This article is written by Hemal Shah wo is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Table of Contents
An Agency Agreement is defined on the basis of a legal relationship between the Principal and the Agent, whereby the agent is allowed to operate on his behalf under some cases by the Principal and to pay for the service. This suggests that the principal has control over the agent. An Agency Agreement is considered an Agency Contract and it defines the roles for the principal that the Agent needs to do. As in India, the law relating to the Agency and most other jurisdictions is characterised as a relationship in which one party, namely an agent, has the right to act on behalf of another person, namely the principal, in order to maintain legal relations between the latter and third parties.
In the Indian Contract Act, 1872, which includes the legislative rules regulating the privileges and duties of both the principal and the agent, the basis of the Law of Agency in India was coded.
An agent is a person hired and permitted to do some act for another and to represent the other person in relations with third parties, formerly under the Act. Whereas the “principal” is called the one who hires and authorises the agent to perform certain actions. The essence of the agency between the agent and the principal will explain the substance of the arrangement.
Who can be termed as agent?
However, it should be noted that not every individual acting on behalf of another can be designated as an agent. As an example, an employee is legally a representative of the employer, but may not be allowed to operate on the employer’s behalf. The provisions of the employment contract define the limitations under which an employee conducts and retains control in the company in which he is working.
It is possible to decide whether a person is an agent by deciding whether he is working for himself or on behalf of the principal. A contract in which a party agrees to be directly responsible is not an agency contract.
The Indian Contract Law stipulates that because the conditions and the actions of the parties are the same, it is not mandatory to provide a formal written agreement in order to establish an agency contract. There might be an entity and it will be legitimate even without respect, which is an exception to the law that deals are invalid without consideration. In addition, any person who is a major and is of a sound mind can be employed as an entity under Section 183 of the Indian Contract Act.
Important clauses in an agency agreement-in brief
Powers of the agent
Not only is the power of the agent restricted to actions expressly given under the Agency Arrangement, but the agent still has the implicit authority to carry out all acts which are incidental to the main act. The Act also specifies that in all emergencies, the agent has the powers to perform all the things to protect the principal, as a person of prudence might do to protect himself in the case of an emergency.
Duties of the agent
The responsibilities of the Agent include the following:
- Conducting the principal’s business according to the instructions given by the principal.
- Run the agency’s business competently and to punish the principal for loss of competence or incompetence in the case of his own negligence.
- Rendering the principal with proper and accurate accounts.
- In contact with the principal and trying to receive his orders, using all due diligence.
- To pay to the principal, all amounts received in the course of the company and without the prior permission of the principal from any work performed on the account of the latter.
Rights of the agent
- The agent has the right to demand any expenditure incurred in the course of the agency’s company by the principal.
- For the dues owed by the principal, the agent has a lien on the products.
- The agent will change his commission against the principal’s balance payable.
Duties, Powers and Rights of the Principal
- Indemnification by the Principal of the agent against the effects of all lawful actions carried out by the agent in the exercise of the control imposed on him by the agent.
- Compensation to be paid by the Principal to the agent in lieu of the harm rendered to the agent by the negligence or lack of ability of the principal.
- The principal is entitled to collect all amounts that have been void or illegitimate in the contracts entered into by the agent on behalf of the principal.
- Principal will lose the remuneration of the agent when the agent is accused of wrongdoing.
- The Principal shall provide the agent with all the valid instructions as are required to be performed while performing the given duties.
- The Principal is liable for the compensation as agreed between the agent for the services provided by the agent
- The Principal shall pay for other statutory payments as required under the law for the agent.
Termination of the agency agreement
- A clear instance of the termination either voluntarily or on occurrence of an incident shall be duly mentioned in the agreement.
- Compensation on death of the agent and the nominee to receive such payment
- The confidentiality of the services and liability of the same post termination should be duly mentioned
- Liability of the agent post termination of the agreement for the acts conducted during the agreement.
- The agent will not perform any kind of those activities that are restricted by the Principal
- The agent will undertake any liability on behalf of the principal unless strictly restricted for the same.
- In the case of any dispute between the parties, the agent will not undertake any legal proceeding against the party other than the consent provided by the Principal
- The agent will not transfer any kind of benefits under this agreement to anyone other than the principal
Modes of termination of agency
According to Section 201 of the Indian Contract Act, 1872, Termination of agency takes place in the following circumstances:
- By revocation of authority by the principal.
- By renunciation of his authority by the agent.
- On the performance of the contract of the agency.
- On the death of either principal or agent.
