Definition and Creation of Agency**

Definition of Agent and Principal (Section 182)

The concept of Agency is fundamental to commercial transactions. It allows one person (the agent) to act on behalf of another person (the principal), creating a legal relationship where the acts of the agent bind the principal. Chapter X of the Indian Contract Act, 1872 (Sections 182 to 238) deals with Agency.

Definition under Section 182

Section 182 defines "Agent" and "Principal":

"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'."

Explanation:

Agent: The person who performs the act or represents the other person. Their role is to create a legal relationship between their principal and a third party.
Principal: The person on whose behalf the act is done or who is represented. The actions of the agent, within the scope of their authority, bind the principal.

The relationship of agency is a fiduciary one, meaning it is based on trust and confidence. The agent owes a duty of loyalty and good faith to the principal.

Agent acts on behalf of the Principal

The core idea of agency is that the agent is a link between the principal and third parties. The agent does not act for themselves but for and on behalf of the principal. The legal effect of the agent's authorized actions is the same as if the principal had performed the actions directly.

Example: A appoints B as his agent to sell his car. B finds a buyer, C, and enters into a contract of sale with C on behalf of A. The contract is between A (principal) and C (third party), brought about by B (agent). A is bound to sell the car to C, and C is bound to pay A, as if A had directly dealt with C.

Any person may be an agent (Section 184), meaning even a minor or person of unsound mind can be an agent, as the agent's capacity to contract is not essential (they are creating a contract between the principal and a third party). However, a person who is a minor or of unsound mind cannot be a principal (Section 183) as they must be competent to contract to appoint an agent. Any person who is of the age of majority and of sound mind can employ an agent.

Example 1. Mr. Alok authorizes Mr. Binod to sign a lease agreement for his flat with a tenant, Mr. Chetan. Mr. Binod signs the lease agreement on behalf of Mr. Alok. Who is the agent, the principal, and the third party in this scenario, and who is bound by the lease agreement?

Answer:

In this scenario:

Mr. Binod is the Agent (person employed to do an act - sign the lease - on behalf of another).
Mr. Alok is the Principal (person for whom the act is done).
Mr. Chetan is the Third Party (person with whom the principal is dealing through the agent).

The lease agreement is binding between the Principal (Mr. Alok) and the Third Party (Mr. Chetan). Mr. Binod, the agent, is not a party to the lease agreement; he merely facilitates the contract between Mr. Alok and Mr. Chetan by acting on Mr. Alok's authority.

How Agency is Created?

The relationship of agency can be created in several ways, not just by a formal agreement. The law recognizes different methods by which one person grants authority to another to act as their agent.

By Express Agreement

Agency is most commonly created by an express agreement between the principal and the agent. This agreement can be oral or written (Section 187). A Power of Attorney is a formal written document that grants express authority to an agent (attorney-in-fact) to act on behalf of the principal in specific matters.

Example: A appoints B by written agreement to manage his property and collect rents. This is agency created by express agreement.

By Implied Agreement (Section 187)

Agency can also be created by implication from the conduct of the parties, or from the circumstances of the case, or from the ordinary course of dealing. Section 187 states that authority is said to be implied when it is 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.

Instances of implied agency include:

Agency by Conduct: When a person, by his conduct, leads others to believe that someone is acting as his agent. Example: If a person allows another person to repeatedly order goods on his behalf and pays for them, an agency relationship might be implied.
Agency by Situation: The relationship between principal and agent may be inferred from the usual course of dealing or relationship between the parties. Example: A wife often acts as the implied agent of her husband for purchasing household necessaries. Partners are agents of the firm for the firm's business. Directors are agents of the company.

By Ratification (Sections 196-200)

Ratification occurs when a person (the principal) subsequently approves an act done by another person (the agent) on their behalf, but without their prior authority. By ratifying the act, the principal retrospectively accepts the act as if it had been done with their authority from the beginning.

Section 196: "Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to either 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."

