Business Laws and Ethics · Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency

Authority, Duties and Rights of Agent under the Contract Act

Updated 10 October 2026 · Fact-checked

An agent's authority may be express (words spoken or written) or implied (inferred from circumstances). The principal is bound by acts within authority, and also by unauthorised acts if his words or conduct made third parties believe they were authorised. To answer, find the authority, test the act against it, then name who is liable.

Understand Authority, Duties and Rights of Agent

An agent acts for another person, the principal, and brings the principal into legal relations with third parties. So the key question in almost every problem is: is the principal bound by what the agent did? The answer depends on the agent's authority.

Authority can be express or implied. It is express when given by words spoken or written. It is implied when it is inferred from the circumstances of the case. Things spoken or written, or the ordinary course of dealing, count as circumstances. The Act's own example: A owns a shop in Serampore and lives in Calcutta. B manages the shop and has been ordering goods from C in A's name and paying from A's funds with A's knowledge. B has implied authority to keep ordering from C.

What if the agent goes beyond authority? Two situations matter. First, where the agent does more than authorised and the authorised part can be separated from the excess, only the authorised part binds the principal. Example: B is told to insure the ship for ₹4,000 but also insures the cargo for ₹4,000. A pays the premium on the ship, not on the cargo. Second, where the agent has no authority but the principal, by his words or conduct, has led the third party to believe the act was within authority, the principal is bound. Students call this apparent (ostensible) authority. It protects an innocent third party who relied on the principal's own behaviour.

Third parties also gain protection in other ways. Notice given to the agent, or information obtained by him in the course of the business he transacts for the principal, has the same legal effect as if given to the principal. If the agent contracts with someone who neither knows nor has reason to suspect that he is an agent, the principal may require performance, but the other party has the same rights against the principal as he would have had against the agent. A person who falsely claims to be an agent is personally liable to compensate the third party for loss, unless the alleged principal ratifies.

Sub-agents are a frequent trap. If the agent has authority to name another person to act for the principal in the business of the agency, that person is an agent of the principal, not a sub-agent. If the agent appoints someone without authority, the agent becomes like a principal to that person and is responsible for his acts to both the principal and third parties. The principal is not bound by that person, and that person owes no duty to the principal.

Key rules to remember

Express authority: Authority given by words spoken or written; Authority of an agent may be express or implied.
Implied authority: Authority inferred from the circumstances of the case, including words, writing or ordinary course of dealing; Look for habit of dealing known to the principal, as in the shop manager illustration.
Principal bound by unauthorised act (apparent authority): Principal is bound if his words or conduct induced the third person to believe the act was within the agent's authority; The inducement must come from the principal, not from the agent's own claim.
Agent exceeds authority: If authorised part is separable from the excess, only the authorised part binds the principal; Applies as between the agent and the principal. If the two parts cannot be separated, this rule does not help.
Notice to agent: Notice or information obtained by the agent in the course of the business he transacts for the principal = notice to the principal; Knowledge gained outside that business, for example in earlier employment with another, is not treated this way, as the second illustration shows.
Undisclosed principal: Third party who neither knows nor suspects agency has the same rights against the principal as against the agent; If the principal discloses himself before completion, the third party may refuse to perform if he shows he would not have contracted had he known the true position.
Pretended agent: Person falsely representing himself as authorised agent is liable to compensate the third party for loss, if the alleged principal does not ratify; Requires that the third party was induced to deal because of the false representation.
Sub-agent appointed without authority: Agent stands as principal to that person and is responsible for his acts to the principal and third parties; The principal is not responsible for that person, nor is that person responsible to the principal.
Person named by agent with authority: Not a sub-agent but an agent of the principal for the part of the business entrusted to him; Example: a solicitor told to employ an auctioneer; the auctioneer is the owner's agent.
Agency for a fixed period: Where the contract says agency continues for a period, wrongful revocation or renunciation without sufficient cause requires compensation; Compensation is paid by the principal to the agent, or by the agent to the principal, as the case may be.
Agent with interest in subject-matter: Agency cannot, without an express contract, be terminated to the prejudice of the agent's interest; Example: agent authorised to sell land and pay his own debts from the proceeds.

How to solve Authority, Duties and Rights of Agent questions

Use the same sequence for any agency problem. It keeps your answer short and gives a step mark for each stage.

1Identify the parties: principal, agent, third party, and any sub-agent or person named by the agent.
2State what authority the agent had: express (words or writing) or implied (circumstances, course of dealing).
3Compare the act done with that authority. Was it within, partly beyond, or wholly outside?
4If beyond, ask whether the authorised part is separable, and whether the principal's words or conduct led the third party to believe the act was authorised.
5Check for special facts: undisclosed principal, notice given to the agent, pretended agent, or unauthorised sub-agent.
6Decide who is bound or liable: principal, agent, or both, and to whom.
7Write the conclusion in one line, tied to the rule, and quote the section number only if you are sure of it.

Quickest way: Three-question test for principal's liability

When to use it: Use it for MCQs and short scenario questions when time is tight.

