Although this relationship is contractual one, it is not possible to interpret this term according to the other contractual rules and regulation
1. Introduction:
We enter into contracts day after day. But in many cases we do not even realize that we are making a contract. In the cases of people engaged in trade, commerce and industry, they carry on business by entering into contracts. The law relating to contracts is to be found in Contract Act 1872.
The law of contracts differs from other branches of law in a very important respect. It does not lay down so many precise rights and duties which the law will protect and enforce; it contains rather a number of limiting principles, subject to which the parties may create rights and duties for themselves and the law will uphold those rights and duties. Thus, we can say that the parties to a contract, in a sense make the law for themselves. So long as they do not transgress some legal prohibition, they can frame any rules they like in regard to the subject matter of their contract and the law will give effect to their contract.
Section 2(h) of the Contract Act, 1872 defines a contract as an agreement enforceable by law. Section 2(e) defines agreement as “Every promise and every set of promises forming consideration for each other.” Section 2(b) defines promise in these words: “When the person to whom the proposal is made signifies his assent there to, the proposal is said to be accepted. A proposal when accepted becomes a promise.”
In contract law the principal, agent and third parties are also important issues. 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.
2. The Principal:
The person who has the legal capacity to perform an act may be a principal.[1] Here, having legal capacity means the person must not be insane or in certain circumstances a minor. The principal has some duties on his agent. The principal has to indemnify against consequences of all lawful acts of agent and the agent against consequences of acts done in good faith. The principal must have to pay the agent the commission or other remuneration agreed. In return of his duties the principal has also some rights from the agent. In the agency relationship the principal has the right to repudiate the transaction. Principal can demand any resulted benefit from the agent. The principal must have to co-operate the agent in accomplishing his duties.
3. The Agent:
According to the Contract Law 1872 “An agent is one who represents another, called the principal, in dealings with third persons.” Such representation is called Agency. An agent is bound to conduct the business of his principal according to the directions given or in the absence of directions according to the custom. He is bound to render proper accounts to his principal and has duty, irrespective of any contract to that effect, to produce vouchers by which items of disbursements are supported as part of the obligation to render proper accounts to the principal on demand. It is the duty of an agent in cases of difficulty, to use all reasonable diligence in communicating with his principal and seeking to obtain his instruction. The agent must have to work for principal’s benefit not for the benefit of himself or the third party. The agent has to follow all the lawful directions from the principal. The agent has to give all the notification that come to agent’s attention concerning the subject matter of agency.
4. The Third Party:
Third party is that person or entity who is served by the agency relationship between the principal and the agent. The principal has some liability on third party. Principal must have to appoint authorized agent. The agent must have a power arising from the agency relationship and not dependent on authority. Unless the principal was undisclosed the third party is liable to the principal on the terms of the agreement made with the agent. There is clear evidence that either the agent or the principal knew that the third party would not have entered into the agreement if they had known of the principal’s involvement.
5. Agency Relationship:
A contract to be made by an agent on behalf of a principal is considered to be the contract of the principal and not that of the agent. Through this contract the principal allows an agent to carry out his duties. The acts must be legal and the agency relationship is usually entered into by both formal and informal agreement.
The agent assumes an obligation of loyalty to the principal that he will follow the principal’s instructions and will neither intentionally nor negligently act improperly in the performance of the act. An agent can’t take personal advantage of the business opportunities. A principal, in turn, reposes trust and confidence in the agent. These obligations bring forth a fiduciary relationship of trust and confidence between principal and agent.
The agent must not do acts that are not expressly or impliedly authorized by the principal. During performing duties the agent must use reasonable care and skill. Most importantly the agent must be loyal to principal. The agent must have to keep himself away from such a position that would ordinarily encourage a conflict between the agent and principal’s interest. The agent must keep the principal informed about all the facts that affect the agency relationship.
When the agent discloses to the third party that he is acting as an agent of a principal and he concludes the authority, the general rule is that the contract is made between the principal and the third party and the agent can’t sue or be sued on the contract. Here, the only function of the agent is to negotiate the contract on behalf of his principal and once he has done that he leave his principal as the true party to the contract.
