Justified and evaluated contractual characteristics of agency relationships on the basis of Law of Contract, 1872?

1. Introduction

 The agency relationship is a very common phenomenon in the business world today. Almost all the companies in today’s business arena deal with agents and third parties and this is nothing new. For over hundreds of years, each and every business has laid their footstep into some sort of agency relationships and those were all contractual. The respective topic talks about the contractual characteristics of agency relationships which, is to be justified and evaluated on the basis of Law of Contract, 1872[1]. In accordance with the learning and perceptual belief of this society reflected from various great philosophers[2], a contractual agreement cannot be terminated without each party’s free consent and knowledge of the situation. However, it might be remotely correct to conclude this that the act of termination of contract without the knowledge of the agent might not be invalid if done after rescission of the contract. Many thousands of contracts form each day but all of them do not perform according to their terms. Often discussion and negotiations can resolve matters and sometimes the contract itself provides some mechanism[3] for resolving disputes among parties using different clauses included in the contract paper. While in other cases, the difficulties caused by breach of contract cannot be resolved informally. The law has to provide a range of remedies[4] to enable the party being affected by the breach to obtain either the performance contracted for or some compensation for not receiving it. Similarly, law might also provide a provision for rescission of a contract. Understanding it clearly would require us to deal with the in-depth understanding of the way agency is formed and the reasons for which contractual agreement might be breached and rescinded in the light of the Law of Contract, 1872. The Law of Contract is derived from the Indian Contract Act and thereby this research would entail extensive synonymous use of the both the phrases.

 Firstly, this paper would deal with the descriptive overview of contracts and agency relationship and then moving the spot light towards validity of termination upon rescission[5] of a contract.

2. Agency relationship and Termination

 a. Agency and Relationships[6]

            Agency in simple term is a sort of a collaboration or relationship between parties. It is the relation that is eminent between persons where one of the persons holds the power or ability to create lawful relationship with another having connections with other third parties. An agency relationship is established within two parties where one of the parties is an agent and the other a principal.[7] An agent is employed to work for the principal performing tasks, selling goods, managing business including dealing with third parties etc. This particular relationship is fiduciary[8] and is governed by employment law. However, this is a contractual relationship and both parties agree upon certain terms to come into the contract under the consideration that the agent will be obligated to work for the principal for a specified time in order to maintain collaboration and dealings with the third parties. But this relationship does not require any consideration.[9] This contract is under the law of agency governed by the Indian Contract Act, 1872.[10]

           The agency relationship might end in various following ways[11]:

  1. By the principal revoking the agency. Although the principal cannot perform such actions if the agency deals with interest. Agencies are tied with interests when the agent has an interest in the subject matter of the agency (illustrated in Section 201)[12].
  2.  By the agent renouncing the business of the agency.
  3. By the business of agency being completed.
  4. By the principal being adjudicated insolvent[13]

b. Termination of an Agency Relationship

            The termination of an agency relationship can take place in various ways. After termination, the agent would not have the authority to work for the principal. It is the responsibility of the principal to inform third parties that the relationship no longer exists. The following are the ways agencies are terminated.[14]

  1. Lapse of time: After the time period for the agency relationship is passed.
  2. Purpose achieved: After the purpose of the relationship or contract is fulfilled.
  3. Mutual agreement: Both the parties come into a termination agreement.
  4. Certain events: Agency terminations automatically if there is any occurrence of death, insanity, or bankruptcy of either the principal or agent.[15]

 If the agency is wrongfully terminated, then either party can sue the other under both contract and employment law accusing breach of a contract[16] or employment law violation.

 3. Contracts and types; Law of Contract, 1872

 A contract is simple terms is an agreement between two parties that is supported by law. While an agreement is defined as a promise between two parties which can take place only when an offer is made to one and that particular offer is accepted by the other. When this agreement is enforced by law, it becomes standardized to a contract. According to Sir William Anson[17], “A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more acts or forbearances on the part of the other or others.”[18] In a nutshell, legally any contract is an agreement which is enforceable by the law. A formal definition of the contract can be found in the Indian Contract Act 1872, which defines agreement as “Every promise and every set of promises forming consideration for each other.” Section 2(b)[19] defines promise in these words:  “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted”; While, Section 2(h) defines the contract as an agreement enforceable by law.

For a contract to valid, there are certain things that should be maintained and present in that contract which are[20]:

1. Proper offer and acceptance: an agreement based on a legitimate offer.[21]

2. Lawful Consideration: the contract should be supported by a consideration which means something[22] in return. It can be monetary, an action or abstinence from an action. It can take place in the past, present or future but these considerations should be real and bounded by law.