Conditions for valid Ratification:

The agent must have purported to act on behalf of an identifiable principal.
The principal must be in existence at the time the act was done.
The principal must be competent to contract both at the time the act was done and at the time of ratification.
The principal must have full knowledge of all material facts when ratifying.
Ratification must be of the entire transaction, not just a part.
Ratification must be done within a reasonable time.
Ratification must not cause injury to a third party.

Example: A, without authority, contracts to buy goods for B. B, on hearing of the contract, ratifies A's act. B is now bound by the contract as if A had been authorized from the start.

By Estoppel (Section 237)

Agency by Estoppel arises when a person, by their words or conduct, leads a third party to believe that another person is their agent, and the third party acts on that belief to their detriment. In such a situation, the person who made the representation is prevented (estopped) from denying the existence of the agency relationship, even if no actual agency existed.

Section 237: "When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations if he has by his words or conduct induced such third persons to believe that those acts and obligations were within the scope of the agent's authority."

Example: A tells C in B's presence that B is his agent and will buy goods for him. B remains silent. C, relying on A's statement, sells goods to B on credit, believing B is A's agent. A is now estopped from denying that B was his agent, and is liable to pay C for the goods, even if B had no actual authority to buy. The principal's conduct (or silence when there is a duty to speak) creates the appearance of authority.

By Necessity

Agency by Necessity arises in certain emergency situations where a person is entrusted with another's property and it becomes necessary to act immediately to preserve the property, even without the owner's express authority. The law implies an agency relationship to allow the person to take reasonable steps in the emergency.

Conditions for Agency by Necessity:

There must be a real and imminent necessity to act.
It must be impossible or impractical to communicate with the principal to obtain instructions.
The person claiming to be an agent by necessity must have acted in the best interest of the principal and reasonably under the circumstances.
The act must be necessary for the preservation of the principal's property.

Example: A transports perishable goods for B. Due to unforeseen delay, the goods are likely to spoil. A cannot contact B. A sells the goods in the nearest market at the best price possible. A's action, though without prior authority, might be considered as taken under agency of necessity, binding B to the sale, provided A acted reasonably in the emergency.

This is a limited form of agency, often arising in situations involving carriers of goods, masters of ships, etc.

Example 1. Mr. Deepak instructs Mr. Eshan, his driver, to take his car for servicing. While Mr. Eshan is driving the car to the service center, a stray dog runs in front of the car, and Mr. Eshan swerves to avoid hitting it, causing a minor accident that damages the car's bumper. Was Mr. Eshan acting as Mr. Deepak's agent?

Answer:

Yes, Mr. Eshan was acting as Mr. Deepak's agent. Mr. Deepak employed Mr. Eshan (driver) to do an act (take the car for servicing) on his behalf. This creates an agency relationship, likely by express agreement or implied from the relationship. The act of driving the car for servicing and dealing with unforeseen events on the road falls within the scope of his duties as a driver acting for the owner. While the accident was not an intended act, it occurred while he was performing his duty as an agent. However, his action to avoid hitting the dog might also be considered an act under agency of necessity to protect the principal's property (the car) from a potentially worse accident, even if the necessity arose suddenly. So, he was acting as an agent in the ordinary course, and perhaps additionally under necessity.

Duties and Powers of Agent and Principal

Duties of Agent towards Principal

The relationship between a principal and an agent is a fiduciary one, implying trust and confidence. This relationship gives rise to certain duties that the agent owes to their principal. These duties are primarily aimed at ensuring the agent acts faithfully and diligently in the principal's best interest. Chapter X of the Indian Contract Act, 1872 outlines these duties.

Duty to conduct business according to principal's directions

Section 211: Agent's duty in conducting of business

"An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in business of the same kind at the place where the agent conducts such business."

"When the agent acts otherwise, if any loss is sustained, he must make it good to the principal, and if any profit accrues, he must account for it."

Explanation:

Follow Directions: The agent's primary duty is to strictly follow the lawful directions given by the principal. If the principal has given specific instructions, the agent must adhere to them, even if the agent believes a different course of action would be better for the principal's business.
Follow Custom: If the principal has not given specific directions, the agent must conduct the business according to the prevailing custom or usage in that type of business at that place.
Consequences of Deviation: If the agent deviates from the principal's directions or the established custom, and the principal suffers a loss as a result, the agent is liable to compensate the principal for that loss. If the deviation results in a profit, the agent cannot keep that profit but must account for it to the principal.

