Introduction:

In order to understand the whole concept of contract law, and its validity we first have to know about the concept of contract. A contract is an agreement, written or orally, between two people, (a principle and an agent) which binds the two parties in a legal obligation. As said above contracts can be both written and oral according to international standards, however in Bangladesh written contracts have much higher preference and validity. According to Bangladesh’s judicial standards until and unless the contract or agreement is written down, the contract itself does not have an existence if the case is taken to the supreme court of justice. Say for instance, Mr. X (Principle) has agreed to pay Tk. 20000 to his employee (Agent) verbally, however according to Bangladeshi standards he is NOT obligated to pay and there is nothing that could be done by the employee if Mr. X decides to pay them less. On the other hand if the same contract made was to be written on a deed paper the employee would have the direct right to sue Mr. X.  Nonetheless there are some criteria regarding making a contract:

• [1]A party must have capacity to contract
• The purpose of the contract must be lawful
• The form of the contract must be legal
• The parties must intend to create a legal relationship
• The parties must consent.

 Define Contract:

It is an agreement entered into by two parties or more with the intension of creating a legal obligation, which may have elements in writing. [2]

Law of Contract:

Consideration is essential for the validity of a contract. “A promise without consideration is a gift one made for a consideration is a bargain”. –Salmond and Windfield, Law of contract. Not all agreement will be contract enforceable in law- social agreement, for example, or contracts which offend against public decency and public policy and those who involves criminal activity[3].

According to Salmond[4] a contract is an agreement creating and defining obligations between the parties. According to Sir William Anson[5], “A contract is an agreement enforceable at law made between two parties, by which rights are acquired by one or more to acts or forbearances on the part of the others or other.

Sir Willams Anson observes as follows:

“As the law relating to property had it origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract is intended to ensure that what a man has been lead to expect shall come to pass; and that what has been promised to him shall be performed.” [6]

Who are Principals and Agents?

 Principal:

Person who has the prime responsibility for an obligation, who empowers another to act as his representatives as distinguished from one who acts as surety or as an endorser. He engages another to act as his agent. This person is primarily liable to fulfill an obligation.

 Agents:

A person who acts on the behalf of another person, group, business. Who acts as a representative, who has the power or authority to act.  One who is authorized or instructed to obtain or to assist in obtaining information for intelligence or counterintelligence purposes.

 Who are competent to contract?

Every person is competent to contract who is of the age of majority according to the law to which is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.[7]

 Liability of an “agent to principal” and a “principal to agent”:

 Agent to principal:

When 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.[8]

 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.[9]

 Termination of the Law:

[10]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 sections 201 to 210 of the Indian Contract Act 1872, an agency may come to an end in a variety of ways:

1. 1.     Withdrawal by the agent – however, the principal cannot revoke an agency coupled with interest to the prejudice of such 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 agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity (illustrations to section 201);
2. 2.     By the agent renouncing the business of agency;
3. 3.     By the business of agency being completed;
4. 4.     By the principal being adjudicated insolvent (section 201).

The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (section 204), though he can always do so, before such authority has been so exercised (section 203).

Further, as per section 205, 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). As per section 207, 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).

When an agent’s authority is terminated, it operates as a termination of subagent also (section 210).

This has become a more difficult area as states are not consistent on the nature of a partnership. Some states opt for the partnership as no more than an aggregate of the natural persons who have joined the firm. Others treat the partnership as a business entity and, like a corporation, vest the partnership with a separate legal personality. Hence, for example, in English law, a partner is the agent of the other partners whereas, in Scots law where there is a separate personality, a partner is the agent of the partnership. This form of agency is inherent in the status of a partner and does not arise out of a contract of agency with a principal. The English Partnership Act 1890 provides that a partner who acts within the scope of his actual authority (express or implied) will bind the partnership when he does anything in the ordinary course of carrying on partnership business. Even if that implied authority has been revoked or limited, the partner will have apparent authority unless the third party knows that the authority has been compromised. Hence, if the partnership wishes to limit any partner’s authority, it must give express notice of the limitation to the world. However, there would be little substantive difference if English law was amended partners will bind the partnership rather than their fellow partners individually. For these purposes, the knowledge of the partner acting will be imputed to the other partners or the firm if a separate personality. The other partners or the firm are the principal and third parties are entitled to assume that the principal has been informed of all relevant information. This causes problems when one partner acts fraudulently or negligently and causes loss to clients of the firm. In most states, a distinction is drawn between knowledge of the firm’s general business activities and the confidential affairs as they affect one client. Thus, there is no imputation if the partner is acting against the interests of the firm as a fraud. There is more likely to be liability in tort if the partnership benefited by receiving fee income for the work negligently performed, even if only as an aspect of the standard provisions of vicarious liability. Whether the injured party wishes to sue the partnership or the individual partners is usually a matter for the plaintiff since, in most jurisdictions, their liability is joint and several.

