliedly, by emergency, by representation, or later ratified?

3. Agent Duties

Follow instructions.
Use skill and diligence.
Render accounts.
Communicate.
No secret profit.
No unauthorised delegation.

4. Agent Rights

Retainer.
Remuneration.
Lien.
Indemnity.
Compensation.

5. Delegation

Sub-agent: under agent.
Substituted agent: agent of principal.
Improper delegation creates liability.

6. Liability

Principal bound by authorised acts.
Agent usually not personally liable.
Exceptions under Sections 230 onwards.

7. Termination

Revocation.
Renunciation.
Completion.
Death or insanity.
Insolvency.
Agency coupled with interest is protected.