1

Central University of South

Bihar

School of Law & Governance

Project Topic: - THE FORMATION OF AGENCY AND
TERMINATION Under the supervision of:
Ms. Meenakshi Kumar
Assistant Prof.Law of Contract
II

Submitted by: RAJA RAUSHAN KR

Course: B.A. LL.B. (Hons.)
Semester: 3rd
Enrolment No.: CUSB1713125036
Subject: Law of Contract - II
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The Formation of Agency and Termination

CONTENTS
 INTRODUCTION
 The concepts
 Research Methodology
 Statement of Problem
 Objectives
 Hypothesis
 The Nature of Agency

(i)Liability of agent to third party

(ii)Liability of agent to principal
(iii)Liability of principal to agent
(IV)Duties
(V)Persons Who Can Initiate an Agency Relationship
 Kinds of Employment Relationships
(i)Employer-Employee Relationship
(ii)Principal-Agent Relationship
(iii)Principal-Independent Contractor Relationship
(iv)Employment at Will
 Summary: Kinds of Employment Relationships
 Formation of the Agency Relationship
(i)Express Agency
(ii)Implied Agency
(iii)Apparent Agency
(iv)Agency by Ratification
 Summary: Formation of Agency Relationships
 Termination
(i)Termination of an Agency and Employment Contract
(ii)Termination by Acts of the Parties (iii)
Termination by Operation of Law
(iv)Irrevocable Agency
(v)Wrongful Termination of an Agency or Employment Contract

 Conclusion
 Suggestions
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Introduction
Agency is a special type of contract. The concept of agency was
developed as one man cannot possibly do every transaction himself. Hence, he should
have opportunity or facility to transact business through others like an agent. The
principles of contract of agency are – (a) excepting matters of a personal nature, what a
person can do himself, he can also do it through agent (e.g. a person cannot marry
through an agent, as it is a matter of personal nature)

(b) A person acting through an agent is acting himself, i.e. act of agent is act of Principal.
Since agency is a contract, all usual requirements of a valid contract are applicable to
agency contract also, except to the extent excluded in the Act. One important distinction
is that as per section 185, no consideration is necessary to create an agency.

This branch of law separates and regulates the relationships between:

• Agents and Principals;

• Agents and the Third Parties with whom they deal on their Principals' behalf;
and
• Principals and the Third Parties when the Agents purport to deal on their behalf.

The common law principle in operation is usually represented in the

Latin phrase, qui facit per alium, facit per se, i.e. the one who acts through another,
acts in his or her own interests and it is a parallel concept to vicarious liability and
strict liability in which one person is held liable in Criminal law or Tort for the acts
or omissions of another.

In the legal phraseology, every person who acts for another is not an
agent. A domestic servant renders to his master a personal service; a person may till
another’s field or tend his flocks in his shop or factory or may performed upon his
roads; one may act for another in aiding in the performance of his legal or
contractual obligations of third persons….In none of these capacities he is an agent
and he is not acting for another in dealings with third persons. It is only when he
acts as a representative of the other in business negotiation, between that other and
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third persons, that he is an agent. Representative character and derivative authority

may briefly be said to be the distinguishing feature of an agent.‖

Hallmark of agency:-
“Agent” is defined in section 182 of the Indian Contract Act in the following ward:

Section-182-“Agent and “principal” defined- An agent is a person employed to do

any act another, or to represent another in dealings with third person. The person
for whom such act is done, or who is so represented, is called the “principal”.

“The essence of the matter is that the principal authorized the agent to represent or act
for him in bringing the principal into contractual relation with a third person.”

CONSIDERATION NOT NECESSARY –:

No consideration is necessary to create an agency. [Section 185 of the

Indian Contract Act 1872]. Thus, payment of agency commission is not essential to hold
appointment of Agent as valid.

A PERSON CAN BECOME A PARTNER IN A FIRM, WHICH IS THE

POSITION OF AN AGENT, WITHOUT MAKING ANY CAPITAL
CONTRIBUTION. 1

THE CONCEPT OF AGENCY-:

The concept of “agency” has been thus explained by RAMSWAMI J

of the Madras High Court in Krishna v Ganapathi; 2

In the legal phraseology, every person who acts for another is not an
agent. A domestic servant renders to his master a personal service; a person may till
another’s field or tend his flocks or work in his shop or mine; one may for another in
aiding in the performance of his legal or contractual obligations of third persons…. In
none of these capacities he is an agent and he is not acting for another in dealings with
third persons.