Was there authority, express or implied? If yes, the principal is bound.
If no, did the principal's words or conduct make the third party believe there was? If yes, the principal is bound.
If neither, the principal is not bound unless he ratifies, and the agent who falsely claimed authority must compensate the third party for loss.

Common mistakes in Authority, Duties and Rights of Agent

Saying the principal is never bound when the agent breaks private instructions.
Students focus on the agent's breach and forget the third party's position.
Fix: Ask whether the third party knew of the instructions. If the principal's conduct made the act look authorised, he is bound, as in the reserved-price illustration.
Treating every person employed by the agent as a sub-agent.
The word sounds natural for anyone appointed by an agent.
Fix: If the agent had authority to name that person, he is the principal's agent for that part of the business. Only an unauthorised appointee is treated differently.
Making the principal liable for the whole transaction when the agent only partly exceeded authority.
Students do not look for separable parts.
Fix: Split the act. The principal is bound only for the part within authority if it can be separated, like the ship policy versus the cargo policy.
Applying notice to the agent for information learnt outside the agency business.
Students remember the rule but skip its condition.
Fix: Check that the information was obtained in the course of the business transacted for the principal. Knowledge picked up earlier as another person's servant does not count.
Confusing a pretended agent with an agent who exceeds authority.
Both involve acts without authority.
Fix: A pretended agent falsely claims to be an agent at all. His liability to compensate arises only if the alleged principal does not ratify.
Writing section numbers from memory and getting them wrong.
Students try to impress with numbers.
Fix: Quote the rule in plain words. Add a section number only when certain. Examiners reward the correct rule applied to the facts.

Worked examples

Example 1

Anil owns a textile shop in Surat and lives in Mumbai. His manager Bhavesh has for years ordered cloth from Chetan Traders in Anil's name and paid from Anil's funds, with Anil's knowledge. Bhavesh orders cloth worth ₹80,000 again. Anil refuses to pay, saying he gave no written authority. Decide.

Show the solution

Authority may be express (words spoken or written) or implied (inferred from circumstances, including the ordinary course of dealing).
Here there is no written authority, but Bhavesh has habitually ordered from Chetan Traders in Anil's name and paid from Anil's funds, with Anil's knowledge.
This course of dealing gives Bhavesh implied authority to order goods for the shop.
The order is therefore within his authority, so Anil is bound.

Answer: Anil is bound and must pay ₹80,000. Absence of written authority is no defence, because Bhavesh had implied authority from the course of dealing.

Example 2

Meera authorises her agent Rohit to sell her goods through a consignment and instructs him not to sell below ₹500 per unit. Rohit sells 100 units to Sunita, who is unaware of the instruction, at ₹450 per unit. Meera says she is not bound. Separately, Meera authorised Rohit to insure the goods for ₹50,000 but he took two policies of ₹50,000 each, one on the goods and one on the godown. Decide both issues.

Show the solution

Issue 1: Rohit had no authority to sell below ₹500, but Meera consigned the goods to him for sale and the reserve price was a private instruction.
Sunita did not know of the instruction. Meera's own conduct, handing him the goods for sale, led third parties to believe he could sell. A principal is bound where his words or conduct induce that belief.
So Meera is bound by the sale at ₹450 per unit. She may have a claim against Rohit for breaching her instructions.
Issue 2: Rohit did more than he was authorised to do. The policy on the goods is within authority, and the policy on the godown is separable from it.
Only what is within authority binds Meera as between her and Rohit, so she must bear the premium for the policy on the goods only, not for the godown.

Answer: Meera is bound by the sale to Sunita at ₹450 per unit, though she may hold Rohit answerable for disobeying instructions. On insurance, she is liable only for the premium on the policy covering the goods, not on the godown.

Exam tips

In scenario questions, write the authority type first (express or implied), then apply it to the facts. This is where step marks are earned.
For 'principal bound or not' MCQs, check whether the third party knew of any private limit on authority and whether the principal's conduct created the belief.
Watch conditions in options: 'in the course of the business' for notice, 'without authority' for sub-agents, 'separated' for excess authority.
Keep a one-line conclusion naming who is liable to whom. Do not add unrelated rules on termination unless asked.
Learn the Act's illustrations by their facts: shop manager, ship and cargo insurance, reserved price, auctioneer named by solicitor. They are easy to recall and adapt.

Practice questions from Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency

Authority, Duties and Rights of Agent in other exams

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

ACCA Applied SkillsAuthority of an Agent

Authority, Duties and Rights of Agent: frequently asked questions

What is the difference between express and implied authority of an agent?

Express authority is given by words spoken or written. Implied authority is inferred from the circumstances of the case, which can include things spoken or written and the ordinary course of dealing.

When is a principal bound by an act the agent had no authority to do?

He is bound if he, by his words or conduct, induced the third person to believe that the act was within the agent's authority. The belief must come from the principal's own behaviour.

Is a person appointed by an agent always a sub-agent?

No. If the agent had express or implied authority to name another person to act for the principal, that person is the principal's agent for the part entrusted to him. Only an appointee named without authority creates the special position where the agent answers for him.

What happens if someone falsely claims to be an agent?

If his alleged employer does not ratify the act, the pretender must compensate the third person for loss or damage suffered by dealing with him on that basis.