Example: A, an agent, is instructed by P, his principal, to sell goods only on cash payment. A sells goods on credit without P's authority. The buyer fails to pay. A is liable to P for the loss (unrecovered price of goods).

Duty to render proper accounts

Section 213: Agent's duty to render accounts

"An agent is bound to render proper accounts to his principal on demand."

Explanation:

The agent must maintain accurate records of all transactions conducted on behalf of the principal.
These accounts must be presented to the principal whenever the principal demands them.
Proper accounts mean accounts that are true, correct, and complete, showing all sums received and spent on the principal's behalf.

This duty ensures transparency and allows the principal to verify the transactions performed by the agent.

Duty to communicate with principal

Section 214: Agent's duty to communicate with principal

"It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions."

Explanation:

If the agent encounters unforeseen difficulties or circumstances during the course of the agency business, they must make reasonable efforts to communicate with the principal and seek further instructions before taking significant action.
This duty reflects the fiduciary nature of the relationship and the principle that the agent acts on the principal's behalf and authority. Important decisions in uncertain situations should ideally be made by the principal after being informed by the agent.
However, in cases of emergency where communication is impossible, the agent may act in their discretion under agency of necessity (Section 189).

Duty not to deal on own account

Section 215: Right of principal when agent deals, on his own account, in business of agency without principal's consent

"If an agent deals with the business of the agency on his own account, instead of on account of his principal, without the knowledge of the principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction."

Section 216: Principal's right to benefit gained by agent dealing on his own account in business of agency

"If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of the principal, the principal is entitled to claim as against the agent, any benefit which may have resulted to him from the transaction."

Explanation:

The agent's duty is to act solely for the benefit of the principal. The agent must not allow their personal interest to conflict with their duty to the principal.
An agent must not buy from or sell to themselves without the principal's knowledge and consent. If they do so without informing the principal, and the transaction is disadvantageous to the principal or advantageous to the agent, the principal has remedies.
If the agent, without the principal's knowledge, makes any profit or gains any benefit from the agency business by dealing on their own account (e.g., selling principal's goods to themselves at a lower price and then reselling for profit, or buying goods meant for principal at a higher price from themselves), the principal is entitled to recover that benefit from the agent.

Example: A is employed by P to buy a house for P. A buys the house in his own name without P's knowledge and then sells it to P at a higher price. P can recover the profit A made from this transaction.

Other Duties of Agent:

Duty to carry out business with reasonable skill and diligence (Section 212): An agent must act with the skill and diligence that a person of ordinary prudence would use in his own business. If the agent is employed in a profession, they must exercise the skill ordinarily required in that profession.
Duty to pay to principal all sums received (Section 218): The agent must pay to the principal all sums received on the principal's account, after deducting their lawful expenses and remuneration.

Example 1. Mr. Sameer is appointed as an agent by Ms. Taruna to sell her plot of land for not less than Rs. 50 Lakhs. Mr. Sameer finds a buyer willing to pay Rs. 55 Lakhs but informs Ms. Taruna that the highest offer is Rs. 50 Lakhs and convinces her to sell to his relative for Rs. 50 Lakhs. Is Mr. Sameer liable to Ms. Taruna?

Answer:

Yes, Mr. Sameer is liable to Ms. Taruna. He has violated several duties as an agent. He failed in his duty to act according to the principal's directions (getting the best price). He also failed in his duty to communicate fully (did not disclose the Rs. 55 Lakh offer). Furthermore, he dealt in the business of agency on his own account (selling to his relative) without the principal's full knowledge, potentially gaining an unfair advantage or causing loss to the principal. Ms. Taruna can recover the loss caused by selling at a lower price (Rs. 5 Lakhs) and any other benefit Mr. Sameer might have gained, and potentially refuse to pay his commission.

