What is the Creation of Agency? 

 The term contract can be defined as an agreement which is legally binding exists between two parties. This document provides the powers & duties to be performed by both the parties to the contract. An agreement can become a contract only when it satisfies the legal requirements. Hence the parties in this contract can enter into the contract either by themselves or through a third party. The concept of agency arises if the person enters into the contract through a third party. The third party here is called as the agent & the person on whose behalf he acts is known as the principal. 

"Creation of an Agency"

Different Modes of Agency Creation are as Follows


Agency by express agreement, agency by operation of law, agency by ratification & agency by implied authority. 

  •        Agency by express agreement: the majority of agency contracts come into force under this method. Under this method, the contract can be either through oral, documentary or preparing of a power of attorney. 
  •        Agency by operation of law: agencies also come into existence through the operation of law. For example under the companies act, promoters are considered as agents & in the case of a partnership firm, partners become the agents of the partnership firm. 
  •        Agency by ratification: ratification takes place with the subsequent happening of an event. It is only after ratification the principal-agent relationship comes into force. A person who performed the action is called an agent & the person who gave the ratification is known as the principal. 

Ratification when performed with an expression becomes express ratification. When there is no expression it becomes implied ratification. 

Following are some of the conditions to be satisfied for the ratification to be effective: 

a)     An agent can act as an agent only for a principal who exists & who also has the required competency to enter into contract. 

b)     At the time of ratification the principal is required to have full knowledge about the facts & also the entire contract must be ratified within a reasonable time period. 

c)     The principal is expected to have the required competency both at the time when the agent performs his acts & also at the time when the actions of the agent are ratified. 

d)     Acts which are legally approved alone can be ratified. 

e)     Ratification cannot be made with a view to subject a third party to any damages or to terminate the rights of a third person. 

 Effects of ratification 

  Some of the effects of ratification are as follows: 

  1.  The main effect of ratification is to turn the unauthorised acts of the agent as approved & to ensure that they have been performed with the approval of the principal. 
  2.  Ratification always stands by the concept “tantamount to prior approval”. This means that ratification accounts the date when the agent performed the acts & not on the date when the acts were ratified by the principal. 
  3.  Agency always comes into effect or existence on the date when the first duty was performed by the agent & not when his acts were ratified by the principal. 
  •        Agency by implied authority: this type of agency comes into existence either through the relationship or conduct of the parties. 

For example, if there are two sisters & one of them stays outside the country. Hence the person who lives within the country sells the property belonging to her sister living outside the country & also transfers her remittances received from the sale. In this case one person becomes the principal & the other one becomes the agent. 

Agency by implied authority can be further into following types, 

  • Agency by necessity: at times there can be situations where one person would be forced to become the agent of the other person. For example, a company has loaded some vegetables & fruits for delivery to another point. This is a bailment contract & because of some issue, the transit got stopped in between because of which no further movement is not possible. Hence because of the perishable nature of the goods, the vehicle authorities sold all of them to the people in the nearby place. Hence this becomes an agency by necessity. 
  •  By estoppels: there are three parties X, Y & Z. In front of X, Y says to Z that he is the agent of X. X also did not interrupt Y from making such statements. 
  • By holding out: There are two parties namely A & B. B is the servant of A. A gives instructions to get goods from D on credit. However, on another occasion A gives some money to buy goods from D on the basis of cash. Considering this, B misappropriates all the money & purchases goods on credit. This is an example of agency by holding out & A has the liability to settle D. 
"types of an Agency Contract"

Following are some of the characteristics of agency: 

  • Binding: the principal is legally bound by the acts of his agent. 
  • Consideration: consideration is not mandatory to support the principal agent relationship. 
  • Capacity: only a person who has reached 18 years of age & is of sound mind can contract & also appoint an agent. 
  • Authority: authority is one of the eligibilities to act as an agent. For example a minor does not fulfil the capacity requirement to act as an agent but he can be given the authority to act as an agent. 

In case of agency, the agent is required to establish the privity of contract between the principal & the third party. According to privity of contract, obligations cannot be imposed on a person who is not the party to the contract. Hence only the parties to the contract can sue each other for damages & a third party is prevented from doing so. 

Agency to be effective, the relationship between principal and agent needs to be effective. There must be a mutual connection between both and each of them will have to perform their roles and responsibilities without any compromise. The agent must act within the interests of the principal and similarly, the principal must also fulfill the requirements of the agent for the agency to be successful. 

Context and Applications 

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for 

  • Bachelor of Commerce
  • Bachelors of Business Administration
  • Masters of Business Administration

Want more help with your business homework?

We've got you covered with step-by-step solutions to millions of textbook problems, subject matter experts on standby 24/7 when you're stumped, and more.

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.

Search. Solve. Succeed!

Study smarter access to millions of step-by step textbook solutions, our Q&A library, and AI powered Math Solver. Plus, you get 30 questions to ask an expert each month.

Tagged in

Business law

Legal environment

Agency relations

Creation Of An Agency Homework Questions from Fellow Students

Browse our recently answered Creation Of An Agency homework questions.

Search. Solve. Succeed!

Study smarter access to millions of step-by step textbook solutions, our Q&A library, and AI powered Math Solver. Plus, you get 30 questions to ask an expert each month.

Tagged in

Business law

Legal environment

Agency relations