How is Agency Constituted?

Creation of agency: Fiduciary element in agency, though the key to much of the law government relation is not the essential element in relation. Contract of agency may be created as under:

Agency by agreement (Secs. 186 and 187 of Indian Contract Law))

Express: The authority of an agent may be express – (1) by writing under seal like power of attorney; or (2) by oral or simple agreement. The authority is said to be express when it is given by words spoken or written.

Implied: The authority of an agent may be implied. An authority is said to be implied when it is inferred from the conduct, situation or relationship of the parties, circumstances of the case; and things spoken or written, or by the ordinary course of dealings. The relationship of principal and agent need not be expressly constituted but can be brought about by implication of law on a particular situation arising or from the necessity of case. Advocate’s power to compromise suit or confess judgment is implied in every Vakalatnama unless expressly excluded.

Agent by necessity: Where one is compelled to act as an agent of another without the authority of that other, such agency is known as ‘agency by necessity’.


The master of the ship borrows money, pledging the ship to carry out necessary to the ship. The master of the ship acts under necessity and in absence of the owner of the Ship, he is an agent of the owner. Such is called Agency by Necessity.

It should be noted that the agent must be under pressing circumstances and dire necessity. He should act in a reasonable manner in times of emergency. In times of extraordinary emergencies an agent is justified in assuming extraordinary powers. Therefore, if he acts in a fair and in a reasonable manner, such acts will bind the principal. The agent must act bonafide in the interest of the parties concerned. The best example of agent’s powers in emergency is in cases of marine adventures. The master of the ship in order to save the cargo may sell or throw the dangerous goods without communicating with the principal. Similarly, perishable goods may be sold by the agent without obtaining principal’s instructions to save their value. Ultimately whether the agency by necessity exists or not will depend on the circumstances of each case.

Agency of necessity to unforeseen events:
For example, an injured person in need of urgent medical attendance may be provided with medical aid or with services of a doctor. The injured person is bound to pay the charges of the doctor and medical aid. It should be noted that agency of necessity cannot arise where the agent can communicate with the principal.

As a rule, marriage does not by itself create any agency between husband and wife though they can be agent of each other by express appointment. However, where the husband does not maintain his wife and the wife pledges the goods on credit of the husband for necessaries of her life, the wife has acted under necessity and therefore, she becomes an agent by necessity.

To constitute a valid agency by necessity, the following conditions must be satisfied:

1) It should be impossible to obtain principal’s instructions.
2) Necessity must exist.
3) The agent must act in the best interests of the principal reasonably.

Agency by estoppel or by holding out: (Sec 237) When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations if he his words or conduct induced such third persons to believe that such acts or obligations were within the scope of the agent’s authority.

In other words, when a principal by his conduct or words induced a third person to believe that a certain person is his agent, he is precluded from subsequently denying the fact of agency. The third person must be induced to act on the basis of such conduct or words. It creates an estoppel against the principal. It is also called ostensible or apparent authority. It is like an implied agency. For instance, a managing director appointed by the Board of Directors of a company has not only an implied authority but also an ostensible or apparent authority to do all such things as fall within the usual scope of his office. However, implied authority is a real authority which is actually given by the principal to the agent, but an ostensible authority is no authority at all. A person acts on behalf of another without any authority but a third party is induced to believe by the principal that such a person has real authority: Apparent or ostensible authority may be presumed to exist from the course of dealings between the parties or from the facts and circumstances of each case. For example, an underwriter of insurance policies may underwrite guarantee policies since it is in the course of business of an underwriter. Once an apparent authority is created, it will continue to exist unless it is terminated by a notice to the third party. It must be presumed that apparent authority is the real authority.