The agency agreement — the one contract that lets somebody else bind you

What an agency is, in one sentence

The statute is unusually direct about it.

In an ordinary contract each party binds only itself, and the worst either can do to the other is to break it. Agency inverts that: the principal is exposed not to the agent’s breach but to the agent’s contracts. That is not a defect in the law — commerce could not function if every buyer had to audit the seller’s internal delegation before placing an order.

Read the second limb slowly, because it is the one that does the work. To represent another in dealings with third persons. An agent is not simply somebody who does a job for you. He is somebody who stands in your place when he talks to other people, and the consequence is that what he agrees, you have agreed.

Almost every dispute in this area comes back to three questions. Did he have authority? If not, is the principal bound anyway? And what can the principal recover from the agent inside? A well-drafted agreement answers the first and third in advance, and does what it can about the second.

No consideration, no writing, and who can be an agent

Three short sections, each of which surprises people.

Section 185 is the one that causes real damage in practice, because it removes the safety net people assume is there. The common belief is that until a commission is agreed, or a document is signed, no relationship exists. The Act says otherwise. Agency needs no consideration, and under Section 186 authority may be implied from the circumstances. A person who has been allowed for two years to quote prices on your letterhead, collect payments and settle complaints is your agent, whatever the absence of paper says.

Section 184 is the odd one. A minor can be an agent so far as third persons are concerned — meaning the minor’s acts can validly bind the principal — but cannot be responsible to the principal for getting it wrong. The risk runs outward and does not run back. It is not a common situation, but it is a reason to know who is actually doing the work when an agency is given to a firm and performed by whoever is available.

The drafting response to all of this is unglamorous and effective: say in the document when the agency begins, say that no prior conduct created one, say who personally may act under it, and say that nothing outside the document extends it.

What people call an agency but is not

A large part of the value in this area is refusing to draft the wrong document. The word “agent” is used loosely in Indian trade for at least five relationships, only one of which is an agency in law.

Agent or distributor — the distinction that costs money

In an agency, the goods remain the principal’s until they reach the customer. The agent arranges a contract between the principal and the customer. The invoice goes from the principal to the customer. The price is the principal’s price. If the customer does not pay, the principal has the bad debt. The agent earns a commission for bringing the business.

In a distributorship, the distributor buys the goods. Title passes to him. He resells at his own price, on his own invoice, carrying his own stock and his own credit risk. There are two sale contracts, not one, and the principal has no contract with the end customer at all.

Every practical consequence flows from that single difference, and the table below is the one we walk clients through before drafting anything.

Express, implied and emergency authority

Authority is the spine of the document, and the Act gives it three layers.

Express authority is what Section 187 describes as authority given by words spoken or written. It is the schedule in the agreement listing what the agent may do.

Implied authority is the same section’s second limb — authority inferred from the circumstances of the case. Section 188 then gives it real width: an agent having authority to do an act has authority to do every lawful thing necessary in order to do it, and an agent having 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.

That phrase — usually done in the course of conducting such business — is where a great many principals discover that they authorised more than they listed. An agent appointed to sell has implied authority to do the things sellers in that trade ordinarily do: quote, negotiate within customary limits, accept a standard order, arrange delivery. If the principal wants those things excluded, silence will not exclude them. The agreement has to say so, and the exclusion has to be visible to the people dealing with the agent.

Emergency authority is Section 189: 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. It is narrow and it is measured against prudence, not convenience. An agent who sells perishable stock at a reduced price because a cold store failed is within it. An agent who settles a dispute on the principal’s behalf because the customer was becoming difficult is not.

When the principal is bound by what he never authorised

This is the section of the Act that principals most need to know and most rarely do.

Nothing in that section requires the principal to have intended anything. It asks what he induced the third person to believe, and conduct counts as much as words. Giving an agent letterhead, a company email address, a designation that sounds like authority, a seat at meetings where terms are settled, and years of unchallenged dealings is conduct. So is accepting the benefit of similar contracts in the past without objecting to how they were made.

Section 238 runs alongside it and is just as sharp. Misrepresentations made, or frauds committed, by agents acting in the course of their business for their principals have the same effect on agreements as if they had been made by the principals themselves — though misrepresentations or frauds in matters outside the agent’s authority do not affect the principal. So a false assurance given by an agent while doing the very thing he was appointed to do lands on the principal.

Where the excess of authority is separable, Sections 227 and 228 soften the blow: if what the agent did within his authority can be separated from what he did beyond it, only the authorised part binds the principal; if it cannot be separated, the principal is not bound by the transaction at all. That is a real defence, but it depends on a clean line between the two halves, which in practice is unusual.

The practical consequence is worth stating in its own words: internal limits protect you against the agent and not against the customer. If it matters that your agent cannot give a discount beyond a figure, cannot extend credit, and cannot vary your warranty, print that on the order form. Three lines on a quotation do more work than three pages in an agreement the customer will never read.

