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The Formation Of Agency and Termination

CONTENTS

 INTRODUCTION
 The concepts
 Research Methodology
 Statement of Problem
 Objectives
 Hypothesis
 The Nature of Agency

(i)Liability of agent to third party

(ii)Liability of agent to principal
(iii)Liability of principal to agent
(IV)Duties
(V)Persons Who Can Initiate an Agency Relationship
 Kinds of Employment Relationships
(i)Employer-Employee Relationship
(ii)Principal-Agent Relationship
(iii)Principal-Independent Contractor Relationship
(iv)Employment at Will
 Summary: Kinds of Employment Relationships
 Formation of the Agency Relationship
(i)Express Agency
(ii)Implied Agency
(iii)Apparent Agency
(iv)Agency by Ratification
 Summary: Formation of Agency Relationships
 Termination
(i)Termination of an Agency and Employment Contract
(ii)Termination by Acts of the Parties
(iii)Termination by Operation of Law
(iv)Irrevocable Agency
(v)Wrongful Termination of an Agency or Employment Contract

 Conclusion
 Suggestions
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Introduction-:
Agency is a special type of contract. The concept of
agency was developed as one man cannot possibly do every transaction
himself. Hence, he should have opportunity or facility to transact business
through others like an agent. The principles of contract of agency are –
(a) Excepting matters of a personal nature, what a person can do himself,
he can also do it through agent (e.g. a person cannot marry through an
agent, as it is a matter of personal nature)

(b) A person acting through an agent is acting himself, i.e. act of agent is act
of Principal. - - Since agency is a contract, all usual requirements of a valid
contract are applicable to agency contract also, except to the extent
excluded in the Act. One important distinction is that as per section 185, no
consideration is necessary to create an agency.
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'
behalf; and
 Principals and the Third Parties when the Agents purport to deal on
their behalf.

The common law principle in operation is usually represented

in the Latin phrase, qui facit per alium, facit per se, i.e. the one who acts
through another, acts in his or her own interests and it is a parallel
concept to vicarious liability and strict liability in which one person is
held liable in Criminal law or Tort for the acts or omissions of another.

―In the legal phraseology, every person who acts for

another is not an agent. A domestic servant renders to his master a
personal service; a person may till another’s field or tend his flocks in his
shop or factory or may performed upon his roads; one may act for
another in aiding in the performance of his legal or contractual
obligations of third persons….In none of these capacities he is an agent
and he is not acting for another in dealings with third persons. It is only
when he acts as a representative of the other in business negotiation,
between that other and third persons, that he is an agent……
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Representative character and derivative authority may briefly be said to

be the distinguishing feature of an agent.‖

Hallmark of agency:-

“Agent” is defined in section 182 of the Indian Contract Act in the

following ward:

Section-182-“Agent and “principal” defined- An agent is a person

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

“The essence of the matter is that the principal authorized the agent to
represent or act for him in bringing the principal into contractual
relation with a third person.”

CONSIDERATION NOT NECESSARY –:

No consideration is necessary to create an agency. [section 185

of the Indian Contract Act 1872 ]. Thus, payment of agency commission is
not essential to hold appointment of Agent as valid.

A PERSON CAN BECOME A PARTNER IN A FIRM, WHICH IS THE

POSITION OF AN AGENT, WITHOUT MAKING ANY CAPITAL
CONTRIBUTION. 1

THE CONCEPT OF AGENCY-:

The concept of “agency” has been thus explained by
RAMSWAMI J of the Madras High Court in Krishna v Ganapathi;2

―In the legal phraseology, every person who acts for another
is not an agent. A domestic servant renders to his master a personal service;
a person may till another’s field or tend his flocks or work in his shop or
mine; one may for another in aiding in the performance of his legal or
contractual obligations of third persons…. In none of these capacities he is
an agent and he is not acting for another in dealings with third persons.