Duties of Principal towards Agent

Just as the agent owes duties to the principal, the principal also owes certain duties to the agent. These duties relate mainly to compensating the agent for their services and protecting them from consequences arising from acts done within their authority.

To pay commission and expenses

Section 219: Agent's right to remuneration

"In the absence of any special contract, payment for the performance of any act is due to an agent when the act is completed."

Section 220: Agent not entitled to remuneration for business misconducted

"An agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted."

Explanation:

Right to Remuneration/Commission: The principal is obligated to pay the agent the agreed commission or remuneration for the services rendered. If no specific amount is agreed, the agent is entitled to a reasonable remuneration according to the custom of the business. The payment is due when the agent completes the act (unless agreed otherwise).
No Remuneration for Misconduct: An agent loses their right to remuneration for any part of the business where they are guilty of misconduct.

Section 224: Agent's right to retain sums received

"An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent."

Explanation:

Reimbursement of Expenses: The principal is bound to reimburse the agent for all lawful expenses properly incurred by the agent in conducting the agency business (Section 224 allows agent to retain; implies principal's duty to reimburse if sums received are insufficient).
These are expenses legitimately incurred by the agent while acting within their authority for the principal's business.

To indemnify agent

The principal is obligated to protect the agent from losses or liabilities incurred by the agent while lawfully acting within the scope of their authority.

Section 222: Agent's right to be indemnified against consequences of lawful acts
"The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him."
Example: A, a broker, contracts to sell goods for B. B fails to deliver the goods, and C, the buyer, sues A for breach of contract. A is compelled to pay damages to C. B is liable to indemnify A for the damages and costs A had to pay, as A's act of contracting was lawful and within his authority.
Section 223: Agent's right to be indemnified against consequences of acts done in good faith
"Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of third persons."
Example: A, a decree holder, instructs B, an agent, to seize goods from C, believing them to be D's goods liable to be taken in execution under a decree against D. B seizes the goods in good faith. It turns out the goods belong to C, not D. C sues B for trespass and recovers damages. A is bound to indemnify B for the amount B had to pay to C and the costs incurred, as B acted in good faith on A's instructions.

Section 225: Compensation to agent for injury caused by principal's neglect

"The principal must make compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill." This covers injuries caused to the agent due to the principal's own fault.

These sections collectively ensure that the agent is not left to bear the financial burden arising from lawful acts done on behalf of the principal, or acts done in good faith under the principal's direction, or injury caused by the principal's negligence.

Example 1. Ms. Una appoints Mr. Vinay as her agent to collect payment of Rs. 10,000/- from Mr. Wasim. Ms. Una agrees to pay Mr. Vinay 10% commission. Mr. Vinay successfully collects the money and deducts Rs. 1,000/- as commission. Can he do this?

Answer:

Yes, Mr. Vinay can do this. The principal (Ms. Una) has a duty to pay the agent (Mr. Vinay) the agreed commission upon completion of the act (collecting payment - Section 219). According to Section 224, an agent has the right to retain, out of sums received on account of the principal, the remuneration payable to him. Mr. Vinay is entitled to Rs. 1,000/- as commission, and he can deduct this amount from the Rs. 10,000/- collected before paying the remaining Rs. 9,000/- to Ms. Una.

Example 2. Mr. Yogesh instructs his agent, Mr. Zubin, to enter into a contract to buy a specific type of machinery. Mr. Zubin enters into the contract within his authority. Later, Mr. Yogesh refuses to accept the machinery, and the seller sues Mr. Zubin for breach of contract, as is permissible under certain circumstances in agency (e.g., if Zubin's authority was not disclosed, or if the contract allows). Mr. Zubin is ordered to pay damages to the seller. Can Mr. Zubin recover this amount from Mr. Yogesh?