 Remedies for breach of Contract:

A party may apply to the court for a number of remedies when the other party is in breach of party contract:

• Damages: as compensation for loss caused by the breach
• Quantum meruit: payment for the value of what he has done
• Specific performance: a court order to the defendant to perform the contract
• Injunction: a court order for the other party to observe negative restriction
• Rescission: cancellation of a contract
• Action for the price: here the breach is failure to pay[11]

Damages: it is primarily intended to restore the party who has suffered loss to the same position he would have been in if the contract had been performed. In a claim for damages the first issue is remoteness of damages, secondly ‘measure of damages’ the court must decide how much money to award in respect of the breach and its relevant consequences measure of damages.\

Quantum Meruit: payment for the value of what he has done, a claim may be made on a quantum meruit basis as an alternative to an action for damages for breach of contract. In most cases the claim is needed because the other party has unjustifiably prevented performances.

 Specific performance: the court may in this discretion order the defendant to perform his part of the contract instead of letting him buy himself out of it by paying damages for breach.

 Injunction: an injunction is also a discretionary court order requiring the defendant to observe a negative restriction of a contract. It may be made even to enforce a contract of personal service for which specific performances would be refused.

 Action for the price: if the breach of a contract arises out of one party’s failure to pay the contractually agreed price due under the contract the creditor should bring an action to recover that sum.

 Rescission: According to sources,[12] “Rescission simply means a contract has been cancelled or rejected and both the parties (Principle and Agent), are restored to their pre-contract condition as if it never been entered into.” This means that if a contract is formed between two or more parties it may switch back to a “non-contract” state when the whole contract gets cancelled off or rejected due to misrepresentations.

                       Such a rescission is the Mutual Rescission, or rescission by agreement, which is the cancellation of agreement based on the obligations faced after issuing new agreement over the original contract but prior to its performance. Such an example is: Mr. X and Mr. Y are wealthy businessman willing to make a big contract, the agreements have been changed a couple of times in the contract however there is one major disagreement over the agreement as such the whole contract had to be cancelled and the whole situation went back to its original state.

[13]In finance, law, and insurance, rescission is the termination of a contract from the beginning (as if it never existed), rendering it. In 2008, one judge ruled that borrowers who refinanced into an adjustable-rate mortgage could force a bank to rescind mortgage loans if it acted similarly inappropriately. Rescission is typically viewed as “an extreme remedy” which is “rarely granted”.

                    Rescission can be carried out mutually, in the knowledge of both the parties or by the Principle. The principle has the authority to overrule certain agreements at times. Meaning if an employee is hired under the contract of two years, he/she is under the obligation to be fired before two years based on the employee’s performance in the company. Even if the employee (agent) is unaware of the condition the contract will be carried out as valid and will be in effect.

So as per question the principle has the power to terminate a contractual relationship without informing the agent after the rescission of contract.

 Conclusion:

However despite all of this there are different conditions, consequences based on which a contract can be certified as valid or invalid, such as the fact that despite termination of a contract without the knowledge of the agent can be carried out as valid after the rescission of a contract. Every contracts gives rise to certain legal obligations or the court enforces duties on the part of the contracting parties and the legal obligations. Once the trust is broken down then it will not be a wise decision to carry on the contract any further.

Bibliography:

1. http://en.wikipedia.org/wiki/Contract/Formation
2. http://en.wikipedia.org/
3. Magazine Insight Law (Daily online law news and law blogs)
4. Salmond-Jurisprudence
5.  Sir William Anson, Law of Contract
6. www.ma-law.org.pk
7. http://www.wickipedia.org/MainArticles:ApparantauthorityandEstoppel
8. http://en.wikipedia.org/wiki/Rescission.