- By insanity of either principal or agent.
- With the expiration of the time period fixed for the contract of the agency.
- By an agreement made between the principal and his agent.
- With the insolvency of principal or agent (in few cases).
- When the principal and his agent is an incorporated company, by its dissolution
- With the destruction of the subject matter. (section 56)
An agency arrangement is a form of general contract. As such, except where the agency is irrevocable, an agency can terminate in the same way as a contract is discharged. Only the act or consent of the parties to the agency or the enforcement of the law may terminate the relationship between the principal and the agent. “In the absence of anything to prove its termination, an agency, when proven to have existed, will be presumed to have continued, unless such a length of time has elapsed as destroys the presumption.” When an entity is dissolved, the obligation of the agent to work on behalf of the principal comes to an end. A government law or instrument may stipulate the timeline for the termination of an entity.
In such a case, if the instrument states in clear and unambiguous terms that after the expiry of the time stated in the instrument, an agency shall terminate without intervention on the part of the principal or administrator, the agency shall, in effect, terminate. If the parties maintain their partnership as principal and agent after the expiry of the duration given for in the contract, a substantiated assumption is posed that their relationship is regulated by the original contract and that the contract is extended for a similar term. For example, where the parties entered into a contract for a year and proceeded to behave after one year under the contractual conditions, the court would conclude that the parties genuinely wanted to hold the contract alive for a period of time.
On the other hand, if no reasonable deadline has been set by the parties for the expiration of the contract, the contract is assumed to have been terminated after a reasonable period of time. “The nature of the act specifically authorised, the formality of the authorisation, the likelihood of changes in the purposes of the principal and other factors shall determine what constitutes a reasonable period of time during which the authority continues.” In comparison, the burden of proving an agency’s termination or revocation lies with the agency.
“Parol evidence cannot be accepted in order to add another term to an agreement even if there is nothing in the writing relating to the specific provision to which the parol evidence is addressed.” Therefore, when deciding the length of an agency contract where the written contract is treated as combined, or unambiguous, or both, courts would not admit parol proof. An agency that lasts for a fair amount of time can be terminated by one party only after giving the other party ample warning.
R. Sayani v. Bright Bros (P) Ltd, AIR 1980 Mad 162
Where an organisation has been formed for a defined amount of time, liability for its premature termination will have to be compensated if the termination did not have appropriate justification. There was no fair warning given for the premature decision of the department. The agent received Rs. 4000 a month. The court was of the opinion that there should have been at least three months’ warning. Correspondingly, a reward of Rs. 12,000 was allowed.
Carter v. White, (1883) 2 Ch D 666: (1881-85) All ER Rep 921
A principal owed his agent a sum of money and gave him an agreed exchange bill with the authority to fill in the name of the drawer. Before the agent could finish the bill, the principal died. His power to fill in the name of the drawer was not considered to be terminated.
Sukhdev v. Commr of Endowments, (1998) 1 BC 403 (AP)
Through the expiry of the name, an agency comes to an automatic end. Where a gas pump was to be regulated by the agency for a certain time, it was held that the agent was obligated to vacate the premises at the end of the period. There was no extension provision, nor was there an actual renewal clause.
Trueman v. Loder (1840) 11 Ad & El 589
A was dealing here as B’s agent. With the authority of B, all parties with which A entered into contracts in that undertaking is held to have the right to hold B accountable until B notifies the world that the authority of A is removed and it makes no sense whether the agent intended to retain the contract on his own account in a specific situation. The court dismissed the claim that it was quite unfair to ask the principal to tell the whole world that he had revoked his agent’s attorney’s power and that it should not be expected that he would contact someone with whom the agent was willing to enter into a deal and inform him of the termination.
Effect of termination of agent’s authority
Sometimes former agents continue to act on their ex-principal’s’ behalf even though the agency has ended. Once an agency terminates by any of the means just described, the agent’s actual authority (expressed and implied) ends as well. Nonetheless, such “ex-agents” may retain apparent authority to bind their former principals.
Third parties who are unaware of the termination can fairly feel that there is still authority for an ex-agent. The obvious authority of an agent also remains after termination to protect third parties who rely on such a fair appearance of authority. Thus, even if the organisation has stopped, a former agent might be able to tie the principal under his obvious jurisdiction.
Notice to third parties
Apparent authority ceases only after an effective notice of termination is issued by a third party, that is to say, when it is no longer fair for a third party to assume that the agent has legitimate authority. Such notification can provide any ground for termination by operation of law (such as modified circumstances).
