There are two parties in the agency system one is the principal and another the agent. An agent is a person acting on behalf of his principal. It’s a connecting link between the principal and the third party. Herein we will discuss the creation of agency under the Indian Contract Act, 1872. Establishment of a Principal-Agent relationship confers rights and duties upon both the parties. There are various examples of such a relationship: Insurance agency, advertising agency, travel agency, factors, brokers, Del credere agents, etc. the relationship of  principal  and agent may be created in any of the following ways: 

1) expressed  agreement, 

2) implied agreement. 

3) ratification, and 

4) operation of law.  

1.Express Agreement: 

You know that when an agent acts within the scope of his authority, his acts bind the principal as well as the third party. The agent derives this authority by the contract by which he is employed as an agent. This contract may be express or implied. Section 186 of the Act says “the authority of an agent may be expressed or implied ‘. Section 187 further says, “an authority is said to be express when it is given by words spoken or written. A~I authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accouter circumstances of the case”, 

2. Implied Agency: 

From Section 187, you have seen that an agency may be implied when it is to be inferred from the circumstance of the c:isc, ~l~ings spoken or written, or ordinary course of dealing. For example, -4 has a car, but he cannot drive it. He allows his neighbor B to drive it. B while driving the car with A meets with an accident and injures C. C can sue A for damages because B is his implied agent. 

a) agency by estoppel, 

b) agency by holding out and 

c) agency by necessity, 

a) Agency by Estoppel: 

First of all we should understand the meaning of the term .’estoppel’. The role of estoppel says “where a person by his words or conduct has wilfully led another person to believe that certain set of circumstances or facts exists, and that other person has acted on that belief, then he is estopped or precluded from denying the truth of such statements, although such a state of thing did not exist in fact. Thus, when a person, by his conduct or statement, wilfully leads another person to believe that a certain person is his a’gent, then he is estopped or prevented from denying the truth of agency.

b) Agency by Holding Out:

 Agency by holding out is a type of agency by estoppel. Here, the alleged principal by ‘his affirmative or positi~e conduct leads,others to believe that person doing some act on his behalf is doing with, his authority. For example, A allows his servant to purchase goods on credit from nearby shop, and later on he pays for such goods. Later on, when the. servant was not .in A’s employment, he buys goods on A’s credit from the same shop. The shopkeeper can recover the price from A, because A-had held out the servant as his agent on earlier occasions, so A will be bound for subsequent transactions entered into under similar circumstances.

c) Agency by Necessity:

Sometimes, owing to the exigencies of circumstances, the law confers agency on some persons to act as an agent of .another person without waiting for the consent of that person. However, before an agency of necessity can be inferred, the following conditions have to be satisfied:

(i) There should be an actual and definite necessity for acting on behalf of the principal; 

(ii) within the available time it should be impossible to obtain the principal’s instructions;

 (iii) the person acting as agent must have acted bonafide. In such situations, the principal is bound by the acts of the agent. For example, some milk was consigned from Bombay to Delhi. The tanker carrying the milk met with an accident. The milk being perishable was sold by the transporter, The sale is binding upon the principal. In this case, the transporter became an agent by necessity. 

3) Agency by ratification:

 By ratification, we mean, “where acts,are dqne by one person on behalf of another, but without his knowled ge or authority, he may elect to ratify or disown such acts. If he ratifies them, ttie same effects will follow as if they have been performed by his authority “, Ratification may be express or implied in the conduct of the person on whose behalf the acts are done.

For example, without A’s authority, his brother B lends his money to C. Later on, C pays the interest on the lended money and A accepts the interest. A’s conduct implies at ratification of the loan, and ii: may be presumed that his (A’s) brother B’s conduct in lending the money is as valid as if it were done in pursuance of 38 his (A’s) prior authority and this kind of agency is called ‘agency by ratification’

Effect of ratification: The effect of ratification is to make the agent’s acts, done without prior authority as binding and valid upon the principal as if they had the prior sanction of the principal. In fact, ratification relates back to the date when the act was done by the agent and not to the date when the principal ratified the act. 

4) By operation of Law: 

Another mode of creation of agency is by Operation of Law. In certain circumstances, the law treats one person as an agent of another. It can be better understood by the example that when a partnership is formed, every partner, by operation of law, automatically becomes the agent of other partners.