Describe the the Agency Relationship; and second, The Termination of Agency under the parlance of Law of Contract, 1872.

1.  Introduction

 In our day to day life we enter into contract so many times that ‘contract’ has become an indispensable part of our life. When we purchase milk or newspaper in the morning or go to movie in the evening, we are entering in to contract. Indian Contract Act, 1872 really codifies the way we enter into a contract, execute a contract, and implement provisions of a contract and effects of breach of a contract[1]. The Contract Act, 1872 consists of limiting factors subject to which contract may be entered into, execute and breach enforced. It only provides a framework of rules and regulations which govern formation and performance of contract. The rights and duties of parties and terms of agreement are decided by the contracting parties themselves. The court of law acts to enforce agreement, in case of non performance[2].

 First, the above topic needs to examine by explaining the Agency Relationship; and second, The Termination of Agency under the parlance of Law of Contract, 1872.

  1. 2.  Agency Relationship

The relationship between Agent and Principal is primarily contractual in nature and is governed by the terms of contract entered into between them “Agency Contract”[3].

Contract of Agency– Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. According to Civil Code Section 2295 (enacted in 1872), “ A consensual relationship created by contract or by law where one party, the principal, grants authority for another party, the agent to act on behalf of and under the control of the principal to deal with a third party” [4].

An agency relationship is fiduciary in nature and the actions and words of an agent exchanged with a third party bind the 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[5].

Creation of Agency Relationship- A principal and agent can create an agency relationship by:

  • agreement between them;
  • by ratification;
  • by estoppels;
  • As the result of the conduct of the parties and the agents inherent relationship with third parties (ex. implied agency)[6].

Agent and Principal Defined– An “Agent” is a person employed to do any act for another or to represent another dealings with third person. The person for whom such act is done or who is so represented is called the “Principal”[7].

Who may employ Agent– Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent[8]. Thus any person competent to contract can appoint an agent.

Who may be an Agent– As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained[9].

 Consideration not necessary– No consideration is necessary to create an agency[10]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

Authority of agent– An agent has authority to:

  • Do everything necessary, prior or usual in the ordinary course of business to effect the purpose of the agency; and
  • Make representation as to facts, not including the terms of the agent’s authority, on which the agent’s right to use his or her authority depends, and the truth of which cannot be determined by the use of reasonable diligence on the part of the person to whom the representation is being made[11].

Actual Authority is that authority a principal intentionally confers upon the agent, or intentionally, or by want of ordinary care, allows the agent to believe that he or she possesses[12]. Ostensible authority is that authority a principal intentionally, or by want of ordinary care, causes or allows third persons to believe that the agent possesses ostensible authority is sometimes referred to as apparent or implied authority[13].

Express Authority- Express authority is created by a contract which completely and precisely delineates those activities the agent is authorized to undertake.

Implied Authority: Authority that is

  • Conferred by customs
  • Inferred from the position the agent occupies, or
  • Inferred as being reasonably necessary to carry out express authority.

Apparent Authority- Apparent authority depends not upon the express or implied agreement between principal and agent, but upon the reasonable expectations of third parties who have been led to believe that the agent is authorized to act in behalf of the principal. Apparent authority is distinctly different from actual or express authority and is sometimes referred to as ostensible authority by estoppels. Ostensible authority by estoppels arises when the principal, by words or conduct, leads a third party to believe that another person is hid agent[14].

When the principal’s actions have created the appearance of authority the agent and a third party reasonably relies, to his/her detriment, upon this authority. The most common cause of question concerning apparent authority is the principal’s placement of a limitations upon the normal and ordinary authority of the agent and failure to communicate this limitations to a third party dealing with the agent.

 Agent’s Duty to Principal– An agent has following principal-: a) conducting principals business as per his directions, b) carry out works with normal skill and diligence, c) render proper accounts[15]. d) Agents duty to communicate with principal[16]. e) Not to deal on his own account, in business of agency[17]. f) Agent’s duty to pay sums received for principal[18]. g) Agent’s duty on termination of agency by principal’s death or insanity[19].

Remuneration to Agent– Consideration is not necessary for creation of agency. However, if there is an agreement, an agent is entitled to get remuneration as per contract.

Rights of Principal– The principal has the following rights-: a) Recover damages from agent if he disregards directions of principal, b) Obtain accounts from agents, c) Recover moneys collected by Agent on behalf of Principal, d) Obtain details of secret profit made by agent and recover it from him, e) Forfeit remuneration of Agent if he misconducts the business.

Duties of Principal– The principal has the following duties-: a) Pay remuneration to agent as agreed, b) Indemnify agent for lawful acts done by him as agent, c) Indemnify agent for lawful acts done by him in good faith, d) Indemnify agent if he suffers loss due to neglect or lack of skill of principal.