Ratification, and its three limits

Where an agent has exceeded his authority the principal may adopt the transaction instead of disowning it. That is ratification, and Section 196 allows it expressly or by conduct — and taking the benefit is conduct. Three limits are worth knowing.

Section 198 — knowledge. There can be no valid ratification by a person whose knowledge of the facts of the case is materially defective. A principal who adopts a transaction without being told what the agent knew has not ratified it, and can later resile.

Section 199 — all or nothing. A person who ratifies an unauthorised act ratifies the whole of the transaction of which that act formed part. There is no cherry-picking the profitable order and disowning the warranty attached to it.

Section 200 — third persons. An act done without authority which, if authorised, would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot by ratification be made to have that effect. Ratification looks backwards but it cannot reach back through somebody else’s accrued rights.

Sub-agents and substituted agents

The starting rule is Section 190: an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless the ordinary custom of trade permits a sub-agent, or the nature of the agency requires one. Agency is a relationship of confidence, and the law begins from the position that you chose this person.

Where delegation does occur, the Act distinguishes two structures that are constantly confused, and the difference decides who carries the risk of the second person’s mistakes.

Read the fourth row twice. Under a sub-agency the original agent remains on the hook to the principal for everything the sub-agent does. Under a substitution, Section 195 releases him the moment he has exercised the discretion of a man of ordinary prudence in the selection. Agents negotiating these agreements should know which structure they are signing up to, and principals should know which one leaves them with somebody to sue.

Section 210 completes the picture: termination of the agent’s authority terminates the authority of sub-agents appointed by him. A principal who ends an agency without asking who else has been acting under it may find he has ended more relationships than he counted, and should ask for the list before serving notice.

What the agent owes the principal

Sections 211 to 218 set out the agent’s duties, and they are more demanding than most agency agreements bother to restate.

Section 211 — follow directions. The agent must conduct the business according to the principal’s directions, or, in their absence, according to the custom prevailing in business of the same kind at the place where he conducts it. Where he departs and loss follows, he makes it good; where profit follows, he accounts for it.

Section 212 — skill and diligence. He must conduct the business with as much skill as is generally possessed by persons engaged in similar business, and must make compensation to the principal in respect of the direct consequences of his own neglect, want of skill or misconduct. The word “direct” is a real limit and is worth knowing on both sides of a dispute.

Section 213 — accounts. He is bound to render proper accounts to the principal on demand. This is a statutory duty, not a contractual courtesy, and it does not depend on the agreement providing for it.

Section 214 — communicate. In cases of difficulty he must use all reasonable diligence in communicating with his principal and in seeking his instructions. An agent who makes a decision alone because the principal was hard to reach is on weak ground unless he can show the diligence.

The agent who deals on his own account

Two sections sit next to each other and give the principal two different weapons. Principals routinely use the wrong one, or assume they have only one.

The difference matters commercially. Section 215 unwinds the deal. Section 216 lets the deal stand and strips the agent of what he made from it. A principal who discovers that his agent’s brother-in-law’s firm was the buyer on a transaction, at a price the agent negotiated on both sides, can often do better under Section 216 than by trying to undo a sale that the market has already moved past.

In drafting, this is handled with a conflict-of-interest clause that requires written disclosure before any related-party transaction, a standing obligation to disclose competing agencies, and an express statement that the remedies under Sections 215 and 216 are preserved in addition to anything the agreement provides. The last of those matters because a badly drawn “sole remedy” clause can be argued to have given away a statutory right the principal did not know he had.

When commission is earned, and when it is lost

More agency disputes are about commission timing than about anything else, and the default rule is stricter than agents expect.

Section 219. In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act. The default is therefore completion, not effort and not introduction.

That default is almost always wrong for the parties’ actual intention, which is why the agreement must define the trigger. In practice there are four candidates, and choosing between them is a commercial decision rather than a legal one:

• Order booked — earliest for the agent, worst for the principal, because commission accrues on business that may never be accepted.
• Order accepted by the principal — a common middle position, and it gives the principal a check on terms.
• Goods despatched or services performed — ties commission to actual fulfilment.
• Payment received from the customer — safest for the principal, and the point at which most disputes disappear, because the money to pay commission is in hand.

Two more sections complete the picture. Section 220: an agent guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted — note that it is the misconducted part, not the whole. Section 221 gives the agent a lien over goods, papers and other property of the principal received by him, until what is due for commission, disbursements and services in respect of the same has been paid or accounted for. That lien is why a termination clause should deal expressly with the return of records, samples, customer lists and stock, and with the settlement of accounts that must precede it.

What the principal owes the agent

The obligations do not run in one direction. Sections 222 to 225 put real duties on the principal, and agents negotiating these agreements should not let them be contracted away without thought.

