“The Law of agency is Commercial law dealing with a contractual or non- contractual set of relationships” Discuss.


Principal can be any person who has the legal capacity to perform an act may be a principal and empower an agent to carry out that act. It can be Persons, Corporation, Partnerships, not for profit organizations, and government agencies may all be principals and appoint agents. On the other hand Agent is basically any individual who are capable of taking care of the act to be undertaken is certified to serve as an agent. The relationship between a Principal and an agent is entirely contractual one that we all know. So, a contract which is made by an agent on behalf of a principal is generally certified to be the contract of the principal which is not of the agent. Generally, it allows the principal to authorize somebody to carry out his/her duties, either for a specific purpose (i.e. purchasing a land). The agency relationship can be both informal and formal agreement. Generally formal agreement is like writing agreement. The acts must be legal for example: we cannot hire agent to conquer illegal lands or kill someone. An Agent must obey all kind of instructions given by the Principal. Main objective is Agent must be loyal to the Principal.[1] Basically, Law of contract, 1872 is when people get involve in trade, commerce and industry, then carry on business by entering into contracts. As already mentioned there should be an intention on the part of the parties to the agreement to create a legal relationship. An agreement of a purely social or domestic nature is not a contract. The Law of agency is Commercial law dealing with a contractual or non- contractual set of relationships. Like a person called the agent who will worked on behalf of another person that person is called principal and that will create a legal relationship with a third party. It is generally relationship between a principal and an agent where as the principal will hire an agent to work under his/her order. The job of the agent is to negotiate on behalf of the principal or bring his/her and third parties into contractual relationship. This branch of law separates and regulates the relationships between:

–          Agents and Principals

–          Agents and the third parties with whom they deal on their principals

–          Principals and the third parties when the agents purport to deal on their behalf.

Basically, Indian act is similar to our country so in India, section 182 of the Contract Act 1872 defines Agents as “a person employed to do any act for another or to represent another in dealings with third persons.” [2] Basically our topic is to evaluate the relation between a Principal and an agent is entirely contractual one. But termination of such relationship without any knowledge of the agent may not render the act invalid which has been done after the recession of the contract.

 The relationship between Agent and Principal:

This relationship has been going since 17th century till now, as days goes by many things have changed as well as the rules and regulations of the Agent and Principal relationship. Basically the relationship between the principal and the agent is called the “agency,” and the law of agency which guide for this type of relationship. The relationship between Agent and Principal can be informal and it also can be formal. For example: when an investor buys share of an index fund, he is the principal, and the fund manager becomes his agent. As an agent, the index fund manager must manage the fund, which consists of many principals assets, in a way that will maximize returns for a given level of risk in accordance with fund’s prospectus.[3]  ”The relationship between Agent and Principal depend on some various questions.

  1. When the appointment of sub- agent is legally justified?

 Where an agent appoints a sub agent, the principal is liable for the acts of the sub agent. Since there is not privity of contract between the principal and the sub agent, the sub agent is not directly answerable to the principal, except in case of fraud or willful wrong.

Similarly, Principal is not liable to the sub agent. Thus the legal relations of the principal, agent and sub-agent can be summarized as follows:

  1. The principal is bound by the acts of the sub agent.
  2. The principal cannot hold the sub agent liable, except in cases of fraud or willful wrong.
  3. The sub agent cannot hold the principal liable, say for his remuneration.
  4. The agent is liable to both, i.e. to the principal for the acts of the sub agent and to the sub agent for the acts of the principal.
  5. The agent is liable to the sub agent for his remuneration.

