The Indian Contract Act 1872, defines an agency as a relationship between two parties, where one party, the principal, authorizes another party, the agent, to act on their behalf in a legal capacity.

The principal entrusts the agent with the authority to make decisions and enter into contracts on their behalf. The agent does not act on their own behalf but acts as a representative of the principal, and any action taken by the agent is binding on the principal.

This relationship is based on the trust and confidence between the two parties, and the agent is obligated to act in the best interest of the principal. There are different types of agency relationships, including express, implied, and apparent.

Express agency is established through a written or oral agreement between the principal and agent, where the principal explicitly authorizes the agent to act on their behalf.

Implied agency arises when the actions or conduct of the principal lead a third party to believe that the agent has the authority to act on the principal`s behalf.

Apparent agency, also known as ostensible agency, occurs when the principal creates the appearance of authority for the agent to act on their behalf by their conduct towards the third party.

The Indian Contract Act also lays down the duties and responsibilities of both the principal and agent in an agency relationship. The principal is responsible for compensating the agent for their services and reimbursing any expenses incurred by the agent during their service.

The agent is responsible for acting in good faith and disclosing any conflicts of interest to the principal. They must also exercise reasonable care and skill in their actions and ensure that they act within the scope of their authority.

In conclusion, the Indian Contract Act defines agency as a relationship between two parties based on trust and confidence, where one party is authorized to act on behalf of the other. Establishing an agency relationship requires clear communication and understanding of each party`s obligations, duties and responsibilities.