1
Shivraj Reddy & Bros v S. Raghu Raj Reddy, AIR 2002 NOC 120 (AP)
2
AIR 1955 SC Mad 648.
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The reciprocal rights and liabilities between a principal and

an agent reflect commercial and legal realities. A business owner often relies
on an employee or another person to conduct a business. In the case of a
corporation, since a corporation is a fictitious legal person, it can only act
through human agents. The principal is bound by the contract entered into by
the agent, so long as the agent performs within the scope of the agency.

A third party may rely in good faith on the representation

by a person who identifies himself as an agent for another. It is not always
cost effective to check whether someone who is represented as having the
authority to act for another actually has such authority. If it is subsequently
found that the alleged agent was acting without necessary authority, the
agent will generally be held liable.

Research Methodology-:

 This Project is based on Doctrinal Research.

Statement of Problem -:

Under Indian Contract Act agent cannot be bound by the

contract on behalf of principal. In the Globalization world all most all made
by the agents. In this situation it is difficult to parties of the contract to
protect their interest.

There are three broad classes of agent-:

1. Universal agents hold broad authority to act on behalf of the principal,

e.g. they may hold a power of attorney (also known as a mandate in
civil law jurisdictions) or have a professional relationship, say, as
lawyer and client.
2. General agents hold a more limited authority to conduct a series of
transactions over a continuous period of time; and
3. Special agents are authorized to conduct either only a single
transaction or a specified series of transactions over a limited period
of time.
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Objectives-:
1. To analyses the law of agency in India.
2. To understand the effect of globalization on the law of agency.
3. To make certain suggestions in the context of Law of agency in the
Globalization.
Hypothesis -:
The Indian contract Act makes the provision about the
presumption of contract of contrary. It seems that under the contract if the
provision about the contract shall be made mandatory them the interest of
third parties can be protect.
The work has been divided into four parts. Part second deals with the
concept of law of agency in India .
Part third is about the concept, effect of globalization particularly to Indian
context.
Part four is the conclusion and suggestion of the law of agency in
globalization.

The Nature of Agency-:

 Agency relationships are formed by the mutual consent of a principal
and an agent.
 Agency is the fiduciary relationship ―which results from the
manifestation of consent by one person to another that the other shall
act in his behalf and subject to his control, and consent by the other so
to act.‖
 Agency Law – The large body of common law that governs agency..
 A mixture of contract law and tort law.
 Principal – The party who employs another person to act on his or her
behalf.
 Agent – The party who agrees to act on behalf of another.

Liability of agent to third party-:

If the agent has actual or apparent authority, the agent will

not be liable for acts performed within the scope of such authority, so long
as the relationship of the agency and the identity of the principal have been
disclosed. When the agency is undisclosed or partially disclosed, however,
both the agent and the principal are liable. Where the principal is not bound
because the agent has no actual or apparent authority, the purported agent is
liable to the third party for breach of the implied warranty of authority.
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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.

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.

Duties-:
An agent owes the principal a number of duties. These include:

 a duty to undertake the task or tasks specified by the terms of the

agency (that is, the agent must not do things that he has not been
authorized by the principal to do);
 a duty to discharge his duties with care and due diligence; and
 a duty to avoid conflict of interest between the interests of the
principal and his own.

An agent also must not engage in self-dealing, or

otherwise unduly enrich himself from the agency. An agent must not usurp
an opportunity from the principal by taking it for himself or passing it on to
a third party.

In return, the principal must make a full disclosure of all

information relevant to the transactions that the agent is authorized to
negotiate and pay the agent either a prearranged commission, or a reasonable
fee established after the fact.

