Creation of Agency and the Extent of the Agent's Authority: Express and Implied Agency, Agency by Necessity, Estoppel and Holding Out, and Actual Authority Compared with Apparent Authority

An agency may be created in six ways and an agent's authority may come from five sources, and the two lists are not the same. Creation answers the question whether a relationship of agency exists at all; authority answers the question how far the agent may go. The distinction matters because the most important category in practice, apparent authority, is not authority at all: it binds the principal not because the agent had power but because the principal is precluded from denying it. This topic works through both lists and then sets out the boundary between actual and apparent authority, which decides who bears the loss when an agent exceeds what he was told to do.

1. Creation of Agency

Sections 186 and 187, Indian Contract Act, 1872

186. Agent's authority may be expressed or implied. The authority of an agent may be expressed or implied.

187. Definitions of express and implied authority. An authority is said to be express when it is given by words spoken or written. An 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 accounted circumstances of the case.

Illustration. A owns a shop in Serampore, living himself in Calcutta, and visiting the shop occasionally. The shop is managed by B, and he is in the habit of ordering goods from C in the name of A for the purposes of the shop, and of paying for them out of A's funds with A's knowledge. B has an implied authority from A to order goods from C in the name of A for the purposes of the shop.

Mode of creation	How it arises	Provision or source
Express agreement	By words spoken or written; no writing is required and no particular form	Sections 186 and 187
Implied agreement, or agency by conduct	Inferred from the circumstances, including the course of dealing and the parties' relationship	Section 187, and its Illustration
Agency by necessity	A person in possession of another's property acts to preserve it in a genuine emergency	Section 189 and the general law
Agency by estoppel or holding out	The principal's words or conduct induce a third party to believe that the acts were within the agent's authority	Section 237
Agency by ratification	An unauthorised act done on another's behalf is adopted afterwards, retrospectively	Sections 196 to 200
Agency by operation of law	Conferred by statute or by the nature of a relationship, as with a partner under Section 18 of the Indian Partnership Act, 1932	Statute

1.1 Implied agency

The Illustration to Section 187 is the model case and it repays close reading. Three elements combine: the manager ordered goods in the owner's name, for the purposes of the shop, and paid for them out of the owner's funds with the owner's knowledge. It is the combination, and particularly the owner's knowledge and acquiescence over time, that creates the implied authority. Implied agency is also presumed in certain relationships, most commonly between spouses, a wife living with her husband being presumed to have authority to pledge his credit for necessaries suitable to their condition in life, a presumption the husband may rebut by showing that he forbade it, that she was adequately supplied, or that the goods were not necessaries.

The six modes of creation, and two special cases

2. Agency by Necessity

Section 189, Indian Contract Act, 1872

Agent's authority in an emergency. An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.

Illustration (a). An agent for sale may have goods repaired if it be necessary. (b). A consigns provisions to B at Calcutta, with directions to send them immediately to C at Cuttack. B may sell the provisions at Calcutta, if they will not bear the journey to Cuttack without spoiling.

Agency by necessity goes further than Section 189, because it can create an agency where none existed before. The conditions are strict.

There must be a real and pressing emergency, not merely inconvenience or commercial advantage.
It must be practically impossible to communicate with the owner and obtain his instructions. This is the condition that most often fails.
The person acting must already be in possession of the other's goods or property, lawfully.
He must act bona fide in the interests of the owner, and not for his own benefit.
He must act as a person of ordinary prudence would in his own case, which is the standard Section 189 states.

📖 Great Northern Railway Co. v. Swaffield, (1874) LR 9 Ex 132

Facts: A horse was consigned by rail. On arrival at the destination station late at night nobody came to collect it, and the railway company was unable to obtain instructions from the owner. The company placed the horse in a livery stable. The owner afterwards refused to pay the stabling charges, and the company sued.

Held: The company was entitled to recover the charges. It had become an agent of necessity. Having the horse on its hands, being unable to communicate with the owner, and having a duty to take reasonable care of the animal, it had acted as a prudent owner would have done, and the expenditure was properly incurred on the owner's behalf.

Ratio: A person left in possession of another's property, unable to obtain instructions and faced with a real need to act, becomes an agent of necessity and may recover the expenses reasonably incurred in preserving it.

📖 Springer v. Great Western Railway Co., [1921] 1 KB 257 (CA)

Facts: A consignment of tomatoes was delayed in transit by bad weather and by a strike. On arrival at the port the railway company found some of the fruit going bad and sold the whole consignment locally instead of forwarding it, without attempting to contact the owner, who could readily have been reached by telegraph.

Held: The company was liable for the loss. It was not an agent of necessity, because communication with the owner was practicable and no attempt had been made. The plea of necessity is available only where it is impossible to obtain the owner's instructions, and a carrier who could have asked and did not must answer for the consequences of his own decision.

Ratio: Agency by necessity requires that communication with the owner be impracticable. Where instructions could have been obtained and were not sought, the plea fails.

3. Agency by Estoppel and Holding Out

Section 237, Indian Contract Act, 1872

Liability of principal inducing belief that agent's unauthorised acts were authorised. 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 has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent's authority.