  1. 3.  Termination Of Agency

Termination of Agency Agency law is similar to contract law in that both an agency and a contract may be terminated by an act of the parties or by operation of law[20]. According to section 201 of the Contract Act, 1872, An agency is terminated by the principal revoking his authority or by the agent renouncing the business of the agency or by the business of the agency being completed or by either the principal or agent dying or becoming of unsound mind or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors[21].

Termination by Act of parties Agency may be terminated by act of the parties in any of the following ways:

  • Lapse of time: The timeframe for termination of an agency can be stipulated by a particular statute or instrument[22]. For instance, if the parties entered into a contract for one year and continued to act under the contractual terms after one year, the court will presume that the parties in fact intended to keep the contract alive for another year[23].

On the other hand, if the parties did not fix any appropriate time for the termination of contract, the contract is deemed to be terminated after a reasonable time. “What constitute a reasonable time during which the authority continues is determined by the nature of the act specifically authorized, the formality of the authorization, the likelihood of changes in the purpose of the principal, and other factors[24]. “An agency, when shown to have existed, will be presumed to have continued, in the absence of anything to show its termination, unless such a length of time has elapsed as destroys the presumption[25].

  • By revocation and renunciation: An agency is terminated by principal revoking agent’s authority by notice or by renunciation by agent by notice. In following cases, an agency cannot be revoked – a) Agency coupled with interest[26]. b) Agent has already exercised his authority[27]. c) Agent has incurred personal liability.

  • By completion or performance: When the business for which the agency was constituted is completed or performed, the agency is terminated. For example, when am agent is appointed to sell a house, agency is completed when the house is sold.

  • Mutual Agreement: The parties can terminate agency by mutual agreement. An agency relationship requires the mutual assent of the parties and both the parties have power to withdraw their assent. An agency may not be terminates by the act of one of the parties and should be done mutually. The mutual abandonment of an agency is a question of fact, since it is a matter of intention of both the parties[28].

  • Termination by One Party: An agency contract may be cancelled on the basis of an express stipulation in the contract. In such a case, the parties will have a right of cancellation of the will of either party or upon the happening of a contingency or the nonperformance of some expressed condition. The principal cannot cancel such an agreement at will so long as the agent fulfils his /her part of the agreement. However, the principal can cancel the agency contract for any justifiable cause.

An agency may be revoked at the will of the principal when an agency is not coupled with an interest, and no third party’s rights are involved. The party terminating the agency must show good cause[29]. Therefore the right to cancel an agency contract is dependent upon some contingency; the cancellation must be justified by establishing the happening of such contingency[30]. An agency cannot be terminated at will during certain specific instances[31].

An agency contract to be performed to the principal’s satisfaction can generally be canceled at will by the principal. Similarly, a power of attorney constituting a mere agency may be revoked at any time, with or without cause.

A principal may unilaterally cancel an agency without incurring liability for breach of contract under the following instances: misconduct or habitual intoxication of the agent which interferes with his/her employment, the refusal of the agent to obey reasonable instructions or to permit the principal to make a proper audit of his/her accounts, serious neglect or breach of duty by the agent, dishonesty or untrustworthiness of the agent, the agents failure to pay an indebtedness owing to the principal, disloyalty of the agent like using the agency to make secret profits[32].

Termination by Operation of Law: An agency may be terminated by operation of law. However, an agency may be made irrevocable by statute, notwithstanding the death of the principal[33]. Agency is terminated by operation of law in any of the following ways:

v     By death or insanity: When the principal or agent dies or, becomes of unsound mind, the agency is terminated[34].

v     Agent’s duty: When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to undertake, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interest entrusted to him[35].

v     By insolvency of the principal: On principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors, the agency is terminated.

Other modes of termination of agency:

By efflux of time, by destruction of the subject matter, by incapacity of principal or agent, Principal or agent becoming an alien enemy, by object of agency becoming unlawful.

  1. 4.                                                                                              Recession of contract:

Contract recession is available under the following circumstances[36]:

  • Consent: Both parties must manifest their intent to have the contract rescinded. It is best if they indicate their consent through an additional written document.
  • Issues with contract formation: The contract must be made under legal conditions, and consent cannot be acquired by force or fraud. If the contract was formed under illegal conditions, it may be rescinded. Common formation defects includes
    • Fraud: The false representation may relate either to the contracts subject matter or to matters related to the contract
    • Lack of capacity: One of the parties lacks to the capacity to negotiate an agreement due to illness, mental incompetence, intoxication, or being underage (under 18 years old)
    • Coercion/Duress/Under Influence: A party cannot be forced to sign a contract under threats of harm or under hostile conditions
    • Mistake: Both parties must clearly understand all the terms in the contract
    • One party’s actions indicate that they will not be performing their part of the bargain (“anticipatory repudiation)
    • Consideration has failed, is inadequate, or is illegal.
    • Against public interest: A contract may be rescinded if performing it would be against the general consent of the public (for example, a contract requiring one of the parties to be subjected to indentured servitude).

