Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Contract of Agency: Agent and Principal Explained

Updated 10 October 2026 · Fact-checked

A contract of agency is where one person, the agent, is employed to act for another, the principal, and deal with third parties on the principal's behalf. Anyone can appoint an agent if they are of age and sound mind. Agency arises by express or implied agreement, necessity, estoppel, ratification or operation of law. To solve questions, identify who acts for whom.

Understand Contract of Agency: Agent and Principal

In daily life you cannot do everything yourself. A shop owner may send a person to buy goods, or a company may employ someone to sign deals. The law lets you act through another person. That is agency.

The principal is the person on whose behalf the work is done. The agent is the person employed to do an act for the principal or to represent the principal in dealings with third persons. The agent acts for the principal, so the act binds the principal, as if the principal did it personally.

Who may be a principal or an agent? Under Section 183 of the Indian Contract Act, 1872, a person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. The principal must be competent because he is the one bound. Under Section 184, an agent need not be a major or of sound mind in order to bind the principal to third parties. But a person who is not a major and of sound mind cannot become an agent so as to be responsible to the principal. So, as a rule, the principal should be competent to contract, while the agent need not be.

Consideration is not necessary to create an agency. An agent may work without any promise of payment, and the agency is still valid.

Creation of agency can be by: express agreement (spoken or written), implied agreement (from conduct, situation or relationship between the parties), necessity (an emergency forces someone to act for the owner), estoppel (the principal's words or conduct made a third party believe someone was his agent), ratification (the principal accepts an act done earlier without authority) and operation of law. Agency by estoppel is also called agency by holding out in many texts. Some lists show the two names as one mode, so follow the wording of your study material and match the facts to the idea.

Kinds of agents can be seen in different ways. By scope of authority, the common-law classification is: a special agent is appointed for a particular act or business, while a general agent is appointed for all acts in a particular business or trade. This classification is not set out in the Act itself. Some books also mention a "universal agent" with unlimited power, but this is outside the Act and is not a standard classification for the exam.

The Act itself deals with the agent, the sub-agent and the substituted agent. A sub-agent is a person employed by the agent and acting under the agent's control (Section 191). A substituted agent arises when an agent, holding express or implied authority to name another person to act for the principal in the business of agency, names such a person. That person is not a sub-agent. He becomes the agent of the principal for that part of the business (Section 194). In choosing him, the agent must use the discretion of a man of ordinary prudence in his own case. If he does, he is not responsible to the principal for the acts or negligence of the person chosen (Section 195).

By trade role, there are mercantile (commercial) agents such as factors, brokers, commission agents, auctioneers and del credere agents.

Key formulas to remember

Meaning of agent: Agent = person employed to do an act for another or to represent another in dealings with third persons; The one for whom the act is done or who is represented is the principal.
Who may employ an agent: Principal must be of the age of majority (as per the law to which he is subject) and of sound mind (S.183); These conditions apply to the principal, not to the agent.
Who may be an agent: Any person may become an agent, even a minor or person of unsound mind (S.184), but he is answerable to the principal only if he is a major and of sound mind; Such an agent is not responsible to the principal for his acts; the principal is still bound to third parties.
Consideration: No consideration is necessary to create an agency; A gratuitous agent is still a valid agent.
Modes of creation: Express, implied, necessity, estoppel (also called holding out in many texts), ratification, operation of law; Estoppel and holding out are treated as the same idea in many texts. Learn the list as given in your study material and match the facts to the mode.
Kinds by scope of authority (common-law classification): Special agent = a particular act; general agent = all acts in a particular business; The key word is the scope of work. The Act itself deals with agent, sub-agent and substituted agent. A 'universal agent' is outside the Act.
Sub-agent and substituted agent: Sub-agent = employed by the agent and under the agent's control (S.191); substituted agent = person named by an agent, holding authority to do so, to act for the principal in the business of agency; he becomes the principal's agent (S.194); Check whose control the second person works under. If the agent used the discretion of a man of ordinary prudence in choosing a substituted agent, he is not responsible to the principal for that person's acts or negligence (S.195).
Mercantile agent: Agent having authority to sell goods, consign goods for sale, buy goods or raise money on their security in customary course of business; Factor, broker and commission agent are common examples.
Del credere agent: Commission agent who also guarantees to the principal that the buyer will pay; He gets extra commission for taking the credit risk.

How to solve Contract of Agency: Agent and Principal questions

Use this method on any MCQ or short scenario on agency.

1Read the facts and mark who is acting for whom. The one acting is the agent and the other is the principal.
2Check the principal first: is he of the age of majority and of sound mind? If not, he cannot validly appoint an agent.
3Check the agent: competence of the agent matters only for his own liability to the principal, not for binding third parties.
4If the question asks how agency arose, look for a clue: written or spoken appointment (express), conduct (implied), emergency (necessity), earlier unauthorised act later accepted (ratification), or the principal's representation to outsiders (estoppel or holding out).
5If it asks the kind of agent, look at the scope: one act (special), all acts in a business (general), or dealing in goods or a trade role (mercantile, broker, factor, commission, del credere).
6If a second person does the work, check who controls him: the agent (sub-agent) or he acts for the principal as the principal's agent (substituted agent).
7Remember that consideration is not needed.
8Match with the options, eliminate those that contradict a rule, and choose the one that fits all facts.

