Business Management · Trusts and agency

Law of Agency: How Agency Is Created and Types of Agents

Updated 11 October 2026 · Fact-checked

Agency is a relationship where an agent is authorised to act for a principal and bind the principal to third parties. Under the Indian Contract Act, 1872, agency arises by express agreement, implication, necessity or ratification. Agents are commonly classed as general, special or universal, based on the scope of authority.

Understand Law of Agency: Creation and Types of Agents

An agent is a person who acts for another, called the principal, in dealings with third parties. The key idea is that the agent's acts, within authority, bind the principal as if the principal had done them. The agent is usually not a party to the resulting contract.

Under the Indian Contract Act, 1872, the agent's authority is the heart of the topic. Consideration is not needed to create an agency. A person who is competent to contract (of the age of majority and of sound mind) can appoint an agent. Under s.184, a person who is below the age of majority or of unsound mind may become an agent, but is not responsible to the principal for their acts as agent. The Act is silent on whether such an agent can bind the principal to third parties.

Agency can be created in four main ways:

Express agency: the principal appoints the agent by words, spoken or written. The Act does not require the authority to be in writing. A power of attorney is a formal written example.
Implied agency: authority is inferred from conduct, the relationship of the parties or the circumstances. For example, a principal who lets someone act as manager of a shop for years may be held to have given authority.
Agency by necessity: in an emergency, a person with no authority acts to protect another's property or interests. Under s.189 you need three things: an actual necessity to prevent loss to the principal, impossibility of communicating with the principal in time to get instructions, and action of the kind a person of ordinary prudence would take in their own case in similar circumstances, for the principal's benefit. A duty to give notice to the principal is not part of s.189. Learn it separately as a common-law point if your study material covers it.
Agency by ratification: a person acts for another without authority, and the other later accepts the act. Ratification relates back to the time of the act, as if authority had existed.

Ratification has conditions. The act must have been done on behalf of the principal who ratifies, not for the agent's own account. Under the usual rule, the principal must have been in existence and competent to contract when the act was done. Under s.198, ratification is not valid if the principal's knowledge of the facts is materially defective, so the principal must know the material facts. Under s.199, ratifying any part of a transaction is ratifying the whole of it, so the principal cannot accept only the favourable part. Ratification cannot be used to injure a third party, for example by ending rights that had already vested.

On types, you should know the usual classification by scope of authority. This is a common-law and textbook classification, not one defined in the Act. A special agent is appointed for a particular act or purpose, for example to sell one specific property. A general agent has authority for all acts connected with a particular business or trade, for example a branch manager. A universal agent has authority to do all acts the principal could lawfully do and delegate, typically under a wide power of attorney. Other terms you may meet are mercantile agents, factors, brokers, del credere agents and commission agents. Exam questions normally focus on creation and scope of authority.

Key rules to remember

Definition of agent and principal: Agent = person employed to do an act for another or to represent another in dealings with third persons; Principal = the person for whom the act is done or who is represented; This is the Indian Contract Act, 1872 definition in plain words. Learn the idea, not the section wording.
Consideration for agency: Agency creation requires no consideration; Do not confuse this with the agent's right to remuneration, which depends on the contract.
Who may appoint and act: Principal must be of the age of majority and of sound mind; a person who is not may become an agent, but is not responsible to the principal (s.184); Such an agent cannot be made answerable to the principal for their acts as agent. The Act is silent on whether such an agent can bind the principal to third parties.
Ways of creating agency: Express | Implied | Necessity | Ratification; Use this four-part list as your answer skeleton.
Conditions for agency of necessity: Actual necessity to prevent loss + impossible to communicate with principal in time + acted as a person of ordinary prudence would in own case, for principal's benefit (s.189); All three must be present. Notice to the principal is not a condition in s.189. If you mention it, attribute it to the common law.
Conditions for valid ratification: Act done on behalf of the principal + principal existed and was competent at the time (usual rule) + knowledge of facts not materially defective (s.198) + whole transaction ratified (s.199) + no injury to third party; Ratification relates back to the date of the act. Ratifying any part of a transaction is ratifying the whole of it.
Types by scope of authority (common-law classification): Special (one act) → General (all acts in a business) → Universal (all lawful acts); This is a textbook classification, not defined in the Act. The order shows widening scope.

How to solve Law of Agency: Creation and Types of Agents questions

Use this method for any scenario or theory question on creation and types of agents.

1Identify the parties: who is the alleged principal, the alleged agent and the third party.
2Ask whether the agent had authority at the time of the act. If yes, find how it arose: express words, implied by conduct or relationship.
3If there was no authority, check for necessity under s.189. Test each condition: an actual necessity to prevent loss to the principal, no possibility of communicating with the principal in time, and action a person of ordinary prudence would take in their own case, for the principal's benefit.
4If necessity fails, check ratification. Was the act done on behalf of the principal? Did the principal exist and have capacity? Did the principal know the facts? Was the whole act accepted?
5Classify the agent by scope of authority: special, general or universal, and link the label to what the agent could do.
6State the legal effect: if the agent acted within authority or the act was ratified, the principal is bound to the third party.
7Conclude clearly in one sentence, naming the way agency arose and the type of agent.

