Monday, January 17, 2011

Agency - Creation, Termination

(a) Explain the terms ‘Agency’, ‘Agent’ and ‘Principal’. How is agency created and terminated?
(b) What are the various types of Agent? Explain the rights, duties and liabilities of Agent and Principal : Agency is a special type of contract. Under ordinary contracts, the parties to the contract act entirely by themselves. When instead another person is engaged to do the acts under the contract, it is called agency. Section 182 of the Contract Act defines the terms Agent and Principal as follows:
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 represented, is called Principal.
The contract which creates the relationship of ‘Principal’ and ‘Agent’ is called an agency.
Creation of agency:
Contract of agency is like any other contract with the difference that there is no need of consideration in contract of agency. A contract of agency comes into existence in any of the following ways.
1.  Agency by express Agreement: The contract of agency may be made orally or in writing. In most of the business dealings the agency is created by a word of mouth. If this form was not recognized by law, the trade and industry could hardly go on. Agency is also created by a contract in writing. Agency is normally preferred in the dealings of immovable property. The common form of an agreement in writing is “power of Attorney” whereby, authority is given to the power of attorney holder, either generally or specifically, to act on behalf of the Principal. A general power of attorney authorises the Agent to do all things on behalf of the Principal i.e. to act generally in the business of the Principal. A specific power of attorney empowers the Agent to do or perform a single transaction e.g. selling of house or borrowing money on a mortgage etc. 2. Agency by implied Agreement: Implied agency may arise by conduct or situation of the parties of the circumstances of the case. Such an agency may take any of the following forms: a)  Agency by estoppel: Such an agency is based on the principle of estoppel. The rule of estoppel can be stated thus: Where a person, by his words or conduct, has willfully led another to believe that certain set of circumstances or facts exist, and that other person has acted on that belief, he is estopped from denying the truth of such statements. In other words, estoppel arises when one is precluded from denying the truth of anything which he has represented as a fact, although it is not a fact.b)  Agency by holding out: Such agency is based on the principle of holding out which is a part of the principle of estoppel. The only distinction is that in this case some affirmative conduct by the Principal is necessary. For example, a dealer in iron usually sent his employee to buy on credit and paid for it afterwards. On one occasion, he sent the employee with cash, who bought the iron on credit and pocketed the money. It was held that the iron merchant was liable to pay for the iron, as the previous dealings justified the seller in assuming that the Agent had authority to buy on credit. The employer’s conduct in ‘holding out’ his employee to be his agent estops him from denying the existence of authority of the employee. However, if the Agent is held out as having only a limited authority to do acts, the Principal is not bound by an act outside the authority. c)  Agency by necessity: In certain circumstances, the law authorises a person to act as agent for another without any regard to the consent of the Principal. A wife deserted by her husband and forced to live separate from him, can pledge her husband’s credit to buy all the necessaries of life according to the position of the husband even against the wish of the husband and the husband can be held liable for the same. In other cases where in order to save the property of another, one has to act before the instructions of the owner can be received, he is, by necessity, authorised to act as Agent and the consent of the owner as Principal is assumed in law. An Agent exceeding his authority, bona fide, in an emergency or the carrier of the goods acting as bailee and doing anything to protect or preserve the goods in an emergency, although there is no express authority, are the examples of implied agency by necessity. 3. Agency by ratification: Ratification means the subsequent adoption and acceptance of an act originally done without instructions or authority. Thus, where an Agent exceeds his authority (except under emergency), the acts of the Agent are not binding on the Principal. The Principal, however, may afterwards confirm and adopt the contract so made and this is known as ratification. Section 196 of the Contract Act provides for ratification and states that ‘where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.’ 
Termination of agency
An agency may be terminated either by – 1) act of the parties, or 2) operation of law.
By act of the parties: 1. By agreement: An agency, like any other contract, can be terminated at any time by a mutual agreement between the Principal and the Agent. 2. Revocation by the Principal: The Principal is empowered to revoke the authority of the Agent at any time. The agency stands terminated from the time such revocation is effected. Revocation can be express or implied.
a.  In the case of a continuous agency, it can be terminated by revocation only for the future. It cannot be revoked in relation to the acts already done by the Agent. In other words, revocation cannot be with retrospective effect. Reasonable notice should be given to the Agent and also the third parties before revocation. b. An agency, which is created for a fixed period, can be terminated by revocation even before the expiry of that period. However, the Principal is bound to pay compensation to the Agent, even if the authority is revoked after giving notice. 3. Renunciation by the Agent: It is the termination of the agency at the instance of the Agent, when he no longer wishes to continue working as Agent. The Agent has to give a reasonable notice to the Principal of his intention to renounce the agency; otherwise he is liable to compensate the Principal for any loss due to renunciation without notice. Further, if the agency is for a fixed period and the Agent renounces it without sufficient cause before the expiry of the period, he shall have to compensate the Principal for the resulting loss, if any.
By operation of law:
An agency comes to end automatically by operation of law in the following conditions:
1. Completion of business of agency: If the purpose for which the agency is created is served and achieved, the agency stands terminated, e.g.  where an advocate is appointed to appear in a suit, his authority comes to end when the adjudication is complete and the judgment is delivered. 2. Expiry of time: When the agency is created for a specified period of time, the agency comes to end with that period, even though the business or reason for which the agency was created continues. 3. Death of the Principal or the Agent: An agency is terminated automatically on the death of the Principal or the Agent. In the event of the death of the Principal, the Agent must take all reasonable care to protect the interests of the deceased Principal, which were entrusted to him. 4. Insanity of the Principal or the Agent:  If the Principal or the Agent becomes of unsound mind, the agency is terminated automatically. Here also, in the case of insanity of the Principal, the duty of the Agent is the same as in the event of death of the Principal. 5. Insolvency of the Principal: When the Principal becomes insolvent, the agency is terminated. However, the termination of agency on the insolvency of the Agent is at the discretion of the Principal. 6. Destruction of the subject matter: Where the agency is created with reference to a particular property or subject matter, it stands terminated automatically with the destruction of that property. When the Agent is appointed for the sale of a house, the agency is terminated when the house is destroyed by fire. 7. Dissolution of a Company: It is like the death of the Principal or the agent. When Principal or the Agent is an artificial person created only in the eyes of law (such as incorporated companies), the agency is terminated with the dissolution of that company.
8.  Becoming an alien enemy: If the Principal or the Agent is a citizen of another country and the war breaks between India and that country, the contract of agency is automatically terminated, as the continuance of the same is unlawful.


  1. very nice answer......
    thanx a lot..for providing such a beautiful info...

  2. Thanks this information is very useful to me. God Bless.