“The agency relationship can be terminated by few reasons which causes the cancellation of the contract may not make the act invalid” Discuss

1. INTRODUCTION:

Law of contract is that diversification of law which determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. We all enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some right and duties upon the contracting parties. The law of contract, 1872 is the Indian contract act, 1872 which puts down the law relating to contracts. Moreover, Indian contract handles with the enforcement of these rights and duties upon the parties. Indian Contract Act, 1872 came into effect from 1^st September, 1872 which was extended to the whole of India except the state of Jammu and Kashmir. However, according to this Act there is a relationship between a Principal and Agent and no consideration is necessary to create such relationship.[1]

 This essay will be discussed in three parts in the parlance of Law of Contract, 1872. Firstly, I would define what Principal, Agent and the relation between Principal and Agent are; secondly, what causes the termination of such relationship and finally, how this termination without the knowledge of the agent may not render the act invalid which has been done after the recession of contract.

 2. DEFINITIONS:

I would define the following terms according to the law of contract, 1782 as these terms are clearly explained in Chapter- X of the law of contract, 1872.

1. a.      Principal:

Any person who has the legal ability (meaning that they are not insane, or in certain circumstances a minor) to perform an act may be a principal and authorize an agent to carry out that act. Persons, corporations, partnerships, not-for-profit organizations, and government agencies may all be principals and appoint agents.

1. b.      Agent:

 Any individual capable of comprehending the act to be undertaken is qualified to serve as an agent.[2]

      Purpose of an Agent:

 An agent is basically an employee and the key difference is that an agent and principal make an agreement that the agent will represent the principal in specific transactions or situations or can only act on behalf of a principal for certain issues (depending on the agreement). For example, a basketball player hires an agent and an agreement between the two may only give the agent power to negotiate contracts.

1. c.       Relationship between Principal and Agent:

A principal-agent relationship is an arrangement in which the principal legally appoints agent to act on its behalf, the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act. Therefore, the relationship between a Principal and an Agent is known as Agency and the law of agency establishes guidelines for such a relationship. The formal terms of a specific principal-agent relationship are often described in a contract. Agent’s authority is said to be express when it is given by words spoken or written and consideration is not necessary to create such relationship.[3] This kind of relationship is governed by employment law and it is fiduciary, meaning it is based on trust. Normally, all employees who handle third parties are considered agents.

• How an Agency Relationship is formed:

 An agency relationship is formed when two parties (Principal and Agent) agree that one will represent the other in certain situations. However, an agency relationship is formed in four general ways:

Agency by agreement: This is the most common way where both sides agree on certain conditions and this agreement can be formed by either an express contract or by a simple conversation and handshake.

Agency by ratification: In this way, a party can agree to be an agent through a third party and an agency relationship is formed as long as the principal is then notified and approves the agreement.[4]

Agency by estoppels: Estoppels are also known as detrimental reliance and there are times when someone’s actions constitute to a third party that another person is your agent (when in fact the person is not). If the third party reasonably believes this is true, a court will prevent him/her from denying that the agency exists.

Agency by operation of law: Even if there was no agency agreement, courts will sometimes step in and consider a person to be an agent to prevent a party from suffering injustice.

• The purpose of the  “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 which allows the principal to authorize somebody to carry out his/her duties, either for a particular purpose such as purchasing a house or generally to conduct many transactions. The agency relationship is usually entered into by informal agreement, but also can occur by formal agreement. In certain cases, the agency relationship must be specified in writing form and the acts must be legal.

• The basis of the Agency relationship:

 Inherent in the Principal-Agent relationship is the understanding that the agent will act for and on behalf of the principal. The agent assumes an obligation of loyalty to the principal that he/she will follow the principal’s instructions and will neither intentionally nor negligently act inappropriately in the performance of the act. An agent cannot take personal advantage of the business opportunities the agency position uncovers where 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 obligations of the Agent to the Principal:

 An agent must obey reasonable instructions given by the Principal and must not do Acts that have not been expressly or impliedly authorized by the Principal. The Agent must use reasonable care and skill in carrying out the duties. Most importantly, the Agent must be loyal to the Principal. The Agent must desist from putting himself/herself in a position that would ordinarily encourage a conflict between the agent’s own interests and those of the principal.[5] The Agent must keep the Principal informed as to all facts that materially affect the agency relationship.

• Duties of the Agent to the Principal:

Agent must protect interests of principal. [6] In emergency, an Agent has authority to take any kind of necessary action in order to protect Principal from losses.[7]

Requires agent to perform certain duties[8]:

Duty of Good Faith (a fiduciary duty): An agent must perform his/her fiduciary duty to ensure a faithful relationship between an agent and a principal.

Duty of Loyalty: An agent must act only for the benefit of the principal. Moreover, the agent should not act for personal gain and any information regarding the agency relationship should be kept confidential.

Duty to Obey All Lawful Instructions: An agent must act as the principal instructs and should not act without the principal’s permission wherein one exception is if a principal asks the agent to flout the law, the agent can refuse without breaching this duty and another exception is that an agent can deviate from a principal’s instructions during emergency situations.

Duty to Act with Reasonable Care: The agent must perform for the principal in an acceptable manner which means that the agent should perform his/her duties with reasonable skill and responsibility.

Duty to give notice or notification: This is also known as the duty to inform where an agent must inform the principal of all matters concerning the subject matter of the agency relationship. For example, a painter hires an agent to sell some of his paintings. If the agent discovers that a buyer will be unable to pay, the agent must inform the principal of this fact.