Introduction:

In order to understand the whole concept of contract law, and its validity we first have to know about the concept of contract. A contract is an agreement, written or orally, between two people, (a principle and an agent) which binds the two parties in a legal obligation. As said above contracts can be both written and oral according to international standards, however in Bangladesh written contracts have much higher preference and validity. According to Bangladesh’s judicial standards until and unless the contract or agreement is written down, the contract itself does not have an existence if the case is taken to the supreme court of justice. Say for instance, Mr. X (Principle) has agreed to pay Tk. 20000 to his employee (Agent) verbally, however according to Bangladeshi standards he is NOT obligated to pay and there is nothing that could be done by the employee if Mr. X decides to pay them less. On the other hand if the same contract made was to be written on a deed paper the employee would have the direct right to sue Mr. X.  Nonetheless there are some criteria regarding making a contract:

• [1]A party must have capacity to contract
• The purpose of the contract must be lawful
• The form of the contract must be legal
• The parties must intend to create a legal relationship
• The parties must consent.

 Define Contract:

It is an agreement entered into by two parties or more with the intension of creating a legal obligation, which may have elements in writing. [2]

Law of Contract:

Consideration is essential for the validity of a contract. “A promise without consideration is a gift one made for a consideration is a bargain”. –Salmond and Windfield, Law of contract. Not all agreement will be contract enforceable in law- social agreement, for example, or contracts which offend against public decency and public policy and those who involves criminal activity[3].

According to Salmond[4] a contract is an agreement creating and defining obligations between the parties. According to Sir William Anson[5], “A contract is an agreement enforceable at law made between two parties, by which rights are acquired by one or more to acts or forbearances on the part of the others or other.

Sir Willams Anson observes as follows:

“As the law relating to property had it origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract is intended to ensure that what a man has been lead to expect shall come to pass; and that what has been promised to him shall be performed.” [6]

Who are Principals and Agents?

 Principal:

Person who has the prime responsibility for an obligation, who empowers another to act as his representatives as distinguished from one who acts as surety or as an endorser. He engages another to act as his agent. This person is primarily liable to fulfill an obligation.

 Agents:

A person who acts on the behalf of another person, group, business. Who acts as a representative, who has the power or authority to act.  One who is authorized or instructed to obtain or to assist in obtaining information for intelligence or counterintelligence purposes.

 Who are competent to contract?

Every person is competent to contract who is of the age of majority according to the law to which is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.[7]

 Liability of an “agent to principal” and a “principal to agent”:

 Agent to principal:

When 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.[8]

 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.[9]

 Termination of the Law:

[10]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 sections 201 to 210 of the Indian Contract Act 1872, an agency may come to an end in a variety of ways:

1. 1.     Withdrawal by the agent – however, the principal cannot revoke an agency coupled with interest to the prejudice of such 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 agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity (illustrations to section 201);
2. 2.     By the agent renouncing the business of agency;
3. 3.     By the business of agency being completed;
4. 4.     By the principal being adjudicated insolvent (section 201).

The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (section 204), though he can always do so, before such authority has been so exercised (section 203).

Further, as per section 205, 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). As per section 207, 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).

When an agent’s authority is terminated, it operates as a termination of subagent also (section 210).

This has become a more difficult area as states are not consistent on the nature of a partnership. Some states opt for the partnership as no more than an aggregate of the natural persons who have joined the firm. Others treat the partnership as a business entity and, like a corporation, vest the partnership with a separate legal personality. Hence, for example, in English law, a partner is the agent of the other partners whereas, in Scots law where there is a separate personality, a partner is the agent of the partnership. This form of agency is inherent in the status of a partner and does not arise out of a contract of agency with a principal. The English Partnership Act 1890 provides that a partner who acts within the scope of his actual authority (express or implied) will bind the partnership when he does anything in the ordinary course of carrying on partnership business. Even if that implied authority has been revoked or limited, the partner will have apparent authority unless the third party knows that the authority has been compromised. Hence, if the partnership wishes to limit any partner’s authority, it must give express notice of the limitation to the world. However, there would be little substantive difference if English law was amended partners will bind the partnership rather than their fellow partners individually. For these purposes, the knowledge of the partner acting will be imputed to the other partners or the firm if a separate personality. The other partners or the firm are the principal and third parties are entitled to assume that the principal has been informed of all relevant information. This causes problems when one partner acts fraudulently or negligently and causes loss to clients of the firm. In most states, a distinction is drawn between knowledge of the firm’s general business activities and the confidential affairs as they affect one client. Thus, there is no imputation if the partner is acting against the interests of the firm as a fraud. There is more likely to be liability in tort if the partnership benefited by receiving fee income for the work negligently performed, even if only as an aspect of the standard provisions of vicarious liability. Whether the injured party wishes to sue the partnership or the individual partners is usually a matter for the plaintiff since, in most jurisdictions, their liability is joint and several.