3. Competent to contract or capacity: For the contract to be valid, all the parties should be matured, should be in sound mind and should not be incapable of forming any contract by any law.[23]

4. Free consent: The parties should form the contract willingly using genuine information and consent.[24]

5. Lawful object and agreement: The object of the agreement or the action of the agreement should not be illegal or unlawful.

6. Agreement not declared void or illegal: Agreements which are stated and considered void or illegal by any law are not supported at law; thereby the contract would not be valid.

7. Intention to Create Legal Relationships: When parties enter into an agreement, the intention must be to create a legal relationship between them

8. Certainty: The contract should not be unclear or ambiguous vague and everything should be articulated with optimum clarity.

 9. Possibility of Performance: The promise of the agreement should not be impossible.

10. Legal Formalities: Agreement without consideration is not valid. Consideration must be there which can be present, past or future.

 There are three types of contract which are Express contract[25], Implied contract[26] and Quasi Contract[27]. The stages involved in a contract are the formation of a contract, execution of a contract and remedies[28] for the breach of a contract. These remedies for the breach of a contract would vastly come into consideration for a proper explanation of the topic.

 a. Formation and Execution of a contract

            Formation of the contract takes place when the creation and acceptance of the agreement from both parties (multiple parties can also exist) is accomplished. Both parties upon a defined consideration[29] agree to come into a contract and thereby the formation of the contract.

Execution of the contract means the exchange of the consideration or the performance of the contract. Any contract creates an obligation for both the parties. Carrying out these obligations is the performance of the contract.  All the parties execute or promise to perform with some obligations. According to the Section 37, “The parties to a contract must either perform or offer to perform, their respective promises, unless such performance is dispense with or excused under the provision of this act, or of any other law.” [30]

b. Remedies for breach of a contract


            After the contract is successfully executed, the most important element is the remedies for the contract if the contract is breached which are as follows.[31]

  1. Damages : Compensation for the loss of a breach
  2. Action for the price: Failure to payment
  3. Quantum meruit: Legitimate payment for the value of what is done.
  4. Specific performance: An order by the court for the performance execution
  5. Injunction: An order by the court for observing negative restrictions.
  6. Rescission: Cancellation of the agreement or contract.

For the purpose of our research, studying Rescission of a contract would be adequate to understand why the termination of the relationship between an agent and a principal would be valid even if the agent is not informed about it.


c. Rescission[32]


            Basically, rescission is the cancellation of the contract. The contract is terminated such that no contract existed which required bringing all the parties back to the point before they entered into the contract. Thereby, all the benefits received from the contract should be refunded. However, rescission is not particularly a remedy for the breach of a contract rather an equitable right for both the parties to rescind the agreement. Rescission might occur due to innocent or fraudulent representation, common mistakes, inadequate legal capacity, presence of an impractical performance to be executed for the contract not contemplated by the parties, or duress and undue influences.[33] For example, assume that you came to an agreement with a buyer that you would sell your apartment that you thought to be yours. However, it was found out that you the property did not belong to you; thereby rescission would be the remedy in this case. Rescission is a useful remedy and it gives the suffering party to terminate unsatisfactory contractual relationships, claim money for damages and start a new contract with other parties. For the execution of rescission, the following conditions must be fulfilled.[34]

  1. Both the parties should be able to return to their initial conditions.[35] By any chance, if the conditions have changed that they cannot go back to their initial state, equity will not allow rescission.
  2. When an innocent third party/client persists the right in this matter of the contract and embargoes the process of rescission for his/her interest.
  3. The rescission is exercised within a given time.[36]
  4. The affirmation of the contract by a person either expressed or implied.[37]

Rescission might occur willingly by both parties or even for misrepresentations or fraudulent behavior. For example, rescissions occur at times in insurance policies where in situations the policy takers misrepresent their information intentionally, the insurance company terminates/rescinds the policy contract of the applicant.

4. Findings[38]


            The following are the findings and understandings form the research and literature reviews.

  1. The Relationships between agents and principals are bounded by contract and is under the Law of Contract.
  2. These relationships require legitimate reasons[39] to be terminated. However, might get automatically terminated if the contract is found to be invalid being assessed under the Contract law, 1872. Any violations to the elements of contractual validity make the contract void.
  3. The termination of the contract might also be for the rescission of the contract.
  4. The rescission of the contract may or may not require the approval of both the parties of the agency depending on the situations.
  5. Rescission might occur for many reasons including misrepresentation and fraud.
  6. Rescission means that the contract does not exist any longer which implies that further termination of the contract may not be necessary.
  7. After rescission has occurred, the agent need not inform or acknowledge the agent regarding termination of the contract as the contract no longer exist. However, the principal must inform the third parties regarding the cancellation of the contract.

