Principal vs. Agent-lustrate & explain

Principal vs. Agent-lustrate & explain


Contract is very familiar word in our everyday life. Everyday knowingly or unknowingly we make contract and follow that contract. If we consider operating a business we cannot think to do even a single thing without contract. A business gets involved in contract in many ways. Once it purchases inventory, contract arises. Whenever it recruits an employee, contract arises. There is presence of contract in almost every activity of a business. Much time a business entity or a person can not do all the things alone, now every one wants to expand their business across the border because globalization has created this opportunity. Now it is so obvious that it’s not possible to do everything directly. Same thing goes to the personal life. A person cannot do everything alone. Whether it is business entity or its person when it makes contract with someone or another business entity, they get involved into principal agent relationship. This relationship is built completely on legal base. Principal gets some rights over its agent in this relationship and on the other hand agents also get some authority and legal rights over its principal because of this relationship. Even if any party whether it is principal or agent wants to terminate contract, they must have to do it under existing contract act of that country.


A contract is an agreement between two parties. It is a legally enforceable agreement that meets certain specified legal requirements between two or more parties in which each party agrees to give and receive something of legal value (Helewitz, 2010). Though a contract is an agreement but all agreement is not contract. For being a contract there are some requirements that need to be fulfilled. Requirements are:

1. Proper offer and acceptance

2. Lawful consideration

3. Capacity to contract

4. Free consent

5. Lawful object and agreement

6. Agreement not void or illegal.

7. Intention to create legal relationship.

8. Certainty

9. Legal formalities.

According to Indian contract act 1872a contract must have to have these criteria. Otherwise that agreement will not be considered as contract.

Principal Agent Relationship:

A contract can be made between any two or more parties. But when a contract is made where an individual or a company authorizes another individual or company to do a job on behalf of him, then this contractual relationship is called principal agent relationship. This type of contract is considered as contract of the principal not as contract of the agent. But most important thing is to make agency relationship through contract both of the parties must have to have all the criteria that is required for making a contract.


Any person who has legal capacity to perform an act can be a principal and therefore can recruit an agent. Principal can be individual, corporations, government agencies, not for profit organizations anything can be a principal.

The main reason of appointing agent by a principal is to transfer responsibility of his own work to someone else. It means appointed agent will do a job on behalf of its principal and therefore will get compensation from principal. But principal also have some responsibility towards its agents. Those are:

1. Compensate its agents properly according to contract.

2. Assist and co-operate its agents in completing job.

3. Protecting agent from claims which has been occurred while discharging principal’s job.

As principal gets involved in contract with agent, it gets some rights over its agents. These rights are mentioned bellow:

1. Principal can call them to an account at all times, in relation to their business with agency.

2. Principal has rights to take compensation from its agent if agent violates contract.

3. The principal can cancel agency ship of his agent, where each may file a case against a third person, by suing in his own name; and he may, by suspending or canceling the right of the agent under the contract.


Person who works on behalf of principal is called an agent. According to Commercial Law, “An agent (also referred to as a manager) is a person who is authorized to act on behalf of another (called the principal or client) to create a legal relationship with a third party.” To what extent an agent can have authority depends on two things.

1. Agreement that has been made between parties.

2. Obligation of loyalty to the interest of principal.

An agent’s duties and responsibilities can differ from contract to contract. But there are some general duties that an agent must need to maintain. Those are:

1. An agent remains under control of a principal and work on behalf of it.

2. Discharge duties with proper care and diligence.

3. Avoid doing something for which he or she is not authorized.

4. Avoid taking any material benefit from third party through use position as agent.

5. Avoid doing anything that hampers or damage principal’s enterprise.

When a contract can be cancelled:

Once a contract is made and after that if it becomes impossible for any of the party to continue contract then contract can be cancelled. When a contract is cancelled in this way, it is called frustration. Doctrine of frustration is exception to this. This allows parties of the contract to be discharged from its responsibility automatically if frustrating event[1] occurs. When termination of contract occurs, all rights and liabilities of both parties are stopped for that time and for future as well. Contract can also be cancelled if person with whom contract has been made dies or become insane.

