A Principal and an Agent is a part of contract. But termination of such relation without the knowledge of the agent may not render the act invalid

A Principal and an Agent is a part of contract. But termination of such relation without the knowledge of the agent may not render the act invalid which has been done after the recession of contract-explain and evaluate the statements in the parlance of law of Contract, 1872.


This statement stated how relation between a principal and a contract must be treated. Thus it focused on their relation under the Law of Contract. According to the law, it is understood that the agent will work for and on behalf of the principal under any contract. An agent has some obligation of loyalty to the principal and he will follow the instructions given by the principal and must not disobey them intentionally or negligently. He cannot make any improper conduct under any circumstances. In return the principal must repose trust and confidence to the agent. That makes a relation more trustworthy and the agent stays faithful during the contract period. The contract between the principal and the agent might be made expressively or impliedly. It is also necessary to identify that whether any third party is involved in this contract or not.

Here we need to explain this situation from two points of view. First, we have to prove that how the contract between the agent and the principal falls under the law of Contract as well as Agency act and valid from all legal perspective. Secondly, how the violation of this contract without the knowledge of the agent is treated by these two laws. Previous records regarding this type of case will be analyzed here and the discharge procedure will be discussed. Law of Agency clearly tells us about the authority of any contract and how this contract can be dissolved. So, in this case, we will try defining the agent, principal and third party involvement through the Law of Agency and establishing a connection between them and a contract under the Law of contract, 1872.

1. The Key Terms:

a. Who can be a Principal?

A person who falls under legal capacity which means he or she is not insane or minor to perform an act and who is also capable of empowering an agent to carry out an act. For example- persons, corporations, not for profit organizations, and government agencies all are counted as principals and appoint agent. A principal must be certified from all kinds of legal frames. A person or any organization must meet the above criteria to be considered as a principal.

b. Who can be an agent?

An agent can be any individual who is capable of undertaking a task to serve according to what the principal wants. Under the Law of agency the person with the ability to work under any circumstances given by a principal to control or manage a third party is called an agent. A proper definition of agent given in the law of contract 1872 where it stated that an agent is employed to do any act for another or represent anyone in dealing with a third party.

c. What is Agency?

Agency can be defined as term between the principal and the agent where an agent on behalf of a principal is considered to be the contract of the principal and not that of the agent. Here this contract allows the principal to nominate someone to carry out his activities may be for a special purpose[2]. This agreement can be formal or informal but the acts must be backed by legal enforce.

d. Obligations of agent to the principal:

The instructions given by the principal must be obeyed by an agent. These instructions are not unreasonable but they are very specific. An agent must avoid things that are not stated expressly or impliedly in the contract. He needs the authorization of the principal before doing or taking any initiative. Above all, the agent must be loyal to his agent. The agent must try to ignore situations where a conflict may arise between his interest and his principal’s[3]. Most importantly, the principal must be informed by all the activities done by the agent.

2. Define Agency Act:

Law of agency is a commercial law which can be made under contract, quasi contract or non contract between an agent and a principal. The relation between this two must be treated from commercial and legal perspective. This law clearly states who the agent is and who the principal is. How they can come under legal constraints and legal obligations. The law also defines and explains the legal authority of a contract and the actions to be taken if there is any violation.

a. Criteria of a Principal:

Under this agency act, the legal principal can be:

1. A person who holds the power of attorney and has a professional relation with the agent.

2. A person who is in legal transactions with another person and in that case, that second person is bound to the first one who is considered his principal.

3. An agent does one or a series of transactions with his principal over a limited period of time. Here, time constraint is very important.

b. Define Authority:

The agency act clearly defines authority from three aspects. So, an authority or a principal can be of three classes depending on their acts or contracts they are performing with an agent. The recognized authorities under law are: actual authority, apparent authority, and ratified authority.

· Actual Authority: This kind of authority is explained from two positions based on the contract it is acting upon. Here the authority is certified either expressly or impliedly which is more from a consensus agreement. In these cases, the agent comes under indemnity if he works within the scope of the main authority. Until or unless any breach of contract or any of its clauses takes place, the person is legally considered as the agent. A part from that, the agent wants sort of warranty from his principal or vice versa that both parties will act upon the acts of the contract.

i) Express Actual Contract: Here the agent expressly committed that he will act according to what he has been told by his principal.

ii) Implied Actual Contract: This type of actual is performed in firms and big corporations where everybody is bound to act upon the corporation rules. In this case, the authority is called the ‘usual authority’ because the agents are acting on the basis of their virtues not on any sort of contract.