 Remedies for breach of Contract:

A party may apply to the court for a number of remedies when the other party is in breach of party contract:

• Damages: as compensation for loss caused by the breach
• Quantum meruit: payment for the value of what he has done
• Specific performance: a court order to the defendant to perform the contract
• Injunction: a court order for the other party to observe negative restriction
• Rescission: cancellation of a contract
• Action for the price: here the breach is failure to pay[11]

Damages: it is primarily intended to restore the party who has suffered loss to the same position he would have been in if the contract had been performed. In a claim for damages the first issue is remoteness of damages, secondly ‘measure of damages’ the court must decide how much money to award in respect of the breach and its relevant consequences measure of damages.\

Quantum Meruit: payment for the value of what he has done, a claim may be made on a quantum meruit basis as an alternative to an action for damages for breach of contract. In most cases the claim is needed because the other party has unjustifiably prevented performances.

 Specific performance: the court may in this discretion order the defendant to perform his part of the contract instead of letting him buy himself out of it by paying damages for breach.

 Injunction: an injunction is also a discretionary court order requiring the defendant to observe a negative restriction of a contract. It may be made even to enforce a contract of personal service for which specific performances would be refused.

 Action for the price: if the breach of a contract arises out of one party’s failure to pay the contractually agreed price due under the contract the creditor should bring an action to recover that sum.

 Rescission: According to sources,[12] “Rescission simply means a contract has been cancelled or rejected and both the parties (Principle and Agent), are restored to their pre-contract condition as if it never been entered into.” This means that if a contract is formed between two or more parties it may switch back to a “non-contract” state when the whole contract gets cancelled off or rejected due to misrepresentations.

                       Such a rescission is the Mutual Rescission, or rescission by agreement, which is the cancellation of agreement based on the obligations faced after issuing new agreement over the original contract but prior to its performance. Such an example is: Mr. X and Mr. Y are wealthy businessman willing to make a big contract, the agreements have been changed a couple of times in the contract however there is one major disagreement over the agreement as such the whole contract had to be cancelled and the whole situation went back to its original state.

[13]In finance, law, and insurance, rescission is the termination of a contract from the beginning (as if it never existed), rendering it. In 2008, one judge ruled that borrowers who refinanced into an adjustable-rate mortgage could force a bank to rescind mortgage loans if it acted similarly inappropriately. Rescission is typically viewed as “an extreme remedy” which is “rarely granted”.

                    Rescission can be carried out mutually, in the knowledge of both the parties or by the Principle. The principle has the authority to overrule certain agreements at times. Meaning if an employee is hired under the contract of two years, he/she is under the obligation to be fired before two years based on the employee’s performance in the company. Even if the employee (agent) is unaware of the condition the contract will be carried out as valid and will be in effect.

So as per question the principle has the power to terminate a contractual relationship without informing the agent after the rescission of contract.

 Conclusion:

However despite all of this there are different conditions, consequences based on which a contract can be certified as valid or invalid, such as the fact that despite termination of a contract without the knowledge of the agent can be carried out as valid after the rescission of a contract. Every contracts gives rise to certain legal obligations or the court enforces duties on the part of the contracting parties and the legal obligations. Once the trust is broken down then it will not be a wise decision to carry on the contract any further.

Bibliography:

1. http://en.wikipedia.org/wiki/Contract/Formation
2. http://en.wikipedia.org/
3. Magazine Insight Law (Daily online law news and law blogs)
4. Salmond-Jurisprudence
5.  Sir William Anson, Law of Contract
6. www.ma-law.org.pk
7. http://www.wickipedia.org/MainArticles:ApparantauthorityandEstoppel
8. http://en.wikipedia.org/wiki/Rescission.