1
Shivraj Reddy & Bros v S. Raghu Raj Reddy, AIR 2002 NOC 120
(AP) 2 AIR 1955 SC Mad 648.
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The reciprocal rights and liabilities between a principal and an agent

reflect commercial and legal realities. A business owner often relies on an employee or
another person to conduct a business. In the case of a corporation, since a corporation
is a fictitious legal person, it can only act through human agents. The principal is bound
by the contract entered into by the agent, so long as the agent performs within the scope
of the agency.

A third party may rely in good faith on the representation by a person

who identifies himself as an agent for another. It is not always cost effective to check
whether someone who is represented as having the authority to act for another actually
has such authority. If it is subsequently found that the alleged agent was acting without
necessary authority, the agent will generally be held liable.

Research Methodology-:

This Project is based on Doctrinal Research.

Statement of Problem -:

Under Indian Contract Act agent cannot be bound by the contract on

behalf of principal. In the Globalization world all most all made by the agents. In this
situation it is difficult to parties of the contract to protect their interest.

There are three broad classes of agent-:

1. Universal agents hold broad authority to act on behalf of the principal,

e.g. they may hold a power of attorney (also known as a mandate in civil law
jurisdictions) or have a professional relationship, say, as lawyer and client.
2. General agents hold a more limited authority to conduct a series of transactions
over a continuous period of time; and
3. Special agents are authorized to conduct either only a single transaction or a
specified series of transactions over a limited period of time.
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Objectives-:
1. To analyses the law of agency in India.
2. To understand the effect of globalization on the law of agency.
3. To make certain suggestions in the context of Law of agency in the
Globalization.

Hypothesis -:
The Indian contract Act makes the provision about the presumption of
contract of contrary. It seems that under the contract if the provision about the contract
shall be made mandatory them the interest of third parties can be protect.
The work has been divided into four parts. Part second deals with the concept of law of
agency in India.
Part third is about the concept, effect of globalization particularly to Indian context.
Part four is the conclusion and suggestion of the law of agency in globalization.

The Nature of Agency-:

 Agency relationships are formed by the mutual consent of a principal and an

agent.
 Agency is the fiduciary relationship ―which results from the manifestation of
consent by one person to another that the other shall act in his behalf and subject
to his control, and consent by the other so to act.‖
 Agency Law – The large body of common law that governs agency...
 A mixture of contract law and tort law.
 Principal – The party who employs another person to act on his or her behalf.
 Agent – The party who agrees to act on behalf of another.
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Liability of agent to third party-:

If the agent has actual or apparent authority, the agent will not be liable
for acts performed within the scope of such authority, so long as the relationship of the
agency and the identity of the principal have been disclosed. When the agency is
undisclosed or partially disclosed, however, both the agent and the principal are liable.
Where the principal is not bound because the agent has no actual or apparent authority,
the purported agent is liable to the third party for breach of the implied warranty of
authority.

Liability of agent to principal-:

If the agent has acted without actual authority, but the principal is
nevertheless bound because the agent had apparent authority, the agent is liable to
indemnify the principal for any resulting loss or damage.

Liability of principal to agent-:

If the agent has acted within the scope of the actual authority given,
the principal must indemnify the agent for payments made during the course of the
relationship whether the expenditure was expressly authorized or merely necessary in
promoting the principal’s business.

Duties-:
An agent owes the principal a number of duties. These include:

a duty to undertake the task or tasks specified by the terms of the agency
(that is, the agent must not do things that he has not been authorized by the
principal to do);

a duty to discharge his duties with care and due diligence; and

A duty to avoid conflict of interest between the interests of the principal and
his own.
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An agent also must not engage in self-dealing, or otherwise unduly

enrich himself from the agency. An agent must not usurp an opportunity from the
principal by taking it for himself or passing it on to a third party.

In return, the principal must make a full disclosure of all information

relevant to the transactions that the agent is authorized to negotiate and pay the agent
either a prearranged commission, or a reasonable fee established after the fact.

Persons Who Can Initiate an Agency Relationship-:

 Any person who has the capacity to contract can appoint an agent to act on his or
her behalf.
 Persons who lack contractual capacity cannot appoint an agent.
 e.g., insane persons and minors
 An agency can be created only to accomplish a lawful purpose.
 Agency contracts that are created for illegal purposes or are against public policy
are void and unenforceable.
An Agent in Commercial Law (also referred to as a manager) is a person
who is authorized to act on behalf of another (called the Principal or client) to create a
legal relationship with a Third Party.
The test of determining the existence of agency relationship has been explained by
DHAWAN J of the Allahabad High Court in the following words:2 Agency depends on
true nature of relationship.3

2
Loon Karan v John & Co. AIR 1967 All 308.
3
Quoting from HALSBURY’S LAWS OF ENGLAND, 3 rd Edn, Vol. 1 146.
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Kinds of Employment Relationships

Employer-Employee Relationship;

Principal-Agent Relationship;

Principal-Independent Contractor Relationship; Employer-Employee

Relationship-:

A relationship that results when an employer hires an employee to perform

some form of physical service.