  1. 5.  After Recession the Termination of Agency

The recession of a contract means the cancellation of a contract[37]. In case of an agency relationship when a contract is successfully rescind the principal, agent and the third party are free from the obligation of the contract. As we know, the principal appoint an agent to act on his behalf with the third party. If the Contract with the third party is cancelled then the agent’s duty related to that contract also ends. After that if principal can terminate agency without informing the agent but principal must inform the third party about the termination of the agency[38].

Notice of Termination: When an agency has been terminated by act of the parties, it is the principal’s duty to inform any third parties who know of the existence of the agency that is has been terminated (although notice of termination may be given by others.). However, express notice to the agent that the agency has been revoked, or to the principal that the agency is renounced, is not always necessary if the affected party actually knows, or has reason to know the facts resulting in such revocation or renunciation[39].

  • Agents Authority Continues until Notify: An agent’s authority continues until the agent receives some notice of termination. As previously mentioned, notice to third parties follows the general rule that an agents apparent authority continues until the third party receives notice (from any source of information) that the authority has been terminated. The principal is expected to notify directly any third party who the principal knows has dealt with the agent[40]. For the third parties who have heard about the agency but have not dealt with the agent, constructive notice is sufficient[41].
  • From of Notice: No particular from is required for notice of termination of the principal-agent relationship to be effective. The principal can actually notify the agent, or the agent can learn of the termination through some other means. If the agent’s authority is written, it must be revoked in writing, and the writing must be shown to all people who saw the original writing that established the agency relationship.
  1. 6.  Conclusion

The relation between principal and agent is contractual in nature so it is enforceable by law. The principal authorizes an agent to act on his behalf while dealing with the third party. In case of termination the parties are not restores to their original situation; neither is the contract treated as if it never existed. Prior to its termination, the parties are obliged to comply with their contractual obligations. Only after the contract has been cancelled will they be released from their obligations.

The termination of the authority of an agent, does not so far as regards the agent, take effect before it becomes known to him, or so far regards third persons, before it becomes known to them[42].Termination, therefore, takes effect as regards the agent when the agent comes to know of it. As regards third person, termination is effective when it comes to their knowledge. Therefore, if the buyer has no notice of termination of agent’s authority, and he buys the goods, the principal will be liable even if the agent has received notice of the termination of his agency.

 However, from the above discussion it can be said that, a principal can terminate the agency relationship without informing the agent because agency is created to accomplish a contract and for any reason if the contract itself is terminated then the principal is no longer bound to be in the contract any further. The termination of agency without informing the agent, after the recession of contract may not be invalid because a principal can terminate an agent’s authority at any time without having to give notice. If trust between the principal and agent has broken down it is not reasonable to allow the principal to remain at risk at any transactions that the agent might conclude during a period of notice. But a principal is obligated to inform the third party about the termination because if the third party without having knowledge of the termination of agency dealt with the agent, the entire liability for the contract will be bear by the principal. So principal must inform the third party about the termination of agency.


  1. Muhammad Ekramul Haque (2007), Law Of Contract, 3rd ed. Justice & Peace.
  2. Cheshire, Fifoot & Furmston (2008), Law Of Contract, 15th ed. Oxford University Press.
  3. Avtar Singh (2008), Contract And Specific Relief, 10th edn, Eastern Book Company.
  4. Mc Kendrick. E (2009), Contract Law,8Th edn, Palgrave Macmillian.
  5. Mohammad Saiful Alam (2009), Law of Dictionary, 4th ed.
  6. Emerson, Robert W. and Hardwick, John W (1997), Business Law, 12th ed. Oxford University Press.
  7. H.S.Pathak (2010), The Indian Contract Act, 11th ed. World Press.
  8. Sin Guenter Treitele (2008), The Law Of Contract, 11th ed.
  9. A.K.Sen (2006), Commercial Law and Industrial Law, 26th ed. World Press.