Quickest way: Four-way test, then label

When to use it: Use for multiple-choice questions and short scenario questions where time is tight.

Look for the key phrase: 'appointed by letter' means express; 'conduct' or 'course of dealing' means implied.
'Emergency' or 'could not contact the owner' points to necessity. Check all conditions.
'Later approved' or 'accepted afterwards' points to ratification. Check the principal existed and knew the facts.
For types, ask the scope: one task is special, a whole business is general, everything is universal.
Eliminate options that say consideration is required for agency or that ratification can be partial.

Common mistakes in Law of Agency: Creation and Types of Agents

Saying consideration is needed to create an agency.
Students carry over the rule for ordinary contracts.
Fix: Remember that agency is an exception. No consideration is needed to create it.
Treating necessity as available whenever it is convenient.
The word emergency is read loosely.
Fix: Check all three s.189 conditions: actual necessity to prevent loss, impossibility of communicating with the principal in time, and action a person of ordinary prudence would take in their own case, for the principal's benefit. Missing any one defeats it.
Allowing partial ratification.
Students assume the principal can accept the gain and reject the loss.
Fix: Under s.199, ratifying any part of a transaction ratifies the whole. Accepting only the favourable part is not valid ratification.
Ratifying an act for a principal who did not exist or lacked capacity at the time.
Students focus on the later approval and forget the time of the act.
Fix: Test the principal's existence and competence at the date of the act, not at the date of ratification.
Mixing up general and universal agents.
Both sound wide.
Fix: General means all acts in one business or trade. Universal means all acts the principal may lawfully do and delegate.
Forgetting that ratification relates back.
It is treated as a fresh authority from the date of approval.
Fix: State that ratification has effect from the date of the act, as if authority had been given then.

Worked examples

Example 1

Ravi, a stranger, signs a contract to buy goods for Meera's firm without any authority. Meera learns all the facts and writes to the seller accepting the contract. Is Meera bound? Name the way agency arose.

Show the solution

Identify the facts: Ravi had no authority when he acted, so there was no express or implied agency at that time.
Necessity does not apply, as there was no emergency.
Test ratification: Ravi acted on behalf of Meera's firm, not for himself.
Meera knew all the material facts and accepted the contract in writing, covering the whole transaction.
Assuming the firm existed and was competent to contract when Ravi acted, the conditions are met.
Ratification relates back to the date of the act, so Ravi is treated as having had authority from the start.

Answer: Meera is bound. Agency arose by ratification, with effect from the date Ravi made the contract.

Example 2

Kiran is appointed by Mr Shah to look after fresh fruit kept in a cold store, with no power to sell it. The cold store fails. Mr Shah is on a remote trek and cannot be contacted, and the fruit will rot within a day. Kiran sells it at the best price available, as a careful owner would sell his own fruit. Can Mr Shah deny the sale? Also, a company gives Anil a wide power of attorney to do all acts the company can lawfully delegate. What type of agent is Anil?

Show the solution

Authority: Kiran had no authority to sell, so check necessity under s.189.
Actual necessity to prevent loss: the cold store failed and the perishable fruit would be lost within a day.
Impossibility of communicating in time: Mr Shah cannot be contacted before the fruit rots.
Ordinary prudence: Kiran sold at the best price available, as a person of ordinary prudence would do in their own case, and acted for Mr Shah's benefit.
All three s.189 conditions are met on these facts, so Kiran acted as agent in an emergency and Mr Shah is bound by the sale.
For Anil: authority covers all acts the principal can lawfully do and delegate, so his scope is the widest.

Answer: On these facts all three s.189 conditions are met, so Mr Shah is bound by the sale and cannot deny it. Anil is a universal agent.

Exam tips

Use the four-way list (express, implied, necessity, ratification) as your answer skeleton and apply each to the facts.
In scenarios, write out each condition for necessity or ratification and tick it against the facts. Marks follow the application.
Always state the legal effect: whether the principal is bound to the third party.
For MCQs, watch for traps: consideration required, partial ratification, or necessity without an emergency.
Keep definitions short. Use your own words, then spend time on the application.

Practice questions from Trusts and agency

Law of Agency: Creation and Types of Agents in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Law of Agency: Creation and Types of Agents: frequently asked questions

How is agency created under the Indian Contract Act?

Agency is created by express appointment, by implication from conduct or circumstances, by necessity in an emergency, or by ratification of an unauthorised act. No consideration is needed. The principal must be of the age of majority and of sound mind.

What is the difference between a special, general and universal agent?

A special agent has authority for a particular act or purpose. A general agent has authority for all acts in a particular business or trade. A universal agent can do all acts the principal may lawfully do and delegate.

What are the conditions for agency by ratification?

The act must have been done on behalf of the principal, who must have existed and been competent at that time. The principal must know the material facts and ratify the whole act. Ratification cannot harm a third party's vested rights.

Why does agency matter for actuaries?

Actuaries often act for clients, employers or trustees and may deal with third parties on their behalf. Knowing when authority exists helps you judge who is bound and where liability sits. It links to fiduciary duty and conflicts of interest.