Illustration (a). A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B's instructions, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract.

The representation must come from the principal, by words or conduct, and not from the agent himself. An agent cannot confer authority on himself by asserting that he has it.
The third party must have relied on it and been induced to deal on that footing.
Private limitations are ineffective against a third party who did not know of them, which is the point of Illustration (a) and of Watteau v. Fenwick, [1893] 1 QB 346.
Placing a person in a position that carries a usual authority is itself a representation, which is the reasoning in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd., [1964] 2 QB 480 and Panorama Developments (Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd., [1971] 2 QB 711.
Failure to notify third parties of a revocation operates in the same way, which is why Section 208 and Section 237 must be read together.

4. The Extent of Authority

Section 188, Indian Contract Act, 1872

Extent of agent's authority. An agent, having an authority to do an act, has authority to do every lawful thing which is necessary in order to do such act.

An agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business.

Illustration (a). A is employed by B, residing in London, to recover at Bombay a debt due to B. A may adopt any legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same. (b). A constitutes B his agent to carry on his business of a ship-builder. B may purchase timber and other materials, and hire workmen, for the purposes of carrying on the business.

Kind of authority	Source	Scope
Express	Words, spoken or written	What the words confer, construed in the commercial context
Implied	The circumstances, the relationship and the course of dealing, under Section 187	What the circumstances reasonably import
Incidental	The first paragraph of Section 188	Every lawful thing necessary to do the act expressly authorised
Usual or customary	The second paragraph of Section 188	Every lawful thing usually done in the course of conducting the business
Emergency	Section 189	Acts to protect the principal from loss, judged by the standard of a person of ordinary prudence
Apparent or ostensible	Section 237 and the general law of estoppel	What the principal's representation led the third party to believe; not authority at all

5. Actual and Apparent Authority

	Actual authority	Apparent or ostensible authority
Nature	A real power conferred on the agent	No power at all; the principal is estopped from denying it
Created by	The agreement between principal and agent, express or implied	A representation by the principal to the third party
To whom addressed	The agent	The third party
Effect of a secret limitation	It limits the agent's actual authority and binds him	It does not affect a third party who had no notice of it
If the agent acts within it	The principal is bound and the agent is entitled to indemnity under Section 222	The principal is bound to the third party, but the agent has no indemnity and is liable to the principal for exceeding his authority
Relevance of the third party's knowledge	None; the authority exists whether or not he knows of it	Decisive; a third party who knew of the limitation cannot rely on the appearance
Statutory basis	Sections 186 to 189	Section 237

⚠ Apparent authority and agency by estoppel are the same doctrine

The two expressions describe one principle from two directions and the difference is only one of emphasis. Apparent authority looks at the agent, asking what authority he appeared to have. Agency by estoppel looks at the principal, asking whether he is precluded from denying it. Section 237 is drafted in the second form. The four conditions are the same in either case, as Freeman & Lockyer sets them out: a representation by the principal, made by a person with actual authority, relied on by the third party, and within the principal's capacity. Nothing turns on which label is used, and a plaintiff pleading one is pleading the other.

6. Delegation: The Rule in Outline

Section 190 states the maxim delegatus non potest delegare: an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may be employed, or the nature of the agency so requires. The rule rests on the personal confidence the principal reposed in his agent. The permitted exceptions, the distinction between a sub-agent and a substituted agent, and the consequences of a proper and an improper appointment are developed in the dedicated topic.

7. The Position Stated Shortly

An agency may be created by express agreement, by implication from conduct, by necessity, by estoppel or holding out, by ratification, and by operation of law.
Section 187 permits authority to be inferred from the circumstances, including the ordinary course of dealing.
Agency by necessity requires a real emergency, impracticability of communication, existing lawful possession, good faith, and the standard of a person of ordinary prudence.
Great Northern Railway v. Swaffield: a carrier left with a horse and unable to reach the owner recovered the stabling charges as an agent of necessity.
Springer v. Great Western Railway: the plea failed where communication was practicable and was not attempted.
Section 237 binds a principal who has by words or conduct induced a third party to believe the acts were within the agent's authority.
Section 188 gives incidental authority to do what is necessary, and usual authority to do what is ordinarily done in conducting the business.
Section 189 confers emergency authority to protect the principal from loss.
Actual authority is a real power; apparent authority is an estoppel, and the third party's knowledge of a limitation is decisive only for the second.
Apparent authority and agency by estoppel are the same doctrine viewed from the agent's side and the principal's.

8. Related Topics and Provisions

Topic or provision	Connection
Delegation and Sub-Agency under Sections 190 to 195	The rule against delegation in full
Ratification under Sections 196 to 200	Agency created retrospectively
Principal and Third Parties under Sections 226 to 238	Excess of authority and the undisclosed principal
Termination of Agency under Sections 201 to 210	Why notice of revocation must reach third parties
Sections 186 to 189, Indian Contract Act	Creation and extent of authority
Section 237, Indian Contract Act	Holding out and estoppel
Section 222, Indian Contract Act	The agent's indemnity for acts within his authority
Section 18, Indian Partnership Act, 1932	A partner as agent of the firm by operation of law