Persons Who Can Initiate an Agency Relationship-:

 Any person who has the capacity to contract can appoint an agent to act
on his or her behalf.
 Persons who lack contractual capacity cannot appoint an agent.
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 e.g., insane persons and minors

 An agency can be created only to accomplish a lawful purpose.
 Agency contracts that are created for illegal purposes or are against
public policy are void and unenforceable.
An Agent in Commercial Law (also referred to as a manager)
is a person who is authorized to act on behalf of another (called the Principal
or client) to create a legal relationship with a Third Party.
The test of determining the existence of agency relationship has been
explained by DHAWAN J of the Allahabad High Court in the following
words:3
―Agency depends on true nature of relationship.4
Kinds of Employment Relationships-:

 Employer-Employee Relationship;
 Principal-Agent Relationship;
 Principal-Independent Contractor Relationship;
Employer-Employee Relationship-:

 A relationship that results when an employer hires an employee to

perform some form of physical service.
 An employee is not an agent unless he or she is specifically
empowered to enter into contracts on the principal employer’s
behalf.
Principal-Agent Relationship-:

 An employer hires an employee and gives that employee authority

to act and enter into contracts on his or her behalf.
 The extent of this authority is governed by any express agreement
between the parties and implied from the circumstances of the
agency.
Principal-Independent Contractor Relationship-:

 Principals employ persons or businesses who are not employees to

perform certain tasks on their behalf.
 These persons and businesses are called independent contractors.
 A principal can authorize an independent contractor to enter into
contracts.

3
Loon Karan v John & Co. AIR 1967 All 308.
4
Quoting from HALSBURY’S LAWS OF ENGLAND, 3 rd Edn, Vol. 1 146.
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 Principals are bound by the authorized contracts of their

independent contractors

The crucial factor in determining whether a person is an

employee or an independent contractor is the degree of control that the
principal has over that person.
Employment at Will-:
 At-Will Employees – Employees who do not have an employment
contract;
 Under common law, an at-will employee could be discharged
by an employer at any time for any reason;
 Exceptions to the at-will doctrine;
 Statutory Exception;
 Contract Exception;

Summary: Kinds of Employment Relationships-:

Type of Relationship Type of Relationship

Employer-Employee The employer has the right to control the

physical conduct of the employee.

Principal-Agent The agent has the authority to act on behalf

of the principal as authorized by the
principal and implied from the agency.

Principal-Independent An employee is often the agent of his

Contractor employer.
The principal has no control over the
details of
The independent contractor’s conduct.
An independent contractor is usually not an
agent of the principal.
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Formation of the Agency Relationship-:

Express Agency--------------- --------Implied Agency

Agency Relationship
Agency by Ratification------- -------Apparent Agency

Express Agency-:

 An agency that occurs when a principal and an agent expressly agree

to enter into an agency agreement with each other.
 Exclusive agency contract
 Power of attorney
 Express agency contracts can be either oral or written unless the
Statute of Frauds stipulates that they must be written.

Implied Agency-:

 An agency that occurs when a principal and an agent do not expressly

create an agency.
 The agency is implied from the conduct of the parties.
 The extent of the agent’s authority is determined from the particular
facts and circumstances of the particular situation.
 Incidental authority

Apparent Agency-:

 Agency that arises when a principal creates the appearance of an

agency that in actuality does not exist.
 When an apparent agency is established, the principal is estopped
from denying the agency relationship.
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 It is the principal’s actions that create an apparent agency.

Agency by Ratification-:

An agency that occurs when:

1. A person misrepresents himself or herself as another’s agent when in
fact he or she is not, and
2. The purported principal ratifies (accepts) the unauthorized act.

Termination-:
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 Section 201 to 210 The Indian Contract Act, 1872, an agency may
come to an end in a variety of ways:

(i) By the principal revoking the agency – However, principal cannot revoke
an agency coupled with interest to the prejudice of such interest. Such
Agency is coupled with 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)

(ii) By the agent renouncing the business of agency;

(iii) By the business of agency being completed; (iv) By the principal being
adjudicated insolvent. (Section 201 of The Indian Contract Act. 1872)

The principal also cannot revoke the agent’s authority after it has been partly
exercised, so as to bind the principal (Section 204 of The Indian Contract
Act. 1872), though he can always do so, before such authority has been so
exercised (Sec 203 of The Indian Contract Act. 1872).
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Further, as per section 205 of The Indian Contract Act. 1872, 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 of The Indian Contract Act. 1872).