10. N.H. Jhabvala (2010), The Law Of Contracts, 29th edn, C.Jamunadas & Co.

11. CIMA (2010), Business Law. P.177-210.

12. Keenan.D & R. Sarah (2009), Business Law, 10th ed. Oxford University Press.

13. Gregory, William A. (2001). The Law Of Agency and Partnership, 3rd ed. St. Paul Minn: West Group.

14. Hynes, J. Dennis. (2001). Agency, Partnership, and the LLC in a Nutshell, 2nd ed. St. Paul Minn: West Group.

15. What is agency? Retrieved from:  Error! Hyperlink reference not valid.

16. Termination of Agency. Retrieved from:

17. Who is agent? Retrieved from:

18. Law of Agency. Retrieved from:

19. Agency Relationship. Retrieved from:

20. How contract terminate? Retrieved from:

21. Indian Contract Act. Retrieved from:

22. Getting out of a contract. Retrieved from:

23. Agency. Retrieved from:

24. Termination of Agency. Retrieved from:

25. Termination and recession. Retrieved from:

26. Law for termination. Retrieved from:

27. Reasons to End or Terminate the Contract. Retrieved from:

 28. Case reference. Retrieved from:

[1]See, THE INDIAN CONTRACT ACT, 1872.ACT No.9 OF 1872 [25th April, 1872.] It is expedient to define and amend certain parts of the law relating to contracts; it is hereby enacted as follows- Short Title:-This Act may be called the Indian Contract Act, 1872. Extent- It extends to the whole of India [except the State of Jammu and Kashmir]; and it shall come into force on the first day of September, 1872.

[2]A.K.Sen. (2006) Commercial Law And Industrial Law.P.9.

[3]The law of agency derives its statutory base from Chapter X of the Indian Contract Act, 1872 (“Act”), which provides the framework of rules and regulations that govern formation and performance of any contract including the Agency Contract.

[4]See, Civil Code Section 2295 (enacted 1872) defines that, The principal of contract of agency are – 🙁 1) 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). (2) a person acting through an agent is acting himself, i.e. act of agent is act of principal.

 [5]N.H. Jhabvala (2010), The Law Of Contracts, 29th ed. P. 177.

[6]Cheshire, Fifoot & Furmston (2008), Law Of Contract, 15th ed. P. 273.

[7]See, Contract Act, 1872, Se. 182. Also see, D.E.S.U. v. Basanti Devi,  AIR 2000 SC 43

[8]See, Contract Act, 1872, Se. 183.Also see Mahendra Pratap Singh v.Padam Kumari Devi, AIR 1993.

[9] See, Contract Act, 1872, Se. 184

[10] See, Contract Act, 1872, Se. 185

 [11] see, (Civil Code Section 2319)

[12] See, (Civil Code Section 2316)

[13]See,  (Civil Code Section 2317)

 [14] Avtar Singh (2008), Contract And Specific Relief, 10th ed. P.730.

[15] See, Contract Act, 1872, Se. 213

[16] See, Contract Act, 1872, Se. 214

[17] See, Contract Act, 1872, Se. 215

[18] See, Contract Act, 1872, Se. 218

[19] See, Contract Act, 1872, Se. 209

[20] Gregory, William A. (2001). The Law Of Agency and Partnership.P.714.

[21] See, Contract Act, 1872, Se. 201

 [22]See,, Tabor v. Mason Dixon Lines, Inc, 196 Tenn. 198 (Tenn. 1953)

[23]See, Cinefot International Corp v. Hudson Photographic Industries, 13 N.Y.2d 249, 252 (N.Y.1963)

[24]See Beaucar v. Bristol Federal Sav & Loan Asso, 6 Conn. Cir. Ct. 148, 159 (Conn. Cir. Ct. 1969)

[25]See v. Foreman, 182 Kan. 550,555 (Kan.1958)

[26] See, Contract Act, 1872, Se. 202. See also Bangalore v. Latitha H. AIR 1994 Kant 133.

[27] See, Contract Act, 1872, Se. 213

[28]See, v. Dudley, 153 Cal. App. 2d 120, 124 ICal. App. 2d Dist. 1957)

[29]See, Wilson Sullivan Co. v. International Paper Makers Realty Corp. 307 .Y.20, 26 (N.Y. 1954)

[30]See Coal Sales, Inc. v. Ramsay Coal Co., 129 Colo. 393, 398 (Colo. 1954)

[31]See,’s Good Tine Co. v. J.W. Brown & Assocs., 203 Mont. 427 (Mont. 1983)

[32] Cheshire, Fifoot & Furmston (2008), Law Of Contract, 15th ed. P. 135

[33] See, Drew. v. Nunn (1879) 4 Q BD 661. Also see, Sovfracht. v. Van Udens (1943) 1 All Er 76.

[34]In case of corporation, the agency is terminated on its begin wounded up. In India, mere death of the principal cannot terminate the agency until the agent has heard of it. In England, death of principal determines the agency at once.

[35] See, Section 209

[36] H.S.Pathak (2010), The Indian Contract Act, 11th ed. P.280.

[37] Mohammad Saiful Alam (2009), Law of Dictionary, 4th ed. P.956.

[38] Muhammad Ekramul Haque (2007), Law Of Contract, 3rd ed. P. 289

[39]See, Van Houten v. Trust Co. of Chicago, 413 I11. 310 (I11. 1952)

[40]See, Morton Marks & Sons, Inc. v. Hill-Chase Steel Co., 196 Va. 268 (Va. 1954)

 [41] Mc Kendrick. E (2009), Contract Law,8Th ed. p.135

 [42] See, section 280