Answer:

Yes, Mr. Zubin can recover the amount from Mr. Yogesh. Mr. Zubin, as the agent, performed a lawful act (entering into the contract to buy machinery) in exercise of the authority conferred upon him by Mr. Yogesh. According to Section 222, the principal (Mr. Yogesh) is bound to indemnify the agent (Mr. Zubin) against the consequences of all lawful acts done by him in exercise of his authority. The damages Mr. Zubin had to pay to the seller are consequences of his lawful act as an agent. Therefore, Mr. Yogesh is liable to indemnify Mr. Zubin for the damages and any costs incurred in the lawsuit, provided Mr. Zubin acted within his authority.

Sub-Agent and Agent's Power to Appoint Sub-Agent

Sometimes, an agent may need assistance to perform the tasks assigned by the principal. This raises the question of whether the agent can delegate their authority to another person. The law relating to sub-agents is covered in Sections 190 to 195.

Definition of Sub-Agent (Section 191)

Section 191 defines "Sub-agent":

"A 'sub-agent' is a person employed by, and acting under the control of, the original agent in the business of the agency."

Explanation:

A sub-agent is employed by the original agent, not the principal.
The sub-agent acts under the control of the original agent, not directly under the principal's control.
The sub-agent performs duties related to the original agency business.

Example: P appoints A as his agent to manage his property. A appoints S to collect rents from tenants on behalf of A. S is a sub-agent.

Agent's Power to Appoint Sub-Agent ("Delegatus non potest delegare") (Section 190)

Section 190:

"An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may be employed, or unless the nature of the agency, or unforeseen circumstances, render it necessary for him to do so."

Explanation: The general rule is based on the Latin maxim "Delegatus non potest delegare", which means "a delegate cannot further delegate". An agent, being a person to whom the principal has delegated authority based on trust and confidence, cannot delegate that authority to someone else. This is particularly true for acts that the agent has undertaken to perform personally (contracts of personal nature, requiring agent's skill, discretion, or confidence).

Exceptions where Agent Can Appoint a Sub-Agent:

Section 190 itself provides the exceptions where an agent can lawfully appoint a sub-agent:

Custom of Trade: Where the ordinary custom of a particular trade or business permits the appointment of a sub-agent.
Nature of Agency: Where the nature of the agency business is such that the appointment of a sub-agent is necessary for its completion.
Unforeseen Circumstances: Where unforeseen circumstances render it necessary for the agent to appoint a sub-agent to perform acts of urgent necessity (this overlaps with agency of necessity).
With Principal's Consent: If the principal expressly or impliedly agrees to the appointment of a sub-agent.
Ministerial Acts: The rule against delegation usually applies to discretionary acts requiring judgment or skill. An agent can delegate purely ministerial acts (routine tasks not requiring discretion or skill) to another person without being prohibited by this rule.

Relationship between Principal, Agent, and Sub-Agent (Section 192, 193)

The legal relationship changes depending on whether the sub-agent was lawfully appointed or not.

Lawfully Appointed Sub-Agent (Section 192):

The principal is bound by the acts of the sub-agent as if the sub-agent were an agent appointed by the principal themselves.
The agent is responsible to the principal for the acts of the sub-agent.
The sub-agent is responsible for their acts to the agent, but not directly to the principal, except in cases of fraud or wilful wrong.

Example: P instructs A to sell goods. Custom allows A to appoint S as sub-agent. S sells the goods. P is bound by the sale. If S acts negligently causing loss, A is liable to P, and S is liable to A. P cannot generally sue S directly for negligence (unless fraud/wilful wrong by S).

Unlawfully Appointed Sub-Agent (Section 193):

The principal is not represented by or bound by the acts of the person so employed.
The agent is responsible for the acts of the person so employed, both to the principal and to third parties.
The person so employed is not responsible to the principal.

Example: P appoints A to paint a picture (personal skill). A unlawfully appoints S to paint it. P is not bound to accept the painting by S. A is liable to P if S fails to paint or paints poorly, and also liable to S for payment. S has no direct relationship with P.

The appointment of a sub-agent affects the chain of responsibility and the direct relationship with the principal.

Example 1. Mr. Alok appoints Mr. Binod to sell his property. Mr. Binod appoints Mr. Chetan to find potential buyers and show them the property. Mr. Chetan finds a buyer, Mr. Deepak, and finalizes the price within the limits set by Mr. Binod, without involving Mr. Alok directly. Is Mr. Chetan a sub-agent, and is Mr. Alok bound by the deal finalized by Mr. Chetan?

