“The “Law of Agency” it is the area of commercial law, it works with the contractual or non contractual set of relationships when an agent is given the power to act on the owner’s behalf so that the agent can build a strong relationship and communication


The relationship between a Principal and an Agent is completely contractual. Usually in this relationship the principal is the business owner or brand depends on another person either an employee or an agent, to carry out his business. The principal wants the agent to work under his command and control, on his behalf. When it is a corporation, as corporation is a fictitious legal entity it only can represents itself through human agent. The principal and the agent are bounded by certain rules and regulation into the contract as long as the contract is valid both the parties must intend that the transaction should be attended by legal consequences and create legal obligations.

 A customer may depend on the agent in good faith on the representation by the agent if he is acting on his principal behalf. Sometimes the agent act on some ground where he has not given the authority to do so. In this case the agent will be held liable.

 A contract is sometimes essential because many incidents occur due to lack of commitment. Thus Law of agency is followed. The “Law of Agency” it is the area of commercial law, it works with the contractual or non contractual set of relationships when an agent is given the power to act on the owner’s behalf so that the agent can build a strong relationship and communication with the customers or the third party. It is the relationship between the principal and the agent. On this contract the agent is required to negotiate with the third parties.

 The statement parlance of “Law of Contract, 1872” defines Agent as a person employed to do any act for another or to represent another in dealings with third persons.

 The Key Concept of Contracts:

Define Contracts:

A contract is an agreement entered into voluntarily by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. [1]

 Define Law of Contract:

 Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda [2]which is usually translated “agreements must be kept” but more literally means “pacts must be kept.”

 Section 2(h) of the Indian contract act provides that, “An agreement enforceable by law is a contract.” Therefore in a contract there must be (1) an agreement and (2) the agreement must be enforceable by law.

 An agreement enforceable by law is a contract. In a contract there must be an agreement and the agreement must be enforced by law. An agreement comes into existence whenever one or more persons promise to one or others, to do or not to do something, “every promise and every set of promises, forming the consideration for each other, is an agreement – sec: 2(e). Some agreements cannot be enforced through the courts of law, e.g., an agreement to play cards or to go to a cinema. An agreement, which can be enforced through the courts of law, is called a contract.

 According to [3]Salmond a contract is “an agreement creating and defining obligations between the parties”. According to Sir William Anson[4], “A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the others or other.

 Sir William Anson [5]observes as follows:

 “As the law relating to property had its origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract is intended to ensure that what a man has been led to expect shall come to pass; and that what has been promised to him shall be performed.”

 What agreements are contracts?

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. Nothing herein contained shall affect any law in force in Bangladesh, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.

Who are competent to contract?

Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.[6]

 Who are Principals?

A person who is the owner, who holds a position of presiding rank, or having a leading role, or the main body of a company or estate or financial holding is a Principal. He is the main body who empowers another to act as his or her representative; he is the risk bearing body that carries the prime responsibility for every obligation.

 Who are Agents?

A person who has the power to act or represent himself on behalf of another person, or group, business, government etc. example: trustee, delegate, negotiator, employee.

 Liability of agent to principal:

 If the agent has acted without actual authority, but the principal is nevertheless bound because the agent had apparent authority, the agent is liable to indemnify the principal for any resulting loss or damage.[7]

 Liability of principal to agent

 If the agent has acted within the scope of the actual authority given, the principal must indemnify the agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business.[8]

 How a Contract comes to an end?

A party who is subject to the obligations of a contract may be discharge from those obligations in one of four ways. The agreement is then at an end. The four ways are:

  • Performance
  • Agreement
  • Breach
  • Frustration

 Effects of the termination of the law:


 The authority of the agent can be terminated at anytime. When the belief, trust between both the agent and principal is broken down, it will not be good enough to allow the principal to remain at risk, at any transaction, where the agent might conclude during the period of notice. In the Indian Contract Act 1872, the section 201 to 210 says that an agency may come to an end in different ways:

  1. Withdrawal by the agent – however, the principal cannot revoke an agency coupled with interest to the prejudice of such interest. 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 (illustrations to section 201);
  2. By the agent renouncing the business of agency;
  3. By the business of agency being completed;
  4. By the principal being adjudicated insolvent (section 201).

 The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (section 204), though he can always do so, before such authority has been so exercised (section 203).[9]

 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. Notice in this connection that want of skill, continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party to the other; otherwise, damage resulting from want of such notice, will have to be paid (section 206). As per section 207, the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (section 208).

