Special Contracts and Commercial Law
Agency: Creation, Authority and Termination
Understand how agency is created, how actual and apparent authority bind a principal, how ratification operates and when authority ends.
The short answer
Agency allows an agent to create legal relations between the principal and third parties within actual or apparent authority.
Creation and authority
No consideration is necessary to create agency under Section 185.
Express authority
Authority is given through spoken or written words.
Implied authority
Authority is inferred from conduct, circumstances or the ordinary course of dealing.
Necessity
Limited authority may arise where urgent action is reasonably required to protect the principal's interests and instructions cannot be obtained.
Apparent authority
A principal whose words or conduct lead a third party reasonably to believe authority exists may be bound under Section 237.
Ratification
A principal may adopt an unauthorized act with material knowledge, ratifying the whole transaction without injuring third-party rights.
Termination of agency
Authority may end by party action or operation of law.
Revocation or renunciation
The principal may revoke and the agent may renounce, subject to the contract, reasonable notice and accrued consequences.
Completion
Agency ends when its business is completed or its agreed period expires.
Death, unsoundness or insolvency
Section 201 identifies events affecting authority, including death or unsoundness of principal or agent and insolvency of the principal.
Interest in subject matter
Under Section 202, agency coupled with the agent's interest cannot ordinarily be terminated to the prejudice of that interest.
Notice
Termination takes effect against the agent and third persons according to Section 208 when it becomes known to them.
Actual and apparent authority compared
Actual authority comes from the principal-agent relationship, while apparent authority protects a third party who relies on the principal's representation.
Express and implied authority are forms of actual authority under Sections 186 and 187. Implied authority includes acts normally necessary or incidental to carrying out the authorised business under Section 188, subject to restrictions known to the third party.
Section 237 may bind a principal who, by words or conduct, induced a third party to believe an unauthorised act fell within the agent's authority. The representation must be attributable to the principal, and the third party's belief and reliance must be reasonable. An agent cannot create apparent authority solely by asserting it.
Ratification of an unauthorised act
Sections 196 to 200 permit adoption of qualifying acts, but ratification is not a shortcut around every authority defect.
Act on behalf of the principal
The actor must have purported to act for the principal. A person cannot ordinarily ratify a transaction made solely in another's own name.
Existence and capacity
The principal must be capable of authorising and adopting the transaction under the applicable law.
Material knowledge
Section 198 requires sufficient knowledge of material facts. Adoption based on a materially incomplete account may not bind the principal as ratification.
Whole transaction and third-party rights
Section 199 prevents selective adoption, while Section 200 prevents ratification that injures a third person by creating a retrospective prejudicial effect.
Termination, agency coupled with interest and notice
Ending actual authority does not necessarily end apparent authority against an uninformed third party.
Sections 201 to 207 govern termination by revocation, renunciation, completion, death, unsoundness and insolvency in the stated circumstances. Reasonable notice may be necessary, and premature termination can produce compensation where the agency was agreed for a period.
Section 202 protects authority given to secure an existing interest of the agent in the subject matter. The authority cannot ordinarily be terminated to the prejudice of that interest. Under Section 208, termination affects the agent and third parties only when it becomes known to them, which makes outward notice distinct from private revocation.
Leading cases and what they establish
Read each authority for the proposition it proves, the legal question it answers and the reasoning that supports the result.
Pannalal Jankidas v. Mohanlal
AIR 1951 SC 144
Held: An agent that fails to follow the principal's instructions and exercise proper skill can be liable for loss directly resulting from that breach of duty.
Why it matters: Use it for the agent's duties and causation of loss.
Read the judgmentBolton Partners v. Lambert
(1889) 41 Ch D 295
Held: Valid ratification generally relates back to the time of the unauthorized act, subject to statutory conditions and third-party rights.
Why it matters: Use it to explain the retrospective effect of ratification.
Using this topic in a legal answer
A clear answer sequence
- Identify the principal, agent, third party and relevant act.
- Classify authority as express, implied, apparent or ratified.
- Apply the scope of authority and any excess.
- If terminated, test Section 202 and notice under Section 208.
Points that are often confused
- Assuming agency always requires consideration.
- Confusing an agent's actual instructions with apparent authority.
- Treating private revocation as immediate notice to third parties.
Open the revision and self-check sheet
Rules to retain
- Agency requires no consideration.
- Authority may be express, implied, apparent or ratified.
- Ratification adopts the whole transaction.
- Agency coupled with interest receives special protection.
- Termination must become known under Section 208.
Questions to test understanding
- What creates apparent authority?
- What conditions limit ratification?
- When does termination affect a third party?
Questions students ask
Does creating agency require consideration?
No. Section 185 states that consideration is not necessary to create an agency.
Can a principal be bound after privately revoking authority?
Yes, where a third party without notice reasonably relies on apparent authority previously created by the principal.
Can an agent create apparent authority by making a claim to a third party?
Not by the agent's assertion alone. Apparent authority depends on a representation attributable to the principal and reasonable third-party reliance on it.
Can a principal ratify only the beneficial part of a transaction?
No. Section 199 treats ratification of part of a transaction as ratification of the whole transaction.
Primary sources and further reading
- Indian Contract Act, 1872 on India Code
- Pannalal Jankidas judgment on the Supreme Court of India website
- Indian Contract Act, 1872, official PDF
This article is written for legal education. Verify the governing provision, applicable amendments and complete judgment before relying on a proposition in practice.