Answer:

Mr. Chetan is a sub-agent because he was employed by Mr. Binod (the original agent) and is acting under Mr. Binod's control in the agency business (selling the property). Whether Mr. Alok (the principal) is bound by the deal depends on whether Mr. Binod's appointment of Mr. Chetan was lawful. Selling property might involve elements of personal skill and discretion. Unless there is a custom of trade allowing an agent to appoint a sub-agent for property sale, or Mr. Alok consented to Mr. Binod appointing someone else, or it was necessary, the appointment of Mr. Chetan as sub-agent might be unlawful. If lawfully appointed, Mr. Alok would be bound by Mr. Chetan's acts within the scope of the original authority. If unlawfully appointed, Mr. Alok would generally not be bound by Mr. Chetan's actions, and Mr. Binod would be responsible to Mr. Alok and Mr. Deepak.

Termination of Agency**

By Act of Parties

An agency relationship, being created by agreement, can also be terminated by the actions of the principal and the agent. Section 201 of the Indian Contract Act, 1872, lists the ways in which an agency is terminated. The first category is termination by the act of the parties.

Rule under Section 201 (partial)

Section 201:

"An agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the agency; or by completion of the business of the agency; or by death or insanity of either the principal or agent; or by the agent being adjudicated an insolvent under any Act for the time being in force for the relief of insolvent debtors."

Section 201 enumerates various methods of termination. Those initiated by the parties themselves fall under "By Act of Parties".

Mutual Agreement

Since the agency relationship is created by agreement between the principal and agent, it can also be terminated at any time by mutual agreement between them. This is a discharge of the contract of agency by agreement (similar to discharge of any other contract under Section 62).

Example: A appoints B as his agent for one year. After six months, A and B mutually agree to terminate the agency. The agency is terminated by mutual agreement.

Revocation by Principal (Sections 203-207)

The principal has the power to revoke the authority of the agent at any time before the authority has been exercised so as to bind the principal (Section 203). However, the principal cannot revoke the agent's authority after the authority has been partly exercised, so far as regards such acts and obligations as arise from acts already done in the agency (Section 204).

Section 203:

"The principal may, save as is otherwise provided by the last preceding section, revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal."

Explanation:

Power to Revoke: The principal generally has the power to revoke the agent's authority.
Limit on Revocation: The revocation is not effective for acts that the agent has already done which have created obligations binding on the principal towards third parties.
Compensation for Premature Revocation (Section 205, 206): If the agency was for a fixed period, the principal must compensate the agent for premature revocation without sufficient cause (Section 205). Reasonable notice must be given of revocation (Section 206).

Example: A authorizes B to sell his house. B finds a buyer C and signs a contract of sale with C on behalf of A. A cannot then revoke B's authority to complete the sale to C, as B has already exercised the authority to bind A.

Renunciation by Agent (Sections 205, 206)

The agent also has the power to renounce the business of the agency. This is the agent terminating the agency relationship from their side.

Explanation:

Power to Renounce: The agent can refuse to continue to act as an agent.
Compensation for Premature Renunciation (Section 205, 206): If the agency was for a fixed period, the agent must compensate the principal for premature renunciation without sufficient cause (Section 205). Reasonable notice must be given of renunciation (Section 206).

Example: A appoints B as his agent for three years. After one year, B decides he no longer wants to be A's agent and informs A. B can renounce the agency, but he may be liable to compensate A for the premature termination if there was no sufficient cause.

Communication of revocation/renunciation is necessary to make it effective (Section 207). It is effective as against the agent/principal when it comes to their knowledge. As against third parties, it is effective when they get knowledge of the termination (Section 208).

Example 1. Mr. Gyan appoints Mr. Harish as his agent for six months to negotiate certain business deals. After four months, Mr. Gyan feels dissatisfied with Mr. Harish's performance and informs Mr. Harish that his authority is terminated. Is the agency terminated?

