Contract Law
Agency Agreement in India: Types, Clauses & Legal Requirements
An agency agreement in India is a contract where one party (the agent) is authorized to act on behalf of another (the principal) to create legal relationships with third parties. Governed by Sections 182–238 of the Indian Contract Act 1872, it is one of the most widely used business arrangements in India — from real estate brokers to insurance agents to sales representatives.
What is an Agency Agreement?
An agency is created when one person (agent) is authorized by another (principal) to act on their behalf. The core legal effect: contracts entered by the agent within their authority bind the principal directly as though the principal made them personally.
Under Indian law, agency does not need a formal written contract — it can arise by express appointment, implication, ratification, or necessity. However, a well-drafted written agency agreement is critical to prevent disputes.
Types of Agency in India
| Type | Description | Common Use |
|---|---|---|
| Express Agency | Created by explicit written or oral agreement | Distributors, sales agents |
| Implied Agency | Inferred from conduct or circumstances | Business partners, employees |
| Agency by Ratification | Principal later approves an unauthorized act | Retrospective authorization |
| Agency by Necessity | Created in emergencies to protect principal's property | Perishable goods, emergencies |
| Del Credere Agent | Agent guarantees buyer's payment for extra commission | Export/import trade |
8 Essential Clauses in an Agency Agreement
1. Scope of Authority
Precisely define what the agent can and cannot do. An agent acting beyond authority makes the principal liable to innocent third parties who relied on apparent authority. Be exhaustive here.
2. Exclusivity & Territory
Specify whether the agency is exclusive (no other agents in the territory) or non-exclusive. Define the geographic territory clearly — state, district, pin codes. Vague territory clauses cause the biggest disputes.
3. Commission Structure
Define commission rate, when it is earned (on order, on delivery, on payment), payment timeline, and what happens on cancellations or returns. Include a right-to-audit clause.
4. Duration & Termination
Set the agreement term, notice period for termination, and conditions for immediate termination (cause). Under Section 201, agency terminates on death, insanity, or insolvency — state what happens to pending commissions.
5. Duties of the Agent
Include: duty to follow principal's instructions, duty to maintain accounts, duty not to make secret profits, duty to protect principal's interest in emergencies, and duty of confidentiality.
6. Indemnity & Liability
Under Section 222, the principal must indemnify the agent against consequences of lawful acts. Clearly define what losses the agent bears vs. what the principal covers. Limit agent liability for losses outside their control.
7. Sub-Agency Restrictions
Explicitly allow or prohibit sub-agents. If allowed, state whether the principal must approve sub-agents. Without a clear clause, disputes over unauthorized sub-agents and resulting liabilities are common.
8. Non-Compete & Non-Solicitation
Restrict the agent from representing competing brands during the agreement. Post-termination non-competes are void under Section 27, but non-solicitation of the principal's clients is generally enforceable.
Principal's Liability to Third Parties
This is where most agency disputes in India originate. Under Section 226, the principal is bound by all acts of the agent done within authority. The agent must not exceed this authority. Three scenarios matter:
- Within authority: Principal is fully liable to third parties
- Exceeding authority: Third party can hold the agent personally liable (Section 235)
- Apparent authority: If the principal's conduct led the third party to believe the agent had authority, the principal may still be bound
Agent's Rights Under Indian Law
- ✅ Right to remuneration — earned once the agreed act is completed (Section 219)
- ✅ Right of lien — retain principal's property until dues are paid (Section 221)
- ✅ Right to indemnity — for lawful acts done in principal's interest (Section 222)
- ✅ Right to compensation — for injury from principal's neglect (Section 225)
GST on Agency Transactions
Agency services are taxable under GST at 18%. The place of supply is where the agent is located. If the agent supplies goods on behalf of the principal, both the agent and principal may need separate GST registrations. Commission income earned by the agent is subject to GST separately from the principal's sale transaction.
Reviewing an Agency Agreement?
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Analyze Your Contract Free →Key Takeaways
- ✅ Agency in India is governed by Sections 182–238 of the Indian Contract Act 1872
- ✅ Written agency agreements are not mandatory but strongly recommended
- ✅ Principal is liable to third parties for all acts within the agent's authority
- ✅ Post-employment non-competes are void; non-solicitation is enforceable
- ✅ Agency commissions attract 18% GST
- ✅ Agency terminates on death, insanity, or insolvency of either party
Frequently Asked Questions
Is an agency agreement mandatory in India?
An agency agreement does not need to be in writing — Section 186 of the Indian Contract Act says agency can be created by express or implied authority. However, a written agreement is strongly recommended to avoid disputes over scope, commission, and termination rights.
What is the liability of a principal for acts of an agent in India?
Under Section 226 of the Indian Contract Act, a principal is liable for all acts done by the agent within the scope of authority. If the agent exceeds authority, the principal can ratify or reject the act under Section 197.
Can an agent delegate authority to a sub-agent?
Under Section 190, an agent cannot delegate authority unless permitted by the principal or by trade custom. A sub-agent appointed without authority renders the agent personally liable for the sub-agent's acts.
How is an agency agreement terminated in India?
Agency is terminated by: (1) revocation by the principal, (2) renunciation by the agent, (3) completion of the agency's purpose, (4) death or insanity of either party, or (5) insolvency of the principal under Section 201 of the Indian Contract Act.
Related reads: Distribution Agreement Guide · Non-Compete Clause India · Vendor Agreement Guide