Section 222 requires the principal to indemnify the agent against the consequences of all lawful acts done in the exercise of the authority conferred. Section 223 extends the indemnity to acts done in good faith, even where they cause injury to the rights of third persons — a meaningful protection for an agent who acted properly on instructions that turned out to be someone else’s problem. Section 225 requires the principal to make compensation to the agent for injury caused to him by the principal’s own neglect or want of skill.

Section 224 is a hard stop that no indemnity clause can drafted around, and it is worth saying plainly to any agent who is being asked to do something he is uneasy about: the promise that the principal will “take care of it” is legally worthless if the act is criminal. An agent carrying that risk is carrying it alone.

Who the third party sues

Section 230 sets the default and then immediately qualifies it, and both halves matter.

The second presumption is the one that catches people. An agent who signs in his own name without naming his principal has, by default, made himself personally liable on the contract. Agents do this constantly, sometimes to protect a client relationship and sometimes out of habit, and it converts a commission arrangement into personal exposure for the full value of the deal.

A related arrangement worth naming, because clients ask for it without knowing the term, is the del credere agent — an agent who, for a higher commission, guarantees to the principal that the customers he introduces will pay. It shifts the credit risk that ordinarily sits with the principal onto the agent, and it is a guarantee in substance, so it should be drafted with the guarantee provisions of the Act in mind rather than as a throwaway sentence about commission. Our page on surety and guarantor liability sets out why that matters.

How an agency ends

Section 201 lists the ways an agency terminates: the principal revoking his authority; the agent renouncing the business; the business of the agency being completed; either party dying or becoming of unsound mind; or the principal being adjudicated an insolvent under the law for the time being in force for the relief of insolvent debtors.

Section 208 deals with the moment termination bites, and it is one of the most practically useful sections in the chapter. The termination of an agent’s authority does not take effect, as regards the agent, before it becomes known to him; and as regards third persons, before it becomes known to them. A principal who terminates an agency and tells nobody has terminated it only as between himself and the agent. The customers who go on dealing with that agent are, as far as they know, still dealing with the principal.

That single sentence dictates the termination procedure we build into every agency agreement: written notice to the agent; a defined handover of records, samples, stock and customer information; the immediate withdrawal of letterhead, email addresses, cards and portal access; and a notice to customers and, where relevant, a notice on the principal’s own website. The last two are not courtesies. They are how Section 208 is satisfied.

The agency that cannot simply be revoked

Principals negotiating these agreements generally assume that revocation is always available to them. Section 202 is the exception, and it is not a narrow one.

It arises far more often than the textbook framing suggests. An agent who has financed the stock he holds. A collecting agent who has advanced money against receivables and is authorised to recover them. A person given authority to sell a property as security for a loan he made to the owner. In each case the authority is not a mere convenience for the principal; it is the mechanism by which the agent gets paid, and the law will not let the principal take it away.

So there are two drafting positions, and a client should choose consciously between them. If the principal wants a free right to revoke, the agreement must say expressly that the agency is revocable notwithstanding any interest the agent may have, and must provide separately for how the agent’s money is protected. If the agent is funding the business, the reverse clause — an express acknowledgement of the interest and of its consequence under Section 202 — is frequently the most valuable line in the document for him.

Compensation and notice on early termination

Even where revocation is available, it is not free. Two sections sit together and are routinely read as one when they are not.

Section 205. Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the agent to the principal, for any previous revocation or renunciation of the agency without sufficient cause. Note that it runs both ways: an agent who walks away from a fixed-term agency without cause owes compensation too.

Section 206. Reasonable notice must be given of such revocation or renunciation; otherwise the damage thereby resulting must be made good. This is a separate obligation. A termination can be for perfectly sufficient cause and still be a breach of Section 206 if it is sprung without notice.

“Reasonable” is not defined, and that is deliberate — it depends on how long the agency has run, how much the agent has invested in it, how long it would reasonably take him to replace the business, and what the trade does. Which is precisely why the agreement should fix a notice period in days. A stated period is enforceable and predictable; an unstated one is an argument.

Territory, exclusivity and what happens afterwards

Exclusivity is the commercial heart of most agency negotiations and it splits into three distinct questions that should be answered separately in the document.

Is the territory exclusive to the agent? That is, will the principal appoint anyone else there, and — a separate question people forget — will the principal himself sell there directly? A “sole agency” that leaves the principal free to sell direct to the largest customer in the territory is worth much less than it sounds, and the clause should say whether commission is payable on the principal’s own direct sales in the territory.

Is the agent exclusive to the principal? During the term this is ordinary and enforceable. An obligation not to represent competing lines while the agency subsists is a positive covenant of service, not a restraint of trade, and Section 27 of the Contract Act does not strike it down.