· Apparent Authority: Apparent authority is also known as the ‘ostensible authority’ that is counted as the authority based on his acts or conducts or words of mouth. These sorts of activities prove or make the third party believe that a person can work as an agent even though there is no such contract between them. In some cases, the principal never discussed anything with the agent. In big companies or the big stars keep their own agents who deal with the third parties whereas they have no contracts with those individuals. But the agents in this case have the power which is given by his authority to act on behalf of him. The can actually believe the agent and act reasonably to perform his part in the deal. The principal will have to accept whatever the work done by his agent because he has the legal power of attorney and there is no way the principal can deny any action taken by that agent. It is also important to know that the principal can escaped from being the authority if the third party changes his position and the agent is the one who has to take care of this situation. So any kind of misconduct done by the third party violating the contract if harms the principal, the agent will be responsible for that and the principal may ask for remedies or compensation directly from his agent. Rama Corporation Ltd v Proved Tin and General Investments Ltd case is a good example of this type of authority.

c. Duties of an Agent:

Duties of an agent can be seen from three angles. Agents need to perform towards the party, for the principal and in return the principal must do certain duties for the agent.

· Depending on the relation between the agent and the principal, duties are mainly determined. If the agent represents an actual or apparent authority, he has no legal bindings for his acts within the scope of the authority. This is because the agency relationship is already disclosed. If this was not disclosed only then the principal and the agent both would have been partially or fully responsible for their acts. The purported agent is actually liable to the third party not the principal.

· As we discussed earlier, the agent has to do his duties according to his principal’s wish. Principal would ask for clarification to his agent because the right of indemnity or the power of attorney is been transferred to the agent. So, for any kind of gain or loss made by agent must be answered to the principal. The principal has every right under the agency act to ask for clarification to his agent.

· If the agent work properly and abide by the rules of his principal, he must be paid according to the contract. The principal must bear all the expenditures incurred by the agent while working for his master. In the contract, it must be written clearly how the payment must be made to the agent and the actions to be taken if there is any violation.

d. The Watteau v Fenwick Case:

Here Plaintiff, Watteau sold goods to a pub manager named Humble who thought that Humble was the pub owner. Later on, he came to know that Fenwick was the actual owner who sought to collect the unpaid balance of goods purchased by Humble.

In this case, Lord Coleridge CJ defended an opinion made by Wills J that a third party can personally be liable to a principal who he did know about when he did something to an agent outside of its authority. Wills J gave a clear statement regarding authority and the agent-principal relationship. This decision was criticized by all that time. But all over UK, it was referred as usual authority. After that, the position of an authority by virtue can be determined as stated below:

Fraud and other harms done while dealing with agents is recognized by the concept of “inherent agency power” It is derived solely from agency relation. Say for example, partners in joint and several businesses. In addition, in corporations, this type relationship is seen. In this case, even though the agent acts without authority, but the principal can ratify these transactions and take the liability as par negotiated.

3. Alignment of Contract Act-1872 and Agency Act:

In law of contract, the relationship between a person and another exists when the first involves the second to do something for him. The law of agency governs the legal relationship between two parties and the law contract tells us how this relationship can be legalized. The law also ensures that the external business with other economic units and the powers of other representatives can be viewed from a legal position. It also specifies certain duties for certain people who act as representatives.

The agent- principal relationship under agency act can be lawful if the contract between them is accepted by certain sections mentioned in Contract Act- 1872. An agent can only have a lawful relation with principal if there is a lawful agreement between the two parties. The considerations of an agreement must be:

· Forbidden by law.

· Must have the content to defeat any provisions of law.

· The court must consider it as moral and does not harm the public interest.

· Any violation of this agreement must be compensated (applicable for both parties).

The agency act must maintain some acts mentioned in section 11 of Contract Act.

· No party can be the minor.

· Both parties must sound mind before get the contract go through.

· Parties cannot be legally disqualified.

Consent of both parties:

Under section-14 of contract Act, two parties can come at one point with mutual consent. They have to agree upon some common facts which are stated in the contract. Same rules follow for agent-principal relationship. How a principal and an agent can give their consent to form a legal agreement can be described in the following sections of Contract Act:

1. Coercion (Section 15): “Coercion” is the committing, or threatening to commit, any act forbidden by the Indian Penal Code [4] or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

2. Undue influence (Section 16): “Where a person who is in a position to dominate the will of another enters into a contract with him and the transaction appears on the face of it, or on the evidence, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in the position to dominate the will of the other.”

3. Fraud (Section 17): “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract.

4. Misrepresentation (Section 18): “causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement”.

5. Mistake of fact (Section 20): “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void”.

These above mentioned sections must be understood by both the parties before giving their consents in any kind of agreement.

4. Termination of Principal- Agent relationship:

The relation between the agent and the principal might break up at any time due to lots of reasons. The principal has the authority to terminate his agent at any time if he can come up with any reasonable cause or he can prove the violation of any clause in the contract. It generally occurs when the principal finds that any activity or any transaction done by the agent may harm his image or business. Termination of agency relation is clearly mentioned in Indian Contract Act 1872, more specifically in section 201-210. The ways are:

a) Withdrawal by agent- the law does not permit the principal to revoke an agent if his interest is associated with the reason. An agency is coupled with interest when the agent himself has an interest in the subject-matter of the agency.

b) By the agent renouncing the business of agency.

c) By the business of agency being completed.

d) By the principal being adjudicated insolvent (section 201).

e) According to section 204, the principal cannot revoke the authority of the agent if it is already in practice or the agent has exercised it while making a deal.