6. Formation of Agency relationship:
Any person who is at the age of majority can employ an agent.Between the third person and principal any person can be agent but he must not be minor. No consideration is needed to create an agency.
A. Agency by Appointment:
An agency is created by express appointment when the principal appoints the agent. This can be an oral or written agreement. An agent may agree to act in consideration for a reward. On the other hand, an agency can be held for no consideration.
B. Agency by Estoppels:
Agency by estoppel arises when principal makes a representation to a third party, whether by words or conduct, that he appoints an agent, and subsequently that third party deals with agent in relevance on such representation. Agency by estoppel is sometimes called implied appointment of agent.
C. Agency by Ratification:
Agency by ratification arises when principal ratifies an act which has already been done in his name and on his behalf by the agent who in fact, had no actual authority to act on his behalf when the act was done. Ratification only creates agency relationship between the principal and the agent only in respect of the act ratified by the principal.
D. Agency of necessity:
Agency of necessity arises when a person is faced with an emergency in which the property of another person’s in imminent jeopardy and it become necessary to preserve the property. It is necessary only when it is impossible for the agent to communicate with the principal before the agent acts on behalf of the principal.
7. Termination of Agency Relationship:
The relation of principal and agent can only be terminated by the act or agreement, rescission or by the operation of law. The agent’s authority can be terminated at any time.
An agency comes to an end in different ways, the withdrawal of the relationship by the agent himself.
· By the agent renouncing the business of agency
· By the business of agency being accomplished.
· By the principal being insolvent
The agent’s duty to act on behalf of the principal ends after the termination of the agency, the timeframe for termination of an agency can be determined by a particular statute or instrument. In such a case if the instruments specifies plain terms that an agency will terminate without action on the part of the principal or agent upon the expiration of the time specified in the instrument, the agency will in fact, terminate. If, after expiration of the time, the parties continue their relationship as principal and agent, a presumption is renewed for a similar period. For example, if the parties entered into a contract for one year and continued that relationship even after one year, the law will presume that the parties are intended to keep the contract alive for another year. On the other hand, if the parties didn’t fix any timeframe for the termination of contract, the contract will be terminated after a reasonable time. This reasonable timeframe will be determined by the nature of the act specifically authorized, the formality of the authorization, the likelihood of changes in the purposes of the principal and other factors. An agency created for a specific purpose is terminated once the particular purpose for which it was created was accomplished. After the termination, the agent is not liable for any duty to the principal arising from that relationship. The parties can terminate the relationship by mutual agreement. The relationship requires the mutual assent of both parties and both parties have the power to withdraw their assent. It may not be terminated by the act of one of the parties and should be done mutually. An agency contract may be cancelled on the basis of express stipulation. In such a case, the parties will have a right of cancellation at the will of either party. Principal can’t cancel the agreement at will as long as the agent fulfills his part of the agreement. But, the principal can cancel the contract for any justifiable cause.[2] An agency may be revoked at the will of the principal when an agency is not coupled with interest. The party who is terminating the contract must show good reason. If the right to cancel an agency contract depends on some contingency, the cancellation must be justified by establishing the happening of such contingency. An agency contract to be performed to the principal’s satisfaction can be canceled at will of the principal. A power of attorney constituting an agency may be revoked at any time, with or without reason. In addition an agency may be terminated by operation of law. The death of the principal leads to an immediate revocation of the agent’s authority. The rule also valid if the agency is created with more than one principal. If any one of the principal dies the agency comes to an end. The loss of capacity of a party due to temporary or permanent mental incompetence results the termination of the agency relationship. Thus, the termination of the agent’s authority due to loss of capacity of the principal does not affect third party’s right. Similarly, bankruptcy of the principal is another valid reason to terminate the agency relationship. The loss or destruction of the agency or the termination of the principal’s interest is another reason for terminating the agent’s authority. In addition, a change of law making may terminate an agency contract.