When an agent’s authority is terminated, it operates as a termination of subagent also (section 210).[7]

 Remedies for Breach of Contract:

 A party may apply to the court for a number of remedies when the other party is in breach of party contract:

  • Damages: as compensation for loss caused by the breach
  • Quantum meruit: payment for the value of what he has done
  • Specific performance: a court order to the defendant to perform the contract
  • Injunction: a court order for the other party to observe negative restriction
  • Rescission: cancellation of a contract
  • Action for the price: here the breach is failure to pay[10]

Damages: it is primarily intended to restore the party who has suffered loss to the same position he would have been in if the contract had been performed. In a claim for damages the first issue is remoteness of damages, secondly ‘measure of damages’ the court must decide how much money to award in respect of the breach and its relevant consequences measure of damages.\

 Quantum meruit: payment for the value of what he has done, a claim may be made on a quantum meruit basis as an alternative to an action for damages for breach of contract. In most cases the claim is needed because the other party has unjustifiably prevented performances.

 Specific performance: the court may in this discretion order the defendant to perform his part of the contract instead of letting him buy himself out of it by paying damages for breach.

 Injunction: an injunction is also a discretionary court order requiring the defendant to observe a negative restriction of a contract. It may be made even to enforce a contract of personal service for which specific performances would be refused.

 Action for the price: if the breach of a contract arises out of one party’s failure to pay the contractually agreed price due under the contract the creditor should bring an action to recover that sum.

 Rescission: strictly speaking the equitable right to withdraw an agreement is not a remedy for breach of contract it is a right which exists in certain circumstances such as where a contract is voidable due to misrepresentation duress and undue influences.

 What is “Rescission of Contract”?

 Declaration by a party to a legal contract, that it is using its legal right to terminate the contract. It is a final step that frees the agent from the principal and also from the contractual obligations. It can take place mutually or through reasonable understanding by an act of law. However, a contract cannot be withdrawn by one party as his wish both the agent and the principal must be present and have to stand upon the same terms and condition as it was there when the contract was formed. A contract cannot be withdrawn by one party; it will be unjustified to break a contract without another party’s decision.

 The Principal-Agent problems:

The Principal Agent problems mainly arise due to the inadequacy of the information. The problem that arises includes moral hazard and conflict of interest. Different mechanism may be used to try to align in solidarity with the principal, for example piece rate, profit sharing, efficiency wages, and performance measurement, and financial statement, agent posting a bond or fear of hiring. The problem between the principal and the agent mostly found in the relationships for example, when shareholders hire top executives of corporations. Another example the implementation of legislation (such as laws and executive directives) is open to bureaucratic interpretation, which creates opportunities and incentives for the bureaucrat-as-agent to deviate from the intentions or preferences of the legislators. Variance in the intensity of legislative oversight also serves to increase principal–agent problems in implementing legislative preferences.


 Every contract gives rise to certain legal obligations or duties on the part of the contracting parties. The legal obligations are enforced by the court.[11] Termination of certain contract between principal and agent might be valid and so the agent may not take legal. The cancellation of the contract of the agent can be done at anytime. If the belief and trust of the principal is broken down then it will not be a wise decision to keep the legal contract. It might be taken place without the knowledge of the agent which will not be invalid.


  • http://en.wikipedia.org/.
  • http://en.wikipedia.org/
  • Anson. Law of Contract.
  • Arun Kumar Sen, J. K. Commercial Law and Industrial Law 26th edition.
  • http://en.wikipedia.org. (n.d.). Apparent Authorrity and Estoppel .
  • http://en.wikipedia.org. (n.d.).
  • http://www.ma-law.org.pk. (n.d.).
  • Salmond-Jurisprudence.

[1] ( http://en.wikipedia.org/)

[2] http://en.wikipedia.org/

“Legally binding” 

[3] (Salmond-Jurisprudence)


[4] (Anson)

[5] Sir William Anson, Law of Contract.

[6] (http://www.ma-law.org.pk)

[9]http://en.wikipedia.org (http://en.wikipedia.org)

Main articles: Apparent authority and Estoppel

Indian Contract Act 1872

[10]  Handouts given by Sir

[11] Book Name: Commercial Law and Industrial Law 26th Edition

Writer: Arun Kumar Sen, Jitendra Kumar Mitra

See pp.15