When we talk about agency relationship, there are some points or some situations when an agency relationship comes to an end. 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. If an agent withdraws its agency himself or herself.

2. If business which is in the contract is done, agency is expired automatically.

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

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.

Reason why act is not invalid where contract has been terminated by principal without knowledge of agent after recession of contract

For doing this analysis we must have to understand about the recession of contract. When a contract is cancelled because of agreement becomes illegal, it is called recession of contract. According to Section-10[2] of Indian Contract Act 1872, any agreement is contract when it is made:

1. With free consent of parties competent to contract:

It means during contract no party was forced, misguided with any kind of information and no mistake was there.

2. There must have to be lawful consideration and lawful object:

Object for which contract has been made and act of contract itself must have to be considered legal according to law.

3. Agreement should not be expressed as void:

If it is expressed that agreement’s existence is no more because of any unlawful consideration or reason, agreement will no longer remain valid.

In this case as principal has terminated contract, we can assume that this agreement has become illegal because of any or more than one of the following reasons:

1. Agent may have committed fraud.

2. Agent may have misrepresented something in the agreement.

3. Principal was forced to make that agreement.

4. Agent may do something beyond its authority.

5. Agent may do something which is not permitted by law.

6. Government may have imposed new laws which have made the act of the agreement illegal.

Principal has legal rights to cancel its contract with agent as agreement itself has become illegal. When agreement becomes illegal, situation becomes something that it becomes impossible to continue this contract. It is a frustrating situation and as a result contract has been cancelled. Section-205 of Indian contract act refers that, a principal cannot cancel contract if contract was made for a fixed period. But this section has also allowed principal to terminate contract if there is any sufficient reasons. Sufficient reasons refer to want of skills, continuous disobedience of lawful orders, rude or insulting behavior. So, principal has full rights to terminate contracts as agreement itself has become illegal.

Though termination of contract made by principal is not illegal but we need to keep one thing in our mind too. In this case termination was done without knowledge of agent. But it is clearly stated in Section-206[3] and Section-207 that, notice of revocation of contract must have to be reached to the agent. Agent must have to be informed regarding termination of contract. If agent is not informed and he already perform his task principal will remain bound to compensate it’s agent as principal did not inform agent regarding cancellation of contract. Principal can inform it expressly or impliedly.

Now, if we consider termination of contract and informing agent regarding termination, we have already proved about legality of terminating contract which was done by principal. And when agreement itself becomes illegal naturally, there is no validity of this contract. So, it is considered that agent has been informed impliedly. So, we can say termination that has been done by principal without knowledge of agent is not invalid.


From the above discussion we can understand that an agreement becomes contract when it meets some of the criteria. But when agreement itself becomes illegal, there is no ways that contract exist anymore. But still in this case principal-agent relationship has already been created through legal way when contract is terminated it also has to be allowed legally. And we have proved that the way through which principal has terminated the contract is legally allowed and therefore has made principal’s act valid.


1. Helewitz.J.A. (2010). Basic Contract Law for Paralegals. (P.2, New York, NY: Aspen Publishers.)

2. Indian Contract act 1872.(n.d.) Retrieved from:

3. Indian Contract Act 1872.(n.d.).Essential elements of a valid contract. Retrieved from:

4. Routledge,Cavendish(2006). Contract law. Rejection(Termination by Offeree).(p.7,Author)

5. Schuler.D(2002). Principal Agent relationship. Retrieved from:

6. Principal(n.d.). The lectric law Library. Retrieved from:

7. Law of agency.(n.d.). Wikipedia. Retrieved from:

8. Rights, duties and liabilities between Principals and agent.(n.d.).Retrieved from:

9. Birch.D.V.(2009 May 26).Frustrating event. Retrieved from:

1.10.Commercial Law(n.d.).Wikipedia. Retrieved from:

11. Recession of Contract.(n.d.).Retrieved from:

[1] A frustrating event is an event which:

· Occurs after the contract has been formed; Is so fundamental as to be regarded by the law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract;

· Is not due to the fault of either party; and Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.


[2] All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.

[3] Indian Contract Act,Section-206. Reasonable notice must be given of such revocation or renunciation; otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made good to the one by the other.