  1. When the appoint of the sub-agent is not legally justified.

If an agent appoints a sub agent without implied or express authority, i.e. without having authority, the principal is not bound by the acts of the sub agent. In such cases, the agent will be personally liable by or responsible for the acts of the sub agent, nor is the sub agent responsible to the principal.” Taken from preserve articles. [4]

 Law of Contract 1872

Law of contract 1872 is basically an Indian contract Act 1872, which is also used by Bangladesh. Basically Law of contract act 1872 is the main source of law regulating contracts in Indian law, as subsequently amended. It determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some right and duties upon the contracting parties. Indian contract deals with the enforcement of these rights and duties upon the parties.[5]

 Essential elements of a Valid Contract:

Essential elements of a valid contract are:

  1. Proper offer and proper acceptance, there must be an agreement based on a lawful offer made by person to another and lawful acceptance of that offer made by the later section 3 to 9 of the contract act, 1872 lay down the rules for making valid acceptance.
  2. Lawful consideration: An agreement to form a valid contract should be supported by consideration. Consideration means “something in return”. It can be cash, kind an act or abstinence. It can be past, present or future. However, consideration should be real and lawful.
  3. Competent to contract or capacity: In order to make a valid contract the parties to it must be competent to be contracted. According to section 11 of the Contract Act, a person is considered to be competent to contract if he satisfies the following criterion:
  4. Free Consent: To constitute a valid contract there must be free and genuine consent of the parties of the contract. It should not be obtained by misrepresentation, fraud, coercion, undue influence or mistake.
  5. Lawful object and agreement: The object of the agreement must not be illegal or unlawful.
  6. Agreement not declared void or illegal: Agreement which have been expressly declared void or illegal by law are not enforceable at law, hence they do not constitute a valid contract.
  7. Intention to create legal relationships: when the two parties enter in to an agreement, there must be intention must be to create a legal relationship between them, if there is no such intention on the part of the parties. There is no contract between them agreements of a social or domestic nature do not contemplate legal relationship as they are not contracts.
  8. Certain, Possibility of Performance.
  9. Legal formalities


In Law, the relationship occurs when one person or party (the principal) engages another (the agent) to act for him/her. For example: a person hires another person to sell his/her goods, to manage his/her business or fixed his/her property. The law of agency is basically the legal relationship where the agent deals with a third party on behalf of the principal. The competent agent is legally capable of acting for this principal through the third party. Therefore, the process of concluding a contract through an agent involves a two kind relationship. On the other side, the law of agency is concerned with the external business relations of an economic unit and with the powers of the various representatives to affect the legal position of the principal. On the other side, it rules the internal relationship between principal and agent as well, thereby imposing certain duties on the representative (diligence, accounting, good faith, etc.)[6]

Agent and Principal problem:

In political science and economics, the problem of motivating a party to act on behalf of another is known as the principal agent problem. The terms principal and agent originate in law. The principal agent problem arises when a principal compensates an agent for performing certain acts that are useful to the principal and costly to the agent, and where there are elements of the performance that are costly to observe. This is the case to some extent for all contracts that are written in a world of information asymmetry, uncertainty and risk. Here, principals do not know enough about whether (or to what extent) a contract has been satisfied. The solution to this information problem – closely related to the moral hazard problem is to ensure the provision of appropriate incentives so agents act in the way principals wish. In terms of game theory, it involves changing the rules of the game so that the self interested rational choices of the agent coincide with what the principal desires. Even in the limited arena of employment contracts, the difficulty of doing this in practice is reflected in a multitude of compensation mechanisms and supervisory schemes, as well in critique of such mechanisms.[7]


An agent’s authority can be terminated at any time. 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.

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. 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).

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).