Answer:

Yes, the agency is terminated by revocation by the principal (Mr. Gyan). Mr. Gyan has the power to revoke Mr. Harish's authority (Section 203). However, since the agency was for a fixed period (six months), and it is being terminated prematurely after four months, Mr. Gyan may be liable to compensate Mr. Harish for the loss of remuneration for the remaining two months, unless Mr. Gyan had a sufficient cause (like misconduct by Mr. Harish) for the revocation (Section 205). Mr. Gyan must also give reasonable notice of termination (Section 206).

By Operation of Law

Apart from the acts of the parties, an agency relationship can also terminate automatically by operation of law upon the happening of certain events. These modes of termination are also listed in Section 201 or implied by other provisions.

Performance of contract (Completion of the business of the agency)

Section 201: "An agency is terminated by completion of the business of the agency."

Explanation: If an agent is appointed for a specific task or purpose, the agency automatically terminates when that task is completed or the purpose is achieved. The agent's authority ceases upon the completion of the work they were appointed to do.

Example: A appoints B to sell his house. Once B successfully sells the house as per the terms, the business of the agency is completed, and B's authority as agent for selling that house terminates automatically.

Unilateral mistake

Unilateral mistake is not a mode of termination of agency listed in Section 201 or generally recognized in agency law as a way to automatically terminate the relationship. Agency is based on the consent of both principal and agent. While certain mistakes (like bilateral mistake of fact essential to the contract creating the agency) might render the *creation* of agency void, a unilateral mistake by one party does not automatically terminate an existing agency relationship. The party making the mistake might have grounds to renounce or revoke the agency, but that would fall under termination by act of parties, not operation of law.

This seems like an incorrect heading/entry in the original prompt. Unilateral mistake does not automatically terminate agency.

Bankruptcy (Insolvency)

Section 201: "An agency is terminated... by the agent being adjudicated an insolvent under any Act for the time being in force for the relief of insolvent debtors." (The 2018 amendment to the Specific Relief Act replaced 'insolvent' with 'adjudicated an insolvent', aligning with modern insolvency laws).

Explanation: If the agent is declared insolvent, the agency terminates. This is because an insolvent person is legally disqualified from dealing with property and affairs (as discussed under Capacity to Contract), which affects their ability to act reliably as an agent. The insolvency of the principal can also terminate the agency, especially if the agency relates to the principal's property which vests in the Official Receiver/Assignee.

Insanity

Section 201: "An agency is terminated... by insanity of either the principal or agent."

Explanation: If either the principal or the agent becomes of unsound mind, the agency terminates. This is because both parties must be competent to contract to maintain the agency relationship, and mental incapacity removes this competency. The principal must be capable of giving instructions, and the agent must be capable of understanding and following them and forming a rational judgment.

Death of Principal or Agent

Section 201: "An agency is terminated... by death of either the principal or agent."

Explanation: The death of either the principal or the agent automatically terminates the agency. This is because the agency relationship is personal, based on the principal giving authority and the agent accepting it. Upon death, a person ceases to exist as a legal entity, and the basis of the relationship is removed. The agent's authority cannot continue when there is no principal to exercise authority over them, and the principal's instructions cannot be carried out by an agent who is deceased.

Dissolution of business (Dissolution of a firm or company)

If the principal is a partnership firm, the dissolution of the firm generally terminates the agency of the partners. If the principal is a company, and the company is wound up or dissolved, the agency of its directors and employees terminates.

Similarly, if the agent is a firm and it is dissolved, the agency terminates. If the agent is appointed to perform duties related to their business (e.g., a firm appointed as sales agent), and that business is dissolved, the agency terminates.

This falls under termination by operation of law as the legal entity that is the principal or agent ceases to exist or operate.

Expiry of Time

If the agency was created for a specific period, it automatically terminates upon the expiry of that period, even if the business of the agency is not completed.

Happening of an Event

If the agency was created to achieve a specific event, it terminates when that event happens. For example, an agency to collect insurance money terminates when the money is collected.

