Note on Contract of Agency

  • Note
  • Things to remember


Contract of agency is a contract, which takes place between an agent and the principal, where an agent performs his/her task according to the instruction of the principal. An agent may be appointed for different acts and purposes.In fact, like the different legal relationship, an agency is a legal relationship, which is based on the express or implied contract. According to Sec. 56 of Nepal Contract Act, 2056, ‘Any person may appoint any other person as his/her agent to do anything on his/her behalf, except something connected with his/her personal skills or to conduct business as his/her agent of any transaction with a third person on his behalf or to represent himself to such person, or to establish any kind of legal relation with the person appointing an agent and a third person, and in case an agent is so appointed, a contract relating to agency shall be deemed to have been concluded.

According to Sec. 182 of Indian Contract Act, 1872, ‘A contract by which a person employs another person to do any act for himself or to present him in dealing with the third person, is a contract of agency.

Sec. 2(a) of Nepal Agency Act, 2014 states, ‘an agent is a person who works for any domestic or the foreign business firm all over Nepal or in any part of Nepal and the term agent may mean a distributor, stockist, nominee or a representative.’


  • X employs Y to buy goods for him. Here, X is a principle and Y an agent. This is contract of agency.

Features or Essentials of Contract of Agency

Contract of agency is also a specific contract like a contract of indemnity and guarantee and contract of bailment. In this contract, a person appoints another to do something on his/her behalf. The essentials of contract of agency are:

  • Representation
  • Delegation of authority
  • Contractual capacity
  • Consideration is not compulsory
  • Purpose

Representation: An agent always represents his/her principal in dealing with third parties. An agent is responsible to the principal of his work.

The delegation of authority: In a contract of agency principal delegates his/her authority to the agent to do the things on his/her behalf. In fact, contract of agency starts after principal appoints the agent along with a delegation of authority.

Contractual capacity:Both principal and agent should be competent in the eye of law. They are incomplete when they have unsound mind, minor, or disqualified in the eye of law.

Consideration is not compulsory:In the contract of agency valid consideration is not compulsory. For example, the wife may take the role of his husband without consideration.

Purpose:An agent may be appointed for any purposes the principal likes. For example buying and selling goods, deposit money in the bank, dealing with a customer. However to be valid purpose it should not be against the prevailing law.

Nature of agent

  • Agent is appointed by the principal.
  • Principal delegate the authority.
  • Principal’s responsibility.
  • To create the legal relationship between principal and a third person is the purpose of the contract.
  • Consideration is not necessary
  • Contract either express or implied.

Features or essentials of contract of agency

Modes of creating agency

  1. Agency by express agreement
  2. Agency by Implied authority
  3. Agency by estoppels
  4. Agency by holding out
  5. Agency by necessity
  6. Agency by ratification
  7. Agency by Operation of law

Rules of valid ratification

  1. Act done on behalf of another person
  2. Existence of principal
  3. Express or implied ratification
  4. Knowledge of subject matter to the principal is essential
  5. No partial ratification
  6. Contractual capacity
  7. Ratification within reasonable time
  8. Only lawful acts may be ratified
  9. Ratification of acts which is within the power of the principal
  10. No damage to the third party
  11. Communication of ratification

Sub-agent, substituted agent and co-agent


According to sec. 58(1) of Nepal Contract Act, In case it is necessary to appoint, a sub-agent according to the nature of any trade, business or transaction, or in case a sub-agent can be appointed according to provision contained or practice followed in the contract relating to agency, the agent may, except when otherwise provided for in the contract, appoint a sub-agent with the consent of the principal person.

Indian contract Act states a sub-agent is a person employed by and acting under the Control of the original agent.

Subsitute Agent

A substituted agent is a person appointed by the agent according to the express or implied authority of the principal, to act on behalf of the principal in the business of the agency.


The co-agent acquires equal rights as the original agent at the same time, are called co-agent.

Rights and duties of an agent


Right to receive remuneration.

Right to retain money:

  • Advances
  • Expenses
  • Dues

Right to lien

Right to indemnification against the consequences of lawful acts.

Right to indemnification against the consequences of the acts done in good faith.

Right to indemnification for injury due to principal’s negligence.

Right to claim compensation in case of removal without any reason.

Right to stoppage of goods in transit.


  • To follow the principal’s direction
  • To act with reasonable skill and diligence
  • To render proper account
  • To communicate to the principal in difficult condition
  • Not to deal on his own account
  • To pay sum
  • Not to Set up adverse title
  • Not to delegate his authority
  • Not to earn secret profit
  • Not to use agency information against principal
  • Not to disclose confidence
  • To take reasonable step

Rights and duties of principal


  • Rights to demand accounts of agency
  • Right to demand secret profit earned by agent
  • Right to receive compensation
  • Right to revoke the agent’s authority


  • To pay remuneration
  • To pay amount for expenses
  • To pay indemnity:
  1. Loss against consequences of lawful acts
  2. Loss against consequences of acts done in good faith
  3. Loss due to neglect

Termination of contract of agency

  1. By acts of the Party:
  1. By mutual agreement
  2. By revocation
  3. By renunciation
  4. By completion or performance

  1. By operation of law:
  2. By expiry of time
  3. By death or insanity
  4. By insolvency
  5. By destruction of subject matter
  6. Due to becoming alien enemy
  7. By change of law
  8. By dissolution of the company

Procedure for registering agency business in Nepal

To carry out business activities, there were not the separate provision in Nepal before 1992 BS.

In 1992 B.S. Rana Prime Minister issued an ordinance (Istihar) in its regards.

In B.S. 2014, The Agency Act had been enacted and enforced. To make very clear provision regarding agency, prevailing contract Act, 2056 has included the provisions regarding agency in chapter 8 of the Act.

Major Provisions of agency Act, 2014

  1. Definition of Agent and Registered Agent:
  2. Registration and its procedures
  3. Renewal
  4. Submission of the statements
  5. Transfer of agency
  6. Punishment and effect of non-registration
  • Economic fine up to 1000 Rs. Non-registration case
  • Fine up to Rs. 500 in case of breach of the terms and conditions while agent agreed in the time of agency registration
  • Fine up to Rs. 200 for breach of the other provisions of the Act.


Shrestha, R. P. (2007). Business Law. Kathmandu: M.K.Books.

Ghai, K. (n.d.). yourarticlelibrary. Retrieved from

Law, E. o. (2008). thefreedictionary. Retrieved from

Collins Dictionary of Law © W.J. Stewart, 2006

Akrani, G. (2011, 09 2). kalyan-city. Retrieved from

Bragg, S. (2011). accountingtools. Retrieved from

Business Law, Ram Prasad Shrestha;M.K Books, Bhotahity, Kathmandu,2013

Modes of creating agency

  • Agency by express agreement
  • Agency by Implied authority
  • Agency by estoppels
  • Agency by holding out
  • Agency by necessity
  • Agency by ratification
  • Agency by Operation of law

Rules of valid ratification

  • Act done on behalf of another person
  • Existence of principal
  • Express or implied ratification
  • Knowledge of subject matter to the principal is essential
  • No partial ratification
  • Contractual capacity
  • Ratification within reasonable time
  • Only lawful acts may be ratified
  • Ratification of acts which is within the power of the principal
  • No damage to the third party
  • Communication of ratification

Nature of agent

  • Agent is appointed by the principal
  • Principal delegate the authority
  • Principal’s responsibility
  • To create the legal relationship between principal and a third person is the purpose of the contract.
  • Consideration is not necessary
  • Contractual capacity
  • Contract either express or implied



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