Characteristics of an Agency

1. Test of Agency: In order to test whether a contract of agency exists or not between two parties, there is a test of agency where two things are tested. Firstly, whether the person is in the capacity to bind the principal and the principal is answerable to the third party for his acts. And secondly, whether he can establish a Privity of Contract between the principal and third party. If the above two conditions are fulfilled, only then, a Contract of Agency is established between the Agent and the Principal.

2. Mutual Trust: To maintain any relationship, good faith among parties to a contract shall exist between each other. The foundation of a good agency relationship between the agent and the principal lies in the foundation of good faith and mutual trust. The agent shall work in accordance with its authority and shall work for the benefit of the principal.

3. Capacity of Principal: For the purpose of the Contract of Agency, the principal is required to be competent to enter a contract; i.e., he must be of the age of majority, must be of sound mind, and shall not be disqualified by law. Since in a contract of agency, the agent builds a contractual relationship between the principal and the third person, it is necessary for the two parties to be competent to contract.

4. Capacity of Agent: The capacity of an agent in the contract of agency is immaterial as any person can become an agent between the principal and the third person. Any person, either minor or otherwise incompetent to contract, is eligible to create a valid contract between his principal and the third person. However, an agent is not responsible to the principal if he is not competent to contract but the principal shall be bound by the acts of the agent.

5. Legally Binding: The principal is legally bound by all the acts done by the agent in the same manner as he would have done that act by himself. However, only those acts which are within the scope of authority of the agent shall bind the principal, he might be held liable for acts done outside the authority.

6. Consent: The relationship of the principal and the agent can only be established by the consent of both the principal and the agent. The consent must have been given by each of them, either expressly or by implication from their words or act.

An Agency agreement establishes the legal relationship between the agent and its principal. It ensures that both parties understand their roles and responsibilities in a contract, which helps to create mutual awareness that the agent shall bind the principal for his acts done within his ambit of authority. The Contract of Agency also establishes the rights and obligations of an agent in a contract of agency, and it also defines the circumstances under which the agent shall be personally liable for his acts on behalf of the principal along with the legal position of the agent, the principal and any other third parties involved.

Geeky Takeaways:

• Contract of Agency can be observed very easily in business as business houses use the services of agencies to expand their operations and also to focus on their key operations.
• Some examples include appointing a human resource professional to hire individuals or attorneys for legal representation or using the services of a stockbroker.
• The provisions regarding the Contract of Agency are contained in Sections 182 to 238 of the Indian Contract Act, 1872.