Example 1. Ms. Lata appoints Mr. Manoj as her agent to sell a piece of land. Mr. Manoj finds a buyer and sells the land. What happens to Mr. Manoj's authority as agent for this task?

Answer:

The agency is terminated by the completion of the business of the agency (Section 201). Mr. Manoj was appointed for the specific task of selling the land. Once the land is sold, the purpose of the agency is accomplished, and Mr. Manoj's authority as agent for selling that land automatically terminates by operation of law.

Example 2. Mr. Naveen appoints Mr. Om as his agent for two years. Six months into the agency period, Mr. Naveen passes away. What happens to the agency?

Answer:

The agency is terminated by operation of law due to the death of the principal (Mr. Naveen). According to Section 201, the death of either the principal or the agent terminates the agency. The fact that the agency was for a fixed period is irrelevant; death automatically brings the relationship to an end. Mr. Om's authority to act on behalf of Mr. Naveen ceases upon Mr. Naveen's death.

Irrevocable Agencies

While the principal generally has the power to revoke the agent's authority (Section 203), the law recognizes certain situations where the principal cannot revoke the agency. These are known as Irrevocable Agencies.

Circumstances where Agency is Irrevocable (Section 202, 204)

Section 202: Termination of agency where agent has an interest in subject-matter

"Where the agent has himself an interest in the property which forms the subject-matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest."

Explanation:

Agent's Interest: The agent must have a personal interest in the property which is the subject matter of the agency, *in addition* to their right to remuneration. This interest must exist at the time the agency is created.
Cannot Terminate to Prejudice Interest: The principal cannot terminate the agency if doing so would harm the agent's interest in the subject matter, unless the contract expressly permits such termination.

Example: A gives B an authority to collect rents of A's land, and to pay himself out of the rents, the amount of a debt due to him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death (Illustration to Section 202). Here, B has an interest in the rents (the subject matter) because he needs to collect them to repay the debt owed by A to him.

Section 204: Revocation where authority has been partly exercised

"The principal cannot revoke the authority given to his agent after the authority has been partly exercised, so far as regards such acts and obligations as arise from acts already done in the agency."

Explanation: Once the agent has exercised their authority to bind the principal towards a third party, the principal cannot revoke the agency to the prejudice of the obligations already created. The agency becomes irrevocable with respect to acts already done.

Example: A authorizes B to buy 100 bales of cotton on account of A, and to pay for them out of A's money remaining in B's hands. B buys 100 bales of cotton from C. A cannot revoke B's authority to pay for the cotton out of A's money, as B has already exercised his authority to buy, creating a binding obligation on A towards C.

Other situations implying Irrevocability:

When Agency is Coupled with Interest: This is essentially what Section 202 covers. The agent's authority is given as a security for a debt due to the agent or to secure the agent's interest. Such agency is irrevocable.
Where Agent has Incurred Personal Liability: If the agent has undertaken personal liability in the business of the agency (e.g., signed a contract in his own name, where permissible), the principal cannot revoke the agency so as to prejudice the agent's position and liability.

In these cases, the principal loses the power to unilaterally terminate the agency, either completely or with respect to certain actions, to protect the agent's rights or interests or the rights of third parties who have already dealt with the agent acting on the principal's behalf.

Example 1. Mr. Prakash owes Rs. 50,000/- to Mr. Qureshi. Mr. Prakash appoints Mr. Qureshi as his agent to sell some shares held by Mr. Prakash and authorizes Mr. Qureshi to deduct the Rs. 50,000/- debt amount from the sale proceeds. Can Mr. Prakash revoke Mr. Qureshi's authority to sell the shares?

Answer:

No, Mr. Prakash cannot revoke Mr. Qureshi's authority to sell the shares. In this case, Mr. Qureshi has an interest in the subject matter of the agency (the shares/sale proceeds) because he needs to sell them to recover the debt owed to him by Mr. Prakash. This is an agency coupled with interest, covered by Section 202. The agency is terminated to the prejudice of Mr. Qureshi's interest (recovering the debt). Therefore, the agency is irrevocable in the absence of an express contract permitting revocation.