Establishing and Proving an Agency Relationship

Every time a property dealer signs papers for a client, or an insurance advisor collects a premium cheque on the company’s behalf, an agency relationship is quietly at work. Yet agency does not always begin with a formal contract and a handshake. Indian law recognises that an agent can be appointed through plain words, inferred from someone’s conduct, or even created after the fact when a principal accepts an unauthorised act done in their name. Knowing how an agency comes into existence, and how one actually proves it exists, matters well beyond an exam answer sheet. It decides who is legally bound when a deal goes right, and who bears the loss when it does not.

What makes someone an agent in the first place 🔗

Chapter X of the Indian Contract Act, 1872 governs agency through Sections 182 to 238. An agent is a person employed to act for another, or to represent another in dealings with third parties, and the person on whose behalf this happens is the principal. No consideration is needed to create this relationship, which sets it apart from most other contracts. What the law does insist on is that the agent’s actions must be capable of altering the principal’s legal position, since that is what separates a genuine agent from someone who is merely helping out informally.

How an agency relationship is constituted 🔗

An agency can be constituted in several distinct ways, and a single business relationship can sometimes arise through more than one route at once. The four broad categories recognised under Indian law are express appointment, implied agreement arising from conduct or necessity, agency by estoppel or holding out, and agency created retrospectively through ratification.

Express appointment 🔗

This is the most straightforward route. The principal states, in words spoken or written, that another person is authorised to act on their behalf. A verbal instruction to a broker to buy shares is just as valid as a formal Power of Attorney appointing someone to manage property, though the latter is preferred wherever the agent needs to prove authority to outsiders. The Supreme Court has clarified that agency essentially describes the relation between a person occupying the position of principal and third parties, which is exactly what an express appointment sets out to create in a landmark case on power of attorney appointments.

Implied agency from conduct 🔗

Agency does not always need to be spelt out. Section 187 of the Act allows authority to be inferred from the circumstances of a case, including how the parties have habitually dealt with each other. A classic illustration involves a shop owner who lives in a different city and visits only occasionally, while a manager regularly places orders with a supplier in the owner’s name and the owner pays for them without objection. That pattern of ordering and payment is enough to establish implied authority, even though nothing was ever put in writing. The same logic applies when a manager in Delhi keeps purchasing goods for a Calcutta-based owner and gets reimbursed each time.

Agency by necessity 🔗

Sometimes circumstances force a person to act on another’s behalf without any prior discussion at all. The master of a ship stranded at a foreign port, for instance, has authority to raise money for urgent repairs because waiting for instructions would cause greater harm. English precedent has extended this logic to situations such as a railway station master who fed a consignee’s cow that was never collected, with the court later ordering reimbursement for the reasonable expense incurred. Indian courts apply the same reasoning wherever urgency, absence of instructions, and genuine good faith combine.

Agency by estoppel and holding out 🔗

Section 237 of the Act deals with a different kind of implied authority, one built on how the principal has represented the situation to outsiders. If a person’s words or conduct lead a third party to reasonably believe that someone else is authorised to act for them, the principal cannot later deny that authority once the third party has relied on it. Holding out goes a step further and requires some positive act by the principal, such as consistently paying for goods that a servant bought on credit in the past. If that servant later misuses cash meant for a purchase and buys on credit again instead, the supplier can still recover payment from the principal, because earlier conduct had held the servant out as an authorised buyer.

Agency by ratification 🔗

Ratification allows a principal to adopt an act that was originally done without any authority at all. Sections 196 to 200 govern this, and ratification can be expressed in words or implied from conduct. A useful example involves an insurance company where a customer paid a premium directly to a branch manager, who then deposited it into the customer’s account; the company’s continued acceptance of that arrangement amounted to implied ratification of the manager’s unauthorised act. For ratification to hold up, the agent must have clearly acted on the principal’s behalf rather than their own, the principal must have had full knowledge of the material facts, the underlying act must have been lawful, and the ratification must come within a reasonable time. It also cannot be used to unwind rights that third parties had already acquired before the principal stepped in.

How agency is actually proved 🔗

Knowing how agency can be created is only half the picture. When a dispute lands in court, someone still has to prove that a genuine agency relationship existed at the relevant time. The Supreme Court addressed this directly while examining whether a telecom company’s distributors were its agents, and it clarified that agency is a triangular relationship that requires a close look at how the principal dealt with the third party and how the agent dealt with the third party in turn. The Court drew a sharp distinction between authority and power, noting that authority is a factual position arising from the terms agreed between the parties, while power is what the law of agency then confers once that authority exists. In other words, calling someone a distributor, consultant, or partner in a contract does not settle the question if their actual dealings show they were acting, and binding another party, in substance.

What tends to count as evidence 🔗

Courts and businesses generally look past labels and examine the real texture of the relationship. A few markers recur often:

• Consistent conduct over time: Repeated instances of one person acting for another, with that person’s knowledge and without objection, build a strong inference of agency, much like the shop manager example under implied authority.
• Acceptance of the resulting benefit: When a principal keeps money, goods, or an advantage that flowed from someone else’s unauthorised action, that acceptance itself signals agreement to the arrangement.
• Silence in the face of knowledge: If a principal learns of an act done in their name and does nothing to object within a reasonable time, that inaction can be read as acquiescence.
• Payment structures: Commission-based payment tied to specific transactions often points toward an agency arrangement rather than an independent, one-off engagement.

Why the real relationship matters more than the paperwork 🔗

This distinction has practical teeth in the Indian gig and platform economy, where delivery partners, franchise operators, and marketplace sellers are frequently labelled independent contractors in their contracts. If their day-to-day work actually involves representing another business and binding it in dealings with customers, a court can still treat them as agents regardless of what the contract calls them. Separately, the Supreme Court has also held that an entity with independent legal personality, functioning on its own account rather than as an extension of another, cannot be treated as an agent merely because it operates within a larger group. The test in every case comes back to the same question: does the person’s conduct actually create legal consequences for someone else?

Why this distinction shapes real business outcomes 🔗

Getting the constitution and proof of agency right is not an academic exercise. It decides whether a company is bound by a promise its regional manager made without written authorisation, whether an insurer must honour a policy sold by an overzealous agent, or whether a franchise owner’s actions expose the parent brand to liability. For students heading into commerce and business roles, recognising these patterns early means being able to spot, in a messy real-world contract or conduct trail, exactly where legal responsibility actually sits.

What do you think? If a company never explicitly appoints someone as its agent but consistently accepts the benefits of that person’s dealings, should that silence carry the same legal weight as a written appointment? And in India’s fast-growing platform economy, where contracts often label workers as independent contractors, how much should their actual day-to-day conduct be allowed to override that label?

References

1. https://wbconsumers.gov.in/writereaddata/ACT%20&%20RULES/Relevant%20Act%20&%20Rules/the-indian-contract-act-1872.pdf
2. https://www.legalserviceindia.com/legal/article-10125-various-methods-of-creation-of-agency.html
3. https://indiankanoon.org/doc/1929180/
4. https://www.defactolaw.in/post/contract-of-agency-in-india
5. https://www.legalservicesindia.com/article/88/Agency-By-Estoppel.html
6. https://lawbhoomi.com/agency-by-ratification/
7. https://www.verdictum.in/court-updates/supreme-court/bharti-cellular-limited-now-bharti-airtel-limited-v-assistant-commissioner-of-income-tax-2024-insc-148-agent-servant-distributor-1523025