Although agency can be terminated at will, law says that notice must be given to the party affected by termination. But, express notice to the agent about the revocation is not always necessary. In that case, the affected party has to actually know the facts resulting from such revocation. The principal has to provide sufficient notice to third parties about the revocation of agent’s authority. If it is not done, then the acts of an agent after his revocation of authority may bind a principal against the third party who rely on the agency’s continued existence. That means the principal can terminate an agent’s authority at any time without any notice. If the trust between the agent and principal breaks down there is no reason to continue agency relationship to remain at risk. There is no need of formal written notice to third party for terminating the agency relationship. In that case, actual notice of termination is sufficient. This notice can be showed as a written and oral communication from the principal or the agent.
8. Recession of the Contract:
In the agency relationship principal appoints an agent to work on behalf of him where the actual contract is made with the third party. So the contract of principal with the third party can be recessed in several ways.
· Fraud and Misrepresentation:
Fraud and misrepresentation are false statements which are used to make a contract. They must be related to a present or past important fact. In this case a contract with third party can be terminated.
· Mistake:
Mistake happens if either party believes that a fact about the contract is not true. Mistake invalids this agency relationship, because, law does not excuse negligence. So in case of this mistake the recession of contract can happen.
· Duress:
Duress means when either party pressurizes other party to make a contract. A contract made under duress is not enforceable by law. In that case, contract can be recessed.
· Lack of Consideration:
Lack of consideration means when there is a promise to do something but either party of contract does not do that. In that case also the contract can be recessed.
· Impossibility of Performance:
Impossibility of performance happens if a situation occurs where it seems that the completion of contract is impossible. In this case also the contract can be recessed.
· Rescission:
Rescission may happen when both parties has right to cancel the contract which means the contract will be in that position where it was before entering into.
Where the third party acquires a right to enforce a term of the contract, there will be a remedy available to him in an action for recession of the contract. In that case, the normal rule of contract law will be applied to the third party’s right of action.
9. Agency Termination after the Recession of Contract:
We know recession means the cancellation of the contract. That means a recessed contract is terminated from the beginning as though the contract never existed. When there is any misunderstanding between the parties then the contract can be recessed. Though the recession process the third party either can make a new contract with the principal or can cancel the entire contract. Although there are many remedies of the recession of the contract like rescission, novation, accord and satisfaction, after recession of contract the agreement that was made initially between principal and third party will be cancelled.
We know that in case of agency relationship the principal is appointing an agent to serve the third party on behalf of the principal. In that case, principal is bound to inform the agent about each and every step he is taking about the contract. On the other hand, the agent is also bound to inform each and every step of himself to the principal, so both the principal and the agent are working for the sake of the third party. So, if there is any contract between the principal and the third party where the agent is appointed to serve the third party, in those cases only the principal has to inform the agent about the initiative he is taking about the contract. But if the contract between the principal and third party recesses, then there is no bindings on the principal to inform the agent about the initiatives, he is taking about the contract. In that case, the principal has the right even to terminate the relationship between himself and the agent also, because, the principal appointed the agent to serve the third party on behalf of him. If the actual contract between the principal and third party never exists, then there is no value of the agency relationship between the principal and the agent. So, there is no binding on principal to continue this agency relationship also. So, the principal can terminate or take any initiative after recession of the contract without the knowledge of the agent.
10. Conclusion:
We know contract is an agreement between two parties which is enforceable by law. Once any party formally agrees to enter into a contract, it is their duty to fulfill their contractual responsibilities. Agency relationship is also a part of contractual relationship three parties like the principal; the agent and the third party are involved. Under the agency relationship also the agent is bound to act according to the principal’s will. An agency relationship arises where one party, the agent, is authorized by another, the principal, to negotiate and to enter into contracts on behalf of the principal. Once an agency relationship is created, the agent is thereby authorized to commit the principal to contractual relationships with third parties. This agency relationship is specialized area of contract law. But there are some conditions under which this agency relationship can be terminated. After termination this relationship never exists. So there is no relationship between the principal and the agent. Agency relationship only exists due to the involvement of third party. The contract between the third party and the principal can also be cancelled or recessed. After this cancellation the principal does not work for the third party. So as the agent work on behalf of the principal he is not also working for the third party after recession, as principal appoints the agent on behalf of him, so there is no importance of the agency relationship between the principal and the agent after recession of the contract with third party. So the principal can terminate his relationship with the agent after the recession of the contract without the knowledge of the agent.