The obvious authority of an agent will continue even after the death or lack of ability of the principal. After the principal’s death or lack of capacity, an agent can act with apparent authority because the basis of apparent authority is the manifestation of a principal to third parties combined with the rational assumption of a third party that the agent acts with real authority They should fairly assume that the agent is approved because third parties have not seen that the principal has died or lost capacity. The rule that the death of the principal should not immediately terminate the obvious authority is in keeping with the interest of shielding third parties who are acting without notice of the death or lack of ability of the principal.
Prudent principals may, however, want to alert third parties themselves in order to defend themselves from unintended liability. The kind of notice needed varies with the third party in question.
Actual notice is mandatory for third parties who have recently worked with the agent or who have started to work with the agent. This can be done by—
(1) a direct personal comment to the third party; or a direct personal statement to the third party;
(2) letter sent privately to a third party, to his place of business.
Constructive notification for the other parties These other parties are generally aware of the firm, but have not entered into any business with the agent. Constructive notice would usually be obtained by announcing the closure of the agency in a general circulation newspaper at the location where the agency’s business was routinely done. If no sufficient publication occurs, disclosure is fairly likely to notify third parties through some means, such as posting a note in public locations or on a website.
Claim for damages
The principal can also seek damages/losses incurred due to the agent’s acts/non-acts, aside from the revocation of the agency. It is therefore well known that the person who has broken the contract and has shown the characteristics of abandoning or renouncing the duties under the contract through his actions would not be able to seek damages from the other side.
In this case, the single sale agent, having displayed uncooperative attitude and actions and practically sabotaging the principal’s enterprise, regardless of his specific duties under both the arrangement and the Contract Act, would have no excuse to go before the court and demand damages or compensation-on the contrary, the principal would be well justified in seeking damages and costs/compensation. In view of the ‘necessity doctrine,’ it would be justified and fair to dispense with notification prior to six months, otherwise waiting for six months and playing in the hands of an untrustworthy agent would only experience the utter annihilation of the company of the principal.
Compensation on termination of the agency agreement
A compensation shall be provided to the agent only if he adheres to the principles laid down in the agreement and it is pertinent to note here that compensation shall be provided only if the agent agrees to such clause. In Indian Law and in English law (read along with common law), there is no maximum limit to which a compensation shall be appended to the agent.
The English courts originally took the opinion that liability for breach of contract had to be limited to the equivalent of damages. Now, the compensation may differ based on the well being of the principal. Let’s say for an example- It is clear that in the case of a principal in a strong financial and commercial role who clearly needs to restructure his business, for instance by adjusting the target market, the valuation of the agency business and therefore the rewards will be substantial. Similarly, if the work of the agent is not good but the deal would not authorise the principal to cancel the violation contract, termination will allow the agent to assert the benefit of the company of the client.
There has not been any substantial changes in the compensation provided to the agents while the termination, but there has been a brighter outlook at the rights of the agents to provide compensation while terminating the agreement. As discussed earlier, it is upon the parties to decide the compensation and more importantly, the amount to be discussed along with the mode of termination and their set of compensation.
An agency agreement is a form of general contract. As such, except where the agency is irrevocable, an agency can terminate in the same way as a contract is discharged. Only the act or consent of the parties to the agency or the enforcement of the law may terminate the relationship between the principal and the agent.
“An agency shall be believed to have continued, if confirmed to have occurred, in the absence of evidence of its termination, until such a period of time has expired in order to destroy the assumption that the agency can be terminated either through the act of the parties or through the action of the rule.”
Subsequent incidents can result in the business being terminated. These may be physical, as if the subject matter is lost, for instance, or the principal or agent dies or gets insane. Alternatively, they can be lawful, as if the principal or agent becomes bankrupt, or the partnership becomes unlawful (for instance, if the principal becomes an alien enemy). The consequences of termination are that as long as the principal and the agent are concerned, the rights conferred at the time of termination can continue, although no new rights can be established, at least until the agent has obtained notice of termination. It would be determinable in the same manner if the entity has been formed by consensus. A continuing entity can also be defined by offering, or in the absence of a fair warning for the duration of notice as stated in that arrangement.
Finally, if a party behaves in a fashion that is compatible with the agency’s continuity, it may, of course, be dismissed, although this could well give rise to grounds of redress for violation of contract. As far as termination by operation by law is concerned, if the organisation is for a specific contract, the partnership shall end at the conclusion of that transaction. It will cease at the end of that period if it is for a specified period.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: