The relation between the principal and agent is based on trust and confidence

The relation between the principal and agent is based on trust and confidence – explain and evaluate the statement in the parlance of law of contract, 1872.


The relation between the principal and agent is based on trust and confidence. While working on behalf of the principal the agent must take all necessary and usual means for that end and remain trustworthy to the principal. The principal has also the obligation for the payment of the agent and be held accountable for any act of the agent done on behalf of him. To protect and carry out the relationship properly the contract act, 1872 has provided certain rules (sections 182- 238) which govern the laws of the agency or the relation between the principal and agent.


Where a person works for another person or represents another person on agreement or by estoppel or by the operation of law or by necessary circumstances, that former person is called the agent of the person for whom he is working or representing and the later person is called the principal. Section 182 of the Contract act, 1872 sets out,

“An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal”

An agent has the authority to do any lawful act for the fulfillment of his duty. He often has large discretion over the proposed work, but he is bound by the instruction of his principal. To this extent, an agent may be considered as a superior servant, where the principal may be considered as the master. The only distinction between servant and agent is that an agent has full authority over the work he is entrusted to, but a servant may not have any authority over the work he is doing. The qualifications for being a principal or an agent are same and they are:

1. The person wanting to be a principal or an agent must be a major i.e. he or she must attain the age of majority according to the law to which he or she is a subject.

2. Such person must be of sound mind i.e. he or she must of sound mind according to the law to which he or she is a subject

The relationship between the principal and agent is called the agency. An agency usually depends on the assent of both parties and therefore may be revoked by the principal or renounced by the agent at any time. Even though it may not be terminated by the act of one of the parties, it may, given the necessary conditions of form and consideration, be terminated through the subsequent release by the party in interest, or the agreement of both parties to rescind or cancel the contract between them. A mutual abandonment of an agency terminates the relationship between the parties. Whether an agency was mutually abandoned is a question of fact and has to be ascertained from the facts and circumstances surrounding the transaction out of which the abandonment is claimed to have resulted; it may be implied from the acts of the parties.


Agency or the relationship between the principal and agent is purely contractual. Where a person agrees to work for another person, there has to certain agreements, formal or informal, between the persons and their relationship has to be guided by certain guidelines for streamlining the process of the act. 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.

An agency can only be established by the consent of both principal and agent. They will be held to have consented if they have agreed to what amounts to law to such relationship even if they do not recognize it themselves and even if they professed to disclaim it. Agency may be constituted by:

a. Express appointment

b. By implication of law by the conduct or situation of parties or from the necessity of the case. or

c. By subsequent notification of the principal.

However, no consideration is necessary to create an agency and the authority of the agent may be expressed or implied, which may be inferred by the circumstances of the case.

When an agent works for the principal he must have certain authority over the matter in respect of which he is working on behalf of the principal. Without such authority he cannot possibly work for the principal. The authority of an agent may be expressed or implied. An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.

Where the given authority is expressed, the agent has to work within that authority and not to go beyond that. But where the authority is implied, interpretations are needed to define the extent of the authority given to the agent. Which will fall in the implied authority depends on the circumstances of the case.

In general, in order to define the extent of implied authority the ordinary course of affairs must be regarded. The ordinary course of affairs means to act according to the usages and customs of the particular business, place or market in which he is engaged, such usages and customs must be well known and reasonable. An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act. Thus if the drawing and accepting of bills drawn or accepted by the agent is incidental to the business entrusted to the agent, that would come within the words of “ordinary course of dealing”. But the lawful act, done to complete the agents work, must be reasonable and consistent with the interest of the principal. Thus a power of attorney to dispose of certain property does not imply an authority to mortgage such. Again authority on dissolution of partnership to settle partnership affairs does not imply the authority to draw, accept or indorse bills of exchange in the name of the firm. Various case laws have emerged to define the extent of the implied authority of the agent.


An agent’s duty to act on behalf of the principal comes to an end on the termination of agency. The contract act, 1872 provides the modes of terminating the relationship between the principal and agent. The contract act, 1872 says that,

An agency is terminated by the principal by revoking his authority; or by the agent by renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any act for the time being in force for relief of insolvent debtors.

As the relationship between the principal and agent forms an agreement between them, the law of agency requires both the parties to notify the other party before terminating such relationship. According to section 205 and 206 of the contract act, 1872 where there is an express or implied contract that the agency should be continued for any period of time and the principal of the agent, as the case may be, wants to revoke or renounce the agency without sufficient cause, he must give the notice of revocation or renunciation, as the case may be, to the other party together with compensation. Otherwise the person wanting to terminate the agency will have to make good to the other, in case, where he has not given the notice of termination of the agency.

Where the instrument specifies in plain and unambiguous terms that an agency will terminate upon the expiration of the time specified in the instrument, the agency will in fact, terminate unless the terms of the agency has been extended and the parties continue their relationship as principal and agent. In such a situation a rebuttable presumption is raised that their relations are governed by the original contract and that the contract is renewed for a similar period. For instance, if the parties entered into a contract for one year and continued to act under the contractual terms after one year, it will be presumed that the parties in fact intended to keep the contract alive for another year. Where an agent has been appointed for a fixed term, the expiration of the term puts an end to the agency, whether the purpose of the agency has been accomplished or not; consequently where an agency for sale has expired by express limitation, a subsequent execution thereof is invalid, unless the term has been extended.[2] In such a situation party wanting to terminate the relationship, must give notice to the other party.