As per section 207 of The Indian Contract Act. 1872, 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 of The Indian Contract Act. 1872).

When an agent’s authority is terminated, it operates as a termination of

subagent also.

Termination of an Agency and Employment Contract-:

 An agency contract is similar to other contracts in that it can be

terminated by:
 Acts of the parties, or
 Operation of law;
 Once an agency relationship is terminated, the agent can no longer
represent the principal or bind the principal to contracts;

Termination by Acts of the Parties-:

An agency may be terminated by the following acts of the parties:

1. Mutual agreement
2. Lapse of time
3. Purpose achieved
4. Occurrence of a specified event

Termination by Operation of Law-:

An agency is terminated by operation of law, including:

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1. Death of the principal or agent

2. Insanity of the principal or agent
3. Bankruptcy of the principal
4. Impossibility of performance
5. Changed circumstances
6. War between the principal’s and agent’s countries.

Irrevocable Agency-:

 An agency coupled with an interest:

 Special type of agency relationship,
 This type of agency is irrevocable by the principal,
 Not terminated by the death or incapacity of either the principal
or the agent,
 Terminates only when the agent’s obligations are performed,

Wrongful Termination of an Agency or Employment Contract-:

 The termination of an agency contract in violation of the terms of the

agency contract.
 The nonbreaching party may recover damages from the breaching
party.
 The distinction between the power and the right to terminate an
agency is critical.

CONCLOSION:-

Technology is an indispensable instrument of globalization. Its

globalizing potential , however its influenced shaped by laws and
regulations. Globalization as we understand it today is a conscious process.
People perceive the world as a single or compressed space. Laws and
regulations enables the technology to achieve its globalizing potential and
allow human activity to stretch across borders. Laws and regulations also
help to create powerful non-state actors such as international organizations
and corporations by permitting such actors to come into being and to acquire
sources of power.

The law of agency is an area of commercial law dealing with a

Contractual or Quasi-Contractual, or non-contractual set of relationships
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when an agent is authorized to act on behalf of another (called the Principal)

to create a legal relationship with a Third Party. Succinctly, it may be
referred to as the relationship between a principal and an agent whereby the
principal, expressly or impliedly, authorizes the agent to work under his
control and on his behalf. The agent is, thus, required to negotiate on behalf
of the principal or bring him and third parties into contractual relationship.

In political science and economics, the principal–agent problem

or agency dilemma treats the difficulties that arise under conditions of
incomplete and asymmetric information when a principal hires an agent,
such as the problem of potential moral hazard and conflict of interest,
inasmuch as the principal is—presumably—hiring the agent to pursue its,
the principal's, interests.

Various mechanisms may be used to try to align the interests of

the agent in solidarity with those of the principal, such as piece
rates/commissions, profit sharing, efficiency wages, performance
measurement (including financial statements), the agent posting a bond, or
fear of firing.

The principal–agent problem is found in most employer/

employee relationships, for example, when stakeholders hire top executives
of corporations. Numerous studies in political science have noted the
problems inherent in the delegation of legislative authority to bureaucratic
agencies.

As 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.
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SUGGESTIONS -:

There are some suggestions gives which was presumption of contract to

contrary-:
 Where the contract is made by an agent for the sale or purchase of
good for a merchant resident abroad.
 Where the agent does not disclose the name of his principal .
 Where the principal, though disclosed, cannot be sued.

BIBLIOGRAPHY

 Law of Contract and Specific Relief By Avtar Singh,9th edi.

 LS Sealy and RJA Hooley, Commercial Law: Text, Cases and
Materials (4th edn OUP 2009)
 "http://en.wikipedia.org/wiki/Law_of_agency"
 The Law of Contract by M.P. Jain.