 

• Duties of the Principal to the Agent:

A principal has duties towards his/her agent and failure to perform these duties can also result in a breach of contract or tort liability. A principal’s duties are very similar to that of an employer which may be specified in the contract between principal and agent.[9]

A principal’s duties include the following:

Cooperation: A principal must allow an agent to perform his duties and this being the case; a principal must cooperate with and assist an agent.

Safe Working Conditions: An agent must be provided with safe working conditions by the principal. For example, the principal needs to warn an agent about unsafe situations while performing certain duties.

Compensation: Since a principal hires an agent, the agent expects payment to be made in a reasonable manner where the situation and the arrangement made between the parties will determine what is “reasonable.”While performing duties for the principal, an agent must be paid any out of pocket expenses by the principal.

1. d.      Invalid contract: An invalid contract is a contract which ceases to be enforceable by law. A contract when originally entered into may be valid and binding on the parties which may subsequently become invalid.

3. THE TERMINATION OF AGENCY RELATIONSHIP:

1. a.      Definition of  “Termination of Agency Relationship”:

 The Principal can terminate an Agent’s authority at any time without having to give notice and if the trust between the Agent and Principal has broken down, it is not reasonable to allow the Principal to remain at risk in any transactions that the Agent might conclude during a period of notice.

b.      How an Agency Relationship can be terminated:

 The relation of principal and agent can only be terminated by the act or agreement of both parties to the agency or by operation of law. Once the relationship is terminated, the agent no longer has authority to act for the principal and the principal is required to inform third parties (that dealt with the agent) that the agency relationship has been terminated. There are many ways to terminate an agency relationship which include:

Lapse of time: If the parties agree to set a time period for the agency relationship which terminates when the time period passes. For instance, you hire a person to be your agent for one year. After one year, the agency relationship automatically terminates unless you extend it. On the other hand, if the parties did not fix any appropriate time for the termination of contract, the contract is considered to be terminated after a reasonable time.

Purpose achieved: Some agents are hired to achieve a certain purpose and once that purpose is achieved, the agency relationship is automatically terminated which you can extend. A basic example is when professional sports players hire an agent to only negotiate contracts.

Mutual agreement: An agency created for a specific purpose as well as an agency created by a power of attorney is terminated once the particular purpose for which it was created was achieved.[10]  After the termination of the agency, the agent is free of any fiduciary duty to the principal arising from the agency relationship and both parties can terminate the agency by mutual agreement as such relationship requires the mutual approval of the parties and both the parties have power to withdraw their approval. Moreover, an agency may not be terminated by the act of one of the parties and should be done mutually and the mutual abandonment of an agency is a question of fact, since it is a matter of intention of both the parties. The court will ascertain such interest from the surrounding facts and circumstances of the transaction as well as implied from the conduct of the parties.[11]

Certain events: An agency relationship will automatically terminate upon the occurrence of certain events include death, insanity, or bankruptcy of either the principal or agent.

In addition, an agency can be terminated by operation of law. The death of the principal operates as an immediate and absolute revocation of the agent’s authority. The loss of capacity of a party resulting from temporary or permanent mental incompetency may result in the termination of the agency relationship. Similarly, bankruptcy of the principal is a valid reason for the termination of agency and the agent is divested of any authority to handle with any assets or rights of property of which the principal was divested by reason of the bankruptcy, irrespective of whether the agent receives notice of the insolvency. A power of attorney may be terminated by the bankruptcy of the principal. The mere bankruptcy of the principal will not automatically terminate agent’s authority.

A change in value of the subject matter or a change in business conditions may terminate or suspend the agent’s authority if the agent should reasonably deduce that the principal would not consent if aware of such facts.  Similarly, a change in legal identity of, or merger by, the principal is a valid ground for termination of an agency contract and the termination of the principal’s interest is yet another ground for terminating the agent’s authority. The agent’s authority ceases when the agent has notice of the fact.

4. How the termination without the knowledge of the agent may not render the act invalid which has been done after the recession of contract:

1. a.      Recession of Contract:

The recession of contract is the act of cancelling or ending law or the cancellation of all or some terms of the contract.

The destruction or annulling of a contract and the right to rescind a contract seems to suppose not that the contract has existed only in appearance; but that it has never had a real existence on account of the faults which accompanied it; or which prevented its actual execution.

A recession of contract cannot be revoked by one party unless both parties can be placed in the same situation, and can stand upon the same terms as existed when the contract was made. The clear instance of this rule is where one party by taking possession has received a partial benefit from the contract.

1. b.      Termination without the knowledge of the agent may not render the act invalid:

According to Indian Contract Act, 1872, a termination of Principal-Agent relationship without the knowledge of the agent cannot make the act invalid after cancelling the contract. Whether the contract between a Principal and an Agent is written or spoken, when acts are completed by the principal without the authority of the agent, the principal can choose to make an agreement officially valid by signing it which is called Ratification. Knowledge requisite is also important for valid ratification as ratification can be invalid by someone whose knowledge of the facts of the case is not materially perfect.[12]

 5. CONCLUSION:

The principal can control an agent’s conduct for any duties specified in the agreement as Principal is more powerful than Agent. Though an agent can represent a principal in anything, many principals restrict the scope of an agent’s representation. For example, if you are selling your house, you may hire an agent who only represents you in selling your house. However, there are two cases in which an agent, though acting without authority or exceeding its authority, may bind the principal and the third party to each other. The first case occurs whenever the principal ratifies the agent’s act. Therefore, the agency relationship can be terminated by few reasons which causes the cancellation of the contract may not make the act invalid.

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