An employee is not an agent unless he or she is specifically empowered to enter

into contracts on the principal employer’s behalf.
Principal-Agent Relationship-:

An employer hires an employee and gives that employee authority to act and
enter into contracts on his or her behalf.

The extent of this authority is governed by any express agreement between the
parties and implied from the circumstances of the agency.

Principal-Independent Contractor Relationship-:

Principals employ persons or businesses who are not employees to perform

certain tasks on their behalf.

These persons and businesses are called independent contractors.

A principal can authorize an independent contractor to enter into contracts.

Principals are bound by the authorized contracts of their independent

contractors

The crucial factor in determining whether a person is an employee or

an independent contractor is the degree of control that the principal has over that
person.
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Employment at Will-:
 At-Will Employees – Employees who do not have an employment contract;
under common law, an at-will employee could be discharged by an
employer at any time for any reason;
 Exceptions to the at-will doctrine;
 Statutory Exception;
 Contract Exception;

Summary: Kinds of Employment Relationships-:

Type of Relationship Type of Relationship

Employer-Employee The employer has the right to control the physical

conduct of the employee.

Principal-Agent The agent has the authority to act on behalf of the

principal as authorized by the principal and implied
from the agency.

Principal-Independent An employee is often the agent of his employer.

Contractor The principal has no control over the details of
The independent contractor’s conduct. An
independent contractor is usually not an agent of
the principal.
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Formation of the Agency Relationship-:

Express Agency--------------- --------Implied
Agency
Agency Relationship
Agency by Ratification------- -------Apparent Agency

Express Agency-:

 An agency that occurs when a principal and an agent expressly agree to enter into
an agency agreement with each other.
 Exclusive agency contract
 Power of attorney
 Express agency contracts can be either oral or written unless the Statute of Frauds
stipulates that they must be written.

Implied Agency-:

 An agency that occurs when a principal and an agent do not expressly

create an agency.
 The agency is implied from the conduct of the parties.
 The extent of the agent’s authority is determined from the particular
facts and circumstances of the particular situation.
Incidental authority
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Apparent Agency-:

 Agency that arises when a principal creates the appearance of an agency that in
actuality does not exist.
 When an apparent agency is established, the principal is estopped from denying
the agency relationship.
 It is the principal’s actions that create an apparent agency.

Agency by Ratification-:

An agency that occurs when:

1. A person misrepresents himself or herself as another’s agent when in fact he or

she is not, and
2. The purported principal ratifies (accepts) the unauthorized act.

Termination-:
An agent's authority can be terminated at any time. If the trust between the
agent and principal has broken down, it is not reasonable to allow the principal to
remain at risk in any transactions that the agent might conclude during a period of
notice.

As per Section 201 to 210 The Indian Contract Act, 1872, an agency may come to an
end in a variety of ways:

(i) By the principal revoking the agency – However, principal cannot revoke an
agency coupled with interest to the prejudice of such interest. Such Agency is
coupled with interest. An agency is coupled with interest when the agent himself
has an interest in the subject-matter of the agency, e.g., where the goods are
consigned by an upcountry constituent to a commission agent for sale, with poor to
recoup himself from the sale proceeds, the advances made by him to the principal
against the security of the goods; in such a case, the principal cannot revoke the
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agent’s authority till the goods are actually sold, nor is the agency terminated by
death or insanity. (Illustrations to section 201)

(ii) By the agent renouncing the business of agency;

(iii) By the business of agency being completed; (IV) by the principal being
adjudicated insolvent. (Section 201 of The Indian Contract Act. 1872)

The principal also cannot revoke the agent’s authority after it has been partly exercised,
so as to bind the principal (Section 204 of The Indian Contract Act. 1872), though he
can always do so, before such authority has been so exercised (Sec 203 of The Indian
Contract Act. 1872).
Further, as per section 205 of The Indian Contract Act. 1872, if the agency is for a fixed
period, the principal cannot terminate the agency before the time expired, except for
sufficient cause. If he does, he is liable to compensate the agent for the loss caused to
him thereby. The same rules apply where the agent, renounces an agency for a fixed
period. Notice in this connection that want of skill continuous disobedience of lawful
orders, and rude or insulting behavior has been held to be sufficient cause for dismissal
of an agent. Further, reasonable notice has to be given by one party to the other;
otherwise, damage resulting from want of such notice, will have to be paid (Section 206
of The Indian Contract Act. 1872).