However, this issue of agency relationship is very narrow area of contract law. Although this relationship is contractual one, it is not possible to interpret this term according to the other contractual rules and regulation. But here we have tried to cover all the topics about the agency law. I have tried to show the principal and agent relationship according to the Contract Act 1872. I have also discussed about the termination issues and recession issues. So, hopefully the desired issues are covered successfully in this discussion.
References:
1. Pathak, H.S. The Indian Contract Act .(11th ed) pp 270
2. Singh, A. Law of Contract and Specific Relief. (9th ed) pp. 628
3. Trietel, G. The Law of Contract .(11th ed) pp 705
4. Sen, A.K. & Mitra, J.K. (2008) Commercial Law & Industrial Law .(25th ed)
5. Jhabvala, N.H. The Law of Contracts. (29th ed). C. Jamnadas & Co. pp 213
6. CIMA Business Law P 177
7. Haque, M.E. (2007) Law of Contract. Center for Law, Justice, Peace . pp 268-301
8. Alam, M. S. (2009) Law Dictionary (4th ed)
9. Formston, M.P. & Fifoot, C. Law of Contract (15th ed). Oxford University Press.
10. Mckendrick, E. (2009) Contract Law (8th ed), Palgrave Macmillan. p 130.
11. Termination of Contract.
Retrieved from: http://www.legalmatch.com/law-library/article/termination-of-contract.html
12. Duration and Termination of Agency
13. Contracts of Agency
Retrieved from: http://www.scribd.com/doc/20874146/Agency-Indian-Contract-Act-1872
14. Law of Contracts
Retrieved from: http://www.newagepublishers.com/samplechapter/001048.pdf
15. Law of Agency
Retrieved from: <href=”#Agency_relationships”>http://en.wikipedia.org/wiki/Law_of_agency#Agency_relationships
16. Getting Out of a Contract
Retrieved from: http://contracts.lawyers.com/contracts/Getting-Out-of-A-Contract.html
17. Recession of Contract
Retrieved from: http://www.realestateagent.com/real-estate-glossary/Realestate/Recession-of-contract.html
18. Termination of Contracts on the ground of frustration
Retrieved from: http://law.anu.edu.au/colin/lectures/frust.htm
19. Termination of Agency Relationship
Retrieved from: http://www.legalmatch.com/law-library/article/termination-of-an-agency-relationship.html
20. The Agency Contract
Retrieved from: http://www.e-iure.com/agency/2007/india.pdf
21. Termination of Agency
Retrieved from: http://www.eaa.org.hk/publications/pub_agency_law11.htm
22. Formation of Agency
Retrieved from: http://www.eaa.org.hk/publications/pub_agency_law3.htm
23. Reasons to Terminate Contracts.
Retrieved from: http://contracts.lawyers.com/contracts/Reasons-to-End-or-Terminate-Contracts.html
24. Agency
Retrieved from: http://www.law.cornell.edu/wex/agency
25. Agency Law
Retrieved from: http://www.bignet.org/legal/legalOLT.pdf
26. Agency Creation and Termination
Retrieved from: www.swlearning.com/blaw/davidson/davidson8e/…/ch29.ppt
Rights and Duties of Principal and Third party
Retrieved from: http://agency.uslegal.com/rights-duties-and-liabilities-between-principal-and-third-parties/
27. Reasons to End or Terminate the Contract
Retrieved from: http://contracts.lawyers.com/contracts/Reasons-to-End-or-Terminate-Contracts.html