Quickest way: Keyword matching for agency questions

When to use it: Use for one-line MCQs on meaning, creation and kinds of agents where time is short.

Principal = needs majority and sound mind. Agent = anyone.
Spot the keyword: emergency means necessity; later adoption means ratification; conduct means implied; guarantee of buyer's payment means del credere.
One particular act means special agent; all acts in a trade means general agent.
Second person under the agent's control means sub-agent; second person named by an agent, within his authority, to act for the principal, who becomes the principal's agent, means substituted agent.
If an option says consideration is essential for agency, reject it.
If two options look similar, pick the one that exactly matches the definition.

Common mistakes in Contract of Agency: Agent and Principal

Saying a minor cannot be an agent at all.
Students link minor's incapacity to contract with every role.
Fix: Under S.184 a minor may be an agent and bind the principal to third parties. He just is not personally answerable to the principal.
Thinking consideration is required to create agency.
Students apply the general contract rule everywhere.
Fix: Remember the specific exception: agency needs no consideration.
Mixing up special agent and general agent.
Both sound like limited roles.
Fix: Special means one particular act; general means all acts in a particular trade or business.
Treating a minor or person of unsound mind as a valid principal.
Students remember that agents need no competence and extend it to principals.
Fix: Under S.183 the principal must be a major (as per the law to which he is subject) and of sound mind.
Confusing ratification with agency by necessity.
Both involve acts without prior authority.
Fix: Ratification: principal approves afterwards. Necessity: an emergency forces the act, and no approval is needed.
Confusing a sub-agent with a substituted agent.
Both involve a second person doing the work.
Fix: A sub-agent is employed by the agent and remains under the agent's control (S.191). A substituted agent is named by an agent, holding authority to do so, to act for the principal in the business of agency, and becomes the principal's agent (S.194). The agent is not responsible for his acts if he chose him with ordinary prudence (S.195).
Treating estoppel and holding out as two unrelated modes of creating agency.
Some books use both terms side by side.
Fix: Many texts treat agency by estoppel and agency by holding out as the same idea. Match the facts (the principal's words or conduct led a third party to believe in the agency) and follow the wording of your study material.

Worked examples

Example 1

Ravi, aged 16, is appointed by Meena, a major of sound mind, to buy 50 kg of rice from a trader in Pune. Ravi buys the rice on Meena's behalf. Which statement is correct? (A) The appointment is void because Ravi is a minor. (B) Meena is bound to the trader, but Ravi is not personally responsible to Meena. (C) Ravi alone is liable to the trader. (D) The agency needs consideration to be valid.

Show the solution

Principal is Meena. She is a major and of sound mind, so she can appoint an agent.
Agent is Ravi, a minor. Any person may be an agent, so the appointment is valid.
Ravi acted within his authority, so Meena is bound to the trader.
As a minor, Ravi is not responsible to Meena for his acts as agent.
Option A is wrong as minors can be agents. Option C is wrong as the principal is bound. Option D is wrong as no consideration is needed.

Answer: (B) Meena is bound to the trader, but Ravi is not personally responsible to Meena.

Example 2

A ship carrying Sharma's perishable goods is stuck at a port. His agent Anil cannot contact him. To avoid loss, Anil sells the goods at a fair price in good faith. By which mode does Anil's authority arise?

Show the solution

Identify the facts: no prior authority to sell, no time to ask the principal.
There is an emergency and the goods would perish.
Anil acted in good faith to protect the principal's interest.
This is the mode in which the law gives an agent authority because of an emergency.
Ratification needs later approval by the principal, and nothing here mentions that. Estoppel needs a representation to a third party, also absent.

Answer: Agency by necessity.

Exam tips

Expect direct MCQs on who can be a principal and who can be an agent. Remember the contrast: principal needs competence, agent does not.
Learn the list of modes of creation (express, implied, necessity, estoppel, ratification, operation of law) and be ready to match facts to a mode. Many texts call agency by estoppel agency by holding out, so read the options carefully.
Learn the one-line meaning of each agent type, especially special vs general, sub-agent vs substituted agent, and del credere.
Remember no consideration is needed. This is a favourite option in MCQs.
Read scenarios slowly. One keyword like 'emergency' or 'later approved' usually decides the answer.

Practice questions from Meaning of Indemnity, Guarantee, Pledge, Agent

Contract of Agency: Agent and Principal in other exams

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

Contract of Agency: Agent and Principal: frequently asked questions

Who can be an agent under the Indian Contract Act?

Any person can be an agent, even a minor or a person of unsound mind. Such an agent can bind the principal to third parties. However, he is not responsible to the principal for his acts.

Is consideration required to create an agency?

No. An agency is valid without consideration. A person may act as agent without any promise of payment.

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

A special agent is appointed to do one particular act or business. A general agent is appointed for all acts connected with a particular trade or business. This is the common-law classification by scope of authority, not a classification set out in the Act.

What are the modes of creation of agency?

Agency can be created by express agreement, implied agreement, necessity, estoppel (also called holding out in many texts), ratification and operation of law. Questions often ask you to match facts to one of these modes.

Who is a mercantile agent?

A mercantile agent has authority to sell goods, consign goods for sale, buy goods or raise money on their security in the customary course of business. Factors, brokers and commission agents are common examples.