This has become a more difficult area as states are not consistent on the nature of a partnership. Some states opt for the partnership as no more than an aggregate of the natural person who have joined the firm. Others treat the partnership as a business entity and, like a corporation vest the partnership with a separate legal personality. Hence, for example, in English law, a partner is the agent of the other partners whereas, in Scots Law where there is a separate personality, a partner is the agent of the partnership. This form of agency is inherent in the status of a partner and does not arise out of a contract of agency with a principal. The English Partnership Act 1890 provides that a partner who acts within the scope of his actual authority (express or implied) will bind the partnership when he does anything in the ordinary course of carrying on partnership business. Even if that implied authority has been revoked or limited, the partner will have apparent authority unless the third party knows that the authority has been compromised. Hence, if the partnership wishes to limit any partner’s authority, it must give express notice of the limitation to the world. However, there would be little substantive difference if English law was amended: partners will bind the partnership rather than their fellow partners individually. For these purposes, the knowledge of the partner acting will be imputed to the other partners or the firm if a separate personality. The other partners or the firm are the principal and third parties are entitled to assume that the principal has been informed of all relevant information. This causes problems when one partner acts fraudulently or negligently and causes loss to clients of the firm. In most states, a distinction is drawn between knowledge of the firm’s general business activities and the confidential affairs as they affect one client. Thus, there is no imputation if the partner is acting against the interests of the firm as a fraud. There is more likely to be liability in tort if the partnership benefited by receiving fee income for the work negligently performed, even if only as an aspect of the standard provisions of vicarious liability. Whether the injured party wishes to sue the partnership or the individual partners are usually a matter for the plaintiff since, in most jurisdictions, their liability is joint and several.[8]


During the past time till now we have seen many changes in rules and regulation there were also some changes in people’s desire and needs. Now days, technology makes life easier and work can be done very easily. So, the relationship between Agent and Principal also change in many ways. Now people do their work through internet and telephone which makes our life easier before it wasn’t possible. What we have seen that without the knowledge of the agent may not render the act invalid which has been done after the recession of contract.



We have seen that many things have been changed now days, people desire also increased at a larger extent. Now days formal relationship between Agent and Principal has increased and people became more reliable on formal contracts rather than informal contracts. So people became more clever and more responsible and they give value to their work and do their work properly. Here we have seen and evaluate on the basis of Law of Contracts 1872 that the relationship between a Principal and an Agent is entirely contractual one but termination of such relationship without the knowledge of the agent may not render the act invalid which has been done after the recession of contract.


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Ahmed M, ‘Challenges in Implementing Access to Justice Reforms in Bangladesh’ in Asian Development Bank, Challenges in Implementing Access to Justice Reforms, (ADB, 2005)

Almond,  M.  A.,  and  S.  Syfert.  “Beyond  Compliance:  Corruption,  Corporate  Responsibility  and  Ethical  Standards  in  the  New  Global  Economy.”  North Carolina Journal of International Law and Commercial Regulation 22 (1997): 389-447.

Alsop,  R.,  ed.  Power,  Rights  and  Poverty:  Concepts  and  Connections.  World  Bank/DFID, 2004. Alston,  Philip,  and  Mary  Robinson,  eds.  Human  Rights  and  Development:  Towards Mutual Reinforcement. Oxford: Oxford University Press, 2005.

Amnesty International, Bangladesh: The Ahmaddiyya Community – their rights must be  protected, (Amnesty International, 2004). <http://asiapacific.amnesty.org/library/Index/ENGASA130052004?open&of=ENG-BGD>,  accessed 13 April 2008.

Anderson,  Michael.  Access  to  Justice  and  Legal  Process:  Making  Legal  Institutions  Responsive  to  Poor  People  in  LDCs.  IDS  Working  Paper  No. 178, 2003. http://siteresources.worldbank.org/INTPOVERTY/Resources/ WDR/DfiD-Project-Papers/anderson.pdf

Aubut, Julie. The Good Governance Agenda: Who Wins and Who Loses. Some  Empirical Evidence from 2001. London School of Economics, Development  Studies Institute, 2004. www.lse.ac.uk/collections/DESTIN/pdf/WP48.p

  [1]  The relationship between Agent and Principal (http://www.ruf.rice.edu/~schuler/principal-agent.html )

[2] Wiki link about the Agent and Principal definition.

[3] Relationship between Principal and agent from wiki link

[5] Wiki link about Indian act 1872.

[6] Wiki links about the agency.

[7] Articles from the magazine Daily sun pg 30.

[8]  Termination process. http://en.wikipedia.org/wiki/Law_of_agency