f) In section 203, it is stated that if the agent has not exercised the authority yet, then this relation can be revoked any time by the principal.

g) Section 205 states the time period of the agency relationship. Every contract has a specific duration. A principal cannot terminate his agent before that period ends. The principal as I said earlier must have reasonable causes to get rid of his agent. Otherwise he will have to compensate the agent with a heavy loss. The reasons that may cause a termination could be illegal advantage from the agency, unexpected behavior, break any law of the contract etc. on top of that, if the agent is found guilty and is about to be fired, the principal must give a notice to the agent stating the reasons of the termination. He also might ask for proper reason why he won’t be terminated.

h) Next come to section 206 which states how the agent would be compensated after the termination of the agency. The agent has the right to be paid as par written in the agreement. Section 207 says the way the termination can be executed. It can be done in a expressive or implied format. Section 208 states from when the termination would be effected. Once the agent is discharged and the third party involved in this contract gets to know about this termination, the revocation executes from that point of time. Section 210 approves the termination and accepts it from legal perspective.

a. Examples of termination of Agency Contract:

1) A company called Will Spring used to supply frozen fruits to different cities in USA. To do so, they were in a contract with Edge advertising ltd. This company acted as Will’s agent to supply frozen products. After having a nice relation with this company came the time when Will decided to stop their business with Edge and turn their attention to commercial products. As these two companies were in a contract, Will had to compensate Edge during the time of termination of agency and they also gave 3 months time to Edge before the contract ended.

2) Back in 2005 3D seller had a contract with 3 year contract with Simon add agency to promote their products during the Christmas but that did not bring any success to company’s sales. The sales did not increase that much so they decided to terminate the contract after just 1 year. But as the two companies were in a contract 3D seller gave a 6 months’ notice to Simon to with a healthy amount of compensation. In that period of time, Simon could find a new client and same went for 3D seller. They found a new ad agency to promote its products for the next Christmas.

b. Indemnities under Contract Law:

According to the court of India, under contract law an agent can claim indemnity if he can prove that his termination was illegal. In this case, agent can only look for compensation if he abides by the rules that were written expressively or impliedly in the contract. There are some special conditions that are mentioned in the contract. In those cases, when special situation arises, the agent must be compensated heavily during termination. It sometimes causes loss to the principal. The contract law suggests some conditions for this indemnity which are written in section 222 to 225.

c.Conditions for Indemnity under Contract law:

1. According to section-222 the agent must be indemnified if he does his act upon his authority and lawfully and the consequences are accepted by the law.

2. According to section-223, the principal must indemnify his agent if he acts in good faith even though it harms a third party.

So it clearly states that if the agent gets the authority to act upon his principal and does his work lawfully, then there is no way the principal can terminate him without being compensated. The moral of these two sections are, even though an agent makes loss for his principal, if he his law while doing hi acts, he must be compensated or he must be indemnified.

In these two sections, the acts of an agent are clearly mentioned. The acts of an agent cannot be illegal. He cannot make any contract with a third party without the consent of his principal. Most importantly, an agent cannot involve himself in kind of criminal activity. So the agent must work within his scope if he wants to stay on the safer side. Section-225 also makes it clear that if the agent gets injured while working for his principal and within hi scope, he must be compensated. The principal must take the liability to take full care of his agent. Indian court has clearly identified the cause which may lead to termination of the contract.

The Indian Court has stated the following causes as ‘sufficient’ to terminate an agent:

· Loss of reputation of an agent.

· Mental or physical incapacity of an agent.

· Misconduct on the part of an agent.

· Taking bribes.

Apart from these four causes, an agent can sue a principal if he has been terminated and not been compensated in three years time after the termination according to an act.

5. Conclusion:

From this discussion, we get to know that agent-principal relationship is a pure contractual one and is certified by both the Agency act and the Contract act. The two acts clearly states how an agent and a principal can come to a contract and how this contract must be treated. If we combine these two acts, we will understand there is not much difference between them and their sections. Both are complement to each other and must be recognized together while evaluating a contract. In the later sections of these laws, they state how the termination of contract might be lawful and in case illegal breech, how the minor and the principal will be treated. Finally, these two acts narrowed down the fault might caused by an agent and if he is right and lawful. How he will be compensated. The agent also gets the right of indemnity and how he could get that is clearly mentioned in these acts and certified by Indian court. Proper conduct of these acts is exercised by the Indian court and they have given certain observations how the agent-principal relation must be dealt.


1. W, Gabler. (2001). Indian Contract 1872. Oxford Press.p.p: 287-411.

2. B, Nilima. (2007). Contract law in India. p.p: 312-356.

3. W, Anirudh. (2011). Indian contract act, 13th edn. Prentice Hall.

4. South Ndlo. (2000). The agency act. Hyderabad: NDLO press.

p.p:1- 16.

[1] Contract Act 1872 defines Agent as “a person employed to do any act for another or to represent another in dealings with third persons”

[2] purchasing a house or generally to conduct many transactions

[3] one might reflect on the role of certain Enron executives on “outside” limited partnerships that did business with Enron in the early 2000s

[4] under(45,1860)