What happens after termination? Here the position reverses. Section 27 provides that every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void, subject only to the narrow statutory exception for the sale of goodwill. Indian law does not admit the “reasonable restraint” doctrine that English law applies, and a post-termination non-compete on an agent is therefore usually unenforceable however carefully it is worded.

What does survive is worth listing, because clients who are told the non-compete will not hold assume they have no protection at all. Confidentiality obligations survive, and they protect the substance of what actually matters — pricing, customer terms, technical information. Non-solicitation of named customers can survive where it is genuinely about protecting confidential information rather than excluding competition. Trade mark and material return obligations survive. And an obligation not to hold oneself out as still representing the principal survives, which is the clause that closes the Section 208 loop discussed above. Our confidentiality agreement page goes into what can and cannot be protected in more detail.

Invoicing, GST and whose supply it is

Tax treatment follows the structure, which is another reason the agent-or-distributor question has to be settled before drafting rather than afterwards.

Where goods pass through the agent’s hands, the position changes and the GST law says so expressly. Schedule I to the Central Goods and Services Tax Act, 2017 treats the supply of goods by a principal to his agent, where the agent undertakes to supply those goods on behalf of the principal, and the supply of goods by an agent to his principal where the agent undertakes to receive them on the principal’s behalf, as a supply even where it is made without consideration. Section 24 of the same Act requires compulsory registration of persons who make taxable supplies of goods or services on behalf of other taxable persons, whether as an agent or otherwise — without the ordinary turnover threshold.

The drafting consequences are simple and should be in the document rather than assumed:

• Whose name goes on the invoice to the customer, and who issues it.
• Whether the agent handles goods at all, or only paperwork and negotiation.
• How and when the agent invoices commission, and on what base — gross value, net of taxes, net of returns, net of discounts given.
• Who bears tax on the commission, and whether the stated rate is inclusive or exclusive. An agreement that says “commission of five per cent” without saying which has created a dispute for the first invoice.

Rates, thresholds and withholding percentages change, so we confirm the position at the time of drafting rather than printing figures that will be wrong within a year. What does not change is the need for the agreement to answer each of the questions above in plain words.

The clauses the agreement has to carry

This is the working list we draft against. An agency agreement that is missing any of these is missing something that has caused a dispute for somebody.

Stamping, execution and proving it later

An agency agreement is ordinarily chargeable as an agreement under the stamp law of the State in which it is executed, and rates differ from State to State. We do not print figures here for the obvious reason that they move; we settle the correct amount at the time of drafting.

Two things are then worth separating, because people conflate them and pay twice or pay nothing.

First, the agency agreement and a power of attorney are different instruments even when the same relationship needs both. The agreement records the bargain between principal and agent. A power of attorney is an instrument of authority addressed to the world, and it carries its own duty; where it relates to immovable property or is to be used before certain authorities, questions of authentication and registration arise. Our power of attorney page deals with that separately. An agency agreement alone does not authorise an agent to execute deeds.

Second, understamping does not make the relationship invalid, but it makes the document a problem at the exact moment you need it. An instrument that is not duly stamped is not, without more, receivable in evidence, and the cure — paying the deficit with a penalty — is available but slow and expensive at the point when a matter is being heard. Getting it right at the start costs a fraction of getting it right in the middle of a dispute. Our e-stamp paper page explains how the instrument is obtained.

Where agency agreements go wrong

From the files, in rough order of how much they cost:

• Writing an agency agreement for what is really a distribution. Everything downstream — invoicing, tax, price control, liability — then contradicts the document.
• Limiting authority internally and never telling the customers. Section 237 does the rest.
• No definition of when commission is earned, leaving Section 219’s completion default to govern a relationship nobody meant to govern that way.
• A post-termination non-compete relied on as the main protection, when Section 27 is likely to void it and confidentiality would have done the real work.
• Terminating and telling nobody, so that under Section 208 the agency continues as regards every customer who has not heard.
• An agent signing in his own name without naming the principal, and acquiring personal liability under Section 230.
• No conflict-of-interest clause, and a principal who learns about Sections 215 and 216 only after the transaction has settled.
• No notice period, leaving “reasonable” under Section 206 to be decided by somebody else.

What we do, and what it costs

Drafting starts at ₹2,500 and ordinarily takes 1 – 3 days.

The first part of the work is not drafting at all. It is a conversation about what the relationship actually is, because the most expensive mistakes in this area are made before a word is written. Who owns the goods. Who invoices. Who sets the price. Who carries the bad debt. Who the customer thinks he is buying from. Those answers decide which document you need, and we would rather tell you that you need a distribution agreement than sell you an agency one.

Stamp duty and any government charges are at actuals. Nothing is payable in advance. Where you would rather do this yourself, everything on this page is what we would tell you.

If you cannot answer the first question with confidence, that is the one to bring to us. It takes ten minutes and it decides everything else.