1) Agency : 
     Agency is the Legal relationship between an Agent and Principal. In a contract of Agency, a person appoints another person to act on his behalf with a third party. The person who appoints another person is called 'Principal' and the person, who is appointed is called 'Agent'

Example : 

     'A' appoints 'B' to buy 50 bags of Wheat on his behalf, Here 'A' is Principal and 'B' is Agent. The relation between 'A' and 'B' is called Agency.
2) Definition of  "Agent" and "principal"

Section 182 of the Indian Contract Act 1872 defines "Agent" and "Principal" as follows:

   Agent : 
            An “agent” is a person employed to do any act for another or to represent another in dealing with third persons. (See... Rights and Duties of Agent )

  Principal :

           The person for whom such act is done, or who is so represented, is called the “principal”. 

   Section 182 of the Indian Contract Act makes it clear that an Agent is a person employed to do any act for another to represent another in dealing with the third person.

3) Who may employ an Agent: 
        According to Section 183 of the Indian Contract Act 1872, Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent.

     In simple words, any person who is a major and sound mind may appoint an agent.
      Under Section 183 of The Indian Contract Act, 1872: Any Person may appoint an agent who is: -

a) Major; and

b) Sound Mind

a) Major :

       According to Section 3 of the Indian Majority Act, 1875, A person is deemed to have attained the age of Majority when he completes the age of 18 years, and not before. The Minority extends to 21 years if a guardian of a minor's person or property is appointed. In England, the age of Majority is 18 years.

b) Sound Mind  

         Section 12 of the Indian Contract Act, 1872 defines the term Sound mind as "A person is said to be of sound mind for the propose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interest.

Following are the persons of unsound mind:

(i) Idiots

(ii) Lunatics

(iii) Drunken or Intoxicated persons

See also 

1) Who is Minor ? Effects of Minor's Agreement.

2) When a unsound mind person is capable to enter into contract ?

3) What is a sound mind for the purposes of contracting ?

4) Difference between Sub-Agent and Substituted-Agent

5)  Difference between Sub Agent and Co-Agent/ Substituted agent


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