On the other hand, if the parties do not fix any appropriate time for the termination of contract, the contract is deemed to be terminated after a reasonable time. What constitutes a reasonable time during which the authority continues is determined by the nature of the act specifically authorized, the formality of the authorization, the likelihood of changes in the purposes of the principal, and other factors. In such situation, the relationship of the principal and agent will not be terminated until the completion of the business. In this regard section 218 of the contract act, 1872 specifies that,

An agent is bound to pay to his principal all sums received on his account.”

In other words, the agency will not be terminated until the completion of all obligations of both the principal and agent regarding their relationship. Case laws specify that where an agent for the sale of goods receives the price, the agency does not terminate on the sale of the goods, but continues until payment of the price to the principal. The authority of an agent for sale to contract on behalf of the principal ceases as soon as the sale is completed. He has no power to alter the terms of the contract without fresh authority from the principal.

Thus, to terminate the relationship between the principal and agent before the expiry of expressed or reasonable period of the agency, notice has to be given to the other party affected by the agency and that other party has to be compensated if he has incurred any loss by such early termination of agency.


Although law stipulates that notice must be given to the party affected by termination, notice to the other party about the revocation or renunciation of the agency is not always necessary, if the affected party actually knows, or has reason to know the facts resulting in such revocation or renunciation[3]. The principle behind giving notice of termination of the agency is to ensure in law that the other party does not incur any loss by such termination. But where such termination does not affect the interest of the parties, it can be terminated without the knowledge of the principal or the agent.

Section 205 of the contract act, 1872 stipulates that reasonable compensation has to be given to the other party affected by the termination, in cases where the agency is terminated before the expiry of the period of contract, which may be either expressed or implied. Where there is no expiry date is specified or implied, section 206 of the contract act stipulates that, reasonable notice must be given of such termination. Otherwise, the party terminating the agency must make good the damage suffered by the other party.

But where the contract of the agency has been completed or rescinded by the principal or by operation of law etc. before the exercise of the authority by the agent, notice of revocation of the agency is not necessary as the agent has no interest in the contract which could be affected by such termination. After reading section 202 and 203 of the contract act, 1872, we understand that, where the agent does not have any interest in the property which forms the subject-matter of the agency may be terminated by the principal at any time before the exercise of the authority by the agent. Case laws also suggest that where the agent has no interest coupled with his power in the agency, the principal can revoke the agency without the agent’s knowledge of the termination of the agency.

According to the contract act, 1872, a contract can be rescinded or terminated in the following circumstances:

1. By a notice of revocation by the principal.

2. By a notice of revocation by the agent.

3. By the completion of the business of the agency.

4. By death, insanity or insolvency of either of the principal or agent.

In the above circumstances (except the fourth circumstance, where the contact will be automatically rescinded whether the agent has any interest in the agency or not) if the agent does not have any interest in the agency, no notice is necessary. In the Bright Bros (P) Ltd vs. J.K. Sayani A.I.R. 1976 case, The plaintiff-appellant entered into an arrangement with the defendants-respondents which did not prescribe any particular period during which the said agency should be in vogue. Under the said arrangement the plaintiff was purchasing the goods from the respondents from time to time as well as booking orders for the sale of the respondents’ goods. This agency of the appellant was terminated by a letter dated 28/30-09-1964. The plaintiff-appellant instituted a suit for recovery of various sums including the fact that the plaintiff was entitled to a reasonable notice before his agency was terminated. The main question was “whether a reasonable notice for determination for the service of the agency was necessary at all, when under the arrangement between the parties, no period of agency has been agreed to either expressly or by necessary implication?” It was held that no notice is required to be given when agency is not for a fixed duration. So where there is no express or implied contract that the agency should be continued for any specific period, the principal is entitled to terminate agency without any obligation to give a reasonable notice.


Whether there is an express or implied contract that the agency should be continued for any period of time, a reasonable notice of such revocation or renunciation as the case may be is necessary. If the contract itself provides for the issuance of a notice, then the matter is beyond doubt and difficulty and the principal who attempts to prematurely revoke the authority cannot do so[4]. The principles applicable to such relationship could be invoked in the name of good conscience, as otherwise the man aggrieved would be without any remedy whatsoever on the facts of the case.

But where it is clear to both principal and agent that the agency does not have any reason to continue or it is bound to terminate, the rule of giving notice is merely a casualty and nothing else, for the sole purposes of rules and regulation are to streamline the contracts between men. Where the agent has no interest at all in the agency or has not even exercised his authority for the reason of rescission of the contract, revocation of such relationship cannot in anyway affect the agent. In such situation the knowledge of the revocation of such relationship does not at all affect the interest of the agent and will not render the act of the principal invalid.


1. The Contract Act, 1872

2. Mulla, “ The Indian Contract Act”, student’s edition

3. Akramul Haque, “The Contract Act”, Dhaka University

4. The Dhaka Law Reports

5. Bangladesh Legal Decision (volume 12,15)

6. All India Reports

7. The All Pakistan Legal Decisions

[1] Ex parte Delhasse, 1887, 7 Ch. D. 511, 526.

[2] Per Mokerjee, J., in Lalljeevs Dada bhai, 1916, 23 Cal, L.J. 190, 202

[3] Van houten vs Trust co. of Chicago, 413 ill. 310, ill. 1952.

[4] Section 204 of the contract act, 1872