As per section 207 of The Indian Contract Act. 1872, the revocation or renunciation of
an agency may be made expressly or impliedly by conduct. The termination does not
take effect as regards the agent, till it becomes known to him and as regards third party,
till the termination is known to them (Section 208 of The Indian Contract Act. 1872).

When an agent’s authority is terminated, it operates as a termination of subagent also.

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Termination of an Agency and Employment Contract-:

 An agency contract is similar to other contracts in that it can be terminated by:

 Acts of the parties, or
 Operation of law;
 Once an agency relationship is terminated, the agent can no longer represent the
principal or bind the principal to contracts;
 Termination by Acts of the Parties-:

An agency may be terminated by the following acts of the parties:

1. Mutual agreement
2. Lapse of time
3. Purpose achieved
4. Occurrence of a specified event

Termination by Operation of Law-:

An agency is terminated by operation of law, including:

1. Death of the principal or agent
2. Insanity of the principal or agent
3. Bankruptcy of the principal
4. Impossibility of performance
5. Changed circumstances
6. War between the principal’s and agent’s countries.

Irrevocable Agency-:

 An agency coupled with an interest:

 Special type of agency relationship,
 This type of agency is irrevocable by the principal,
 Not terminated by the death or incapacity of either the principal or the agent,
 Terminates only when the agent’s obligations are performed,
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Wrongful Termination of an Agency or Employment Contract-:

 The termination of an agency contract in violation of the terms of the agency

contract.
 The nonbreaking party may recover damages from the breaching party.
 The distinction between the power and the right to terminate an agency is critical.
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CONCLUSION:-

Technology is an indispensable instrument of globalization. Its

globalizing potential, however it’s influenced shaped by laws and regulations.
Globalization as we understand it today is a conscious process. People perceive the
world as a single or compressed space. Laws and regulations enables the technology to
achieve its globalizing potential and allow human activity to stretch across borders.
Laws and regulations also help to create powerful non-state actors such as international
organizations and corporations by permitting such actors to come into being and to
acquire sources of power.
The law of agency is an area of commercial law dealing with a
Contractual or Quasi-Contractual, or non-contractual set of relationships when an
agent is authorized to act on behalf of another (called the Principal) to create a legal
relationship with a Third Party. Succinctly, it may be referred to as the relationship
between a principal and an agent whereby the principal, expressly or impliedly,
authorizes the agent to work under his control and on his behalf. The agent is, thus,
required to negotiate on behalf of the principal or bring him and third parties into
contractual relationship. In political science and economics, the principal–agent
problem or agency dilemma treats the difficulties that arise under conditions of
incomplete and asymmetric information when a principal hires an agent, such as
the problem of potential moral hazard and conflict of interest, inasmuch as the
principal is presumably hiring the agent to pursue its, the principal's, interests.
Various mechanisms may be used to try to align the interests of the agent in
solidarity with those of the principal, such as rates/commissions, profit sharing,
efficiency wages, performance measurement (including financial statements), the
agent posting a bond, or fear of firing. The principal–agent problem is found in
most employer/ employee relationships, for example, when stakeholders hire top
executives of corporations. Numerous studies in political science have noted the
problems inherent in the delegation of legislative authority to bureaucratic
agencies. As another example, the implementation of legislation (such as laws and
executive directives) is open to bureaucratic interpretation, which creates
opportunities and incentives for the bureaucrat-as-agent to deviate from the
intentions or preferences of the legislators. Variance in the intensity of legislative
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oversight also serves to increase principal–agent problems in implementing

legislative preferences.
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SUGGESTIONS -:

There are some suggestions gives which was presumption of contract to

contrary-:
Where the contract is made by an agent for the sale or
purchase of good for a merchant resident abroad.
Where the agent does not disclose the name of his principal.
where the principal, though disclosed, cannot be sued.

BIBLIOGRAPHY

• Law of Contract and Specific Relief by Avtar Singh, 9th edi.

• LS Sealy and RJA Hooley, Commercial Law: Text, Cases and
Materials (4th end OUP 2009)
• "http://en.wikipedia.org/wiki/Law_of_agency" The Law of Contract
by M.P. Jain.