5. Conclusion


            Agencies are formed by a contractual agreement between the principal and the agent under certain circumstances and voluntary termination of the contract is not appropriate. The agent may sue the principal if the contract is terminated unlawfully as the agent might possess rights on his interests and might get affected financially through the act of termination. Thereby, the agent must be informed and reasoned with legitimate grounds for the termination of the contract if done before expiration of the contract or fulfillment of the purpose. However, if the contract is rescinded before the termination of the contract, the principal would not have to inform or notify the agent regarding the termination. This is due to these reasons that rescission may occur for various reasons including unethical and unlawful business activities (within the contractual agreement of the agency) or for committing fraud by the agent leading to an unsatisfactory performance for the principal. In addition, the contract after rescission is already ended and bring forth to a position as if the contract never existed, the principal do not have any obligation towards the agent. Thereby, it can be concluded that the act of termination by the principal without the knowledge of the agent done after rescission is not invalid in accordance to the Law of Contract, 1872.

[1] The India Contract Act, 1872 which abides all the contractual agreement including agency contracts.

[2] Many philosophers and academics have given guidelines for the laws of the society including Socrates, Aristotle, Cicero, Karl Marx etc.

[3] Different clauses included in the contract to eliminate confusions for the future disputes.

[4] Remedies of breach of contract, which includes solutions when contract is violated for some reason.

[5] One of the remedies for the breach of a contract.

[6] The whole agency relationships are defined in the Indian Contract Act, 1872 from section 182 to 238

[7] Section 182, Indian Contract Act, 1872.

[8] Fiduciary mean it is based on trust or commitment for trust.

[9] Section 185, Indian Contract Act, 1872.

[10] The agency is formed and regulated under the Indian Contract Act, 1872 thereby being a contractual relationship.

[11] Under Section 201 to 210, Indian Contract Act, 1872.

[12] 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. (section 201)

[13] Section 201 of the Indian Contract Act.

[14] Section 201, The Contract Act, 1872

[15] A court of law will usually step in and terminate the agency relationship if one of the parties refuses to do so. Both parties may also specify particular events that can cause termination.

[16] Discussed later in the paper.

[17] Sir William Reynell Anson, 3rd Baronet PC (14 November 1843 – 4 June 1914) was a British jurist and Liberal Unionist politician

[18] Business Law-CIMA,  Statement by Sir William Anson, retrieved from slides of A.M. Masum

[19] Section (2b) and Section (2h) are parts of the law of contract, 1872 that explains the contract law.

[20] Section 10, Law of Contract, 1872.

[21] Section 3 to 9 explains in details about the acceptance and offer.

[22] Quid pro quo

[23] Section 11, Law of Contract, 1872

[24] It should not be obtained by fraud, coercion, undue influence or by mistake, Section 14-18, Law of Contract.

[25] The contract is expressed and articulated in words spoken or written.

[26] Understood from the acts, the conduct of the parties or the course of dealing between them.

[27] There are certain dealings which are not contracts strictly, though the parties act as if there is a contract.

[28] Actions or solutions to be taken when a contract is breached or violated.

[29] The exchange between the parties, the give an take that needs to be performed for the contract.

[30] Section 37, Para 1, Contract Act, 1872.

[31] Remedies for breach of contract, Business law-CIMA, Retrieved from http://www.lawyersnjurists.com/resource/course-materials/business-law/cima/remedies-for-breach-of-contract-cima/

[32] Section 62 to 67, Indian Contract Act, 1872.

[33] Business Law-CIMA, Remedies for breach of contract, http://www.lawyersnjurists.com/resource/course-materials/business-law/cima/remedies-for-breach-of-contract-cima/

[34] Section 63 to 67, Conditions for the validity of the rescission derived from the Contraction Act,1972, retrieved from presentation slides of A. M. Masum, 2008.

[35] restitutio in intergrum

[36] a reasonable time is there for the rescission to be valid, otherwise equitable doctrine of ‘laches’ comes into effect.

[37] Verbal or written.

[38] A list of summarized key points important for understanding the research conclusions and findings.

[39]Breach of contract, mention earlier in this research.




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