Unit 9: Agency Chapter Notes | Business Laws for CA Foundation PDF Download

Agency in Business Transactions 

A relationship of agency is created when one party, known as the  agent,  is given the authority by another party, the  principal,  to act on their behalf. This type of relationship usually comes into play when one party wants to expand their activities beyond what they can manage on their own. In today’s world, it is often not feasible for an individual to handle all tasks by themselves. Therefore, people frequently rely on agents to take care of various activities.

Agency relationships are commonly seen in various business transactions, such as:

• Hiring employees
• Engaging professionals like attorneys, design experts, or software developers

An agent has the authority to enter into contracts on behalf of the principal, thereby binding the principal to those agreements. This relationship is built on trust and confidence, and it is essential for the agent to carry out their responsibilities competently and diligently.

The legal framework governing agency relationships in India is outlined in sections  182 to 238 of the Indian Contract Act, 1872.  For those unfamiliar with the Act, it is advisable to refer to these sections for a better understanding of the specific provisions related to agency.

Understanding Agency

Test of Agency 
(a) Whether the individual has the capacity to bind the principal and hold him accountable to third parties.
(b) Whether he can establish privity of contract between the principal and third parties.
If the answer to these questions is in the affirmative, then there is a relationship of agency.

Appointment and Authority of Agents 

• According to Section 183, “any person who has attained majority according to the law to which he is subject, and who is of sound mind, may employ an agent.”
• A minor or a person of unsound mind cannot appoint an agent.
• A person qualified to appoint an agent must be of sound mind.

Who can be an Agent: Section 184 of the Act  states that anyone can become an agent, including minors and individuals of unsound mind. However, it is advisable not to appoint such individuals as agents because they are incompetent to contract. If a minor or a person of unsound mind is appointed as an agent, the principal will be bound by the agent's actions, but legal action cannot be taken against the agent in case of misconduct or negligence.

Example : If P appoints Q, a minor, to sell his car for a minimum of ₹2,50,000, and Q sells it for ₹2,00,000, P will be bound by the transaction and cannot claim compensation from Q for not following instructions, as a contract with a minor is void ab initio.

Consideration Not Necessary  : As per  Section 185  , no consideration is required to create an agency. The acceptance of the agent's office is considered sufficient consideration for the appointment.

Creation of Agency

The relationship between the principal and the agent can be established in various ways.

 Authority: Express vs. Implied  According to  Section 186  , the authority of an agent can be either express or implied.

 Express Authority  : This refers to authority explicitly granted through spoken or written words.  Examples  :

• A authorizing B as the caretaker of his house in Kolkata through a power of attorney.
• A bank requiring written evidence of a customer's agent appointment for banking transactions.

 Implied Authority  : This authority is inferred from the circumstances, conduct of parties, and ordinary business practices.  Examples  :

• A person collecting rent on behalf of a landlord.
• B managing A's shop in Selampur and ordering goods from C in A's name with A's knowledge.

Implied Agency

Implied Agency refers to the situations where an agency relationship is inferred from the conduct or circumstances of the parties involved. It includes various forms such as Agency by Estoppel and Agency by Necessity.

Agency by Estoppel 

 Meaning:  Agency by Estoppel occurs when a principal, through their conduct or statement, induces another person to believe that a certain individual is their agent. The principal is then prevented from denying the existence of the agency.

 Essentials:  For Agency by Estoppel to be created, the following conditions must be met:

•  Representation by Principal:  The principal must make a representation, either express or implied.
•  Authority Representation:  The representation must imply that the agent has the authority to perform certain acts, even if they do not have such authority.
•  Inducement:  The principal must induce the third party based on this representation.
•  Belief and Action:  The third party must believe the representation and act upon it, entering into a contract based on that belief.

 Example 1:  A consigns goods to B with instructions not to sell below a certain price. C, unaware of this instruction, enters into a contract with B to buy the goods at a lower price. A is bound by the contract with C, as an agency by estoppel is established between A and B.

 Example 2:  If Piyal (the principal) has allowed Sunil to buy goods on credit from Prasad, leading Prasad to believe that Sunil is Piyal's agent, Piyal cannot later refuse to pay Prasad for the goods. Piyal is estopped from denying Sunil's agency because of his previous conduct.

Agency by Necessity 

• Meaning:  Agency by Necessity arises in emergency situations where a person is authorized to take actions they normally would not be able to take to prevent loss to the principal.
• Example:  If Raja, the owner of a large farm, is in Canada and a fire breaks out on the property, Shyam, the caretaker, becomes an agent of necessity to save the farm from destruction. Raja will be responsible for any expenses incurred by Shyam to extinguish the fire and protect the property during Raja's absence.

Agency by Operation of Law

• Agency by Operation of Law occurs when the law automatically considers one person as the agent of another.
• For instance, in a partnership, each partner is legally deemed to be the agent of the firm for activities related to the business of the firm.

Rights of a Person Regarding Acts Done on Their Behalf Without Authority 

When one person acts on behalf of another without their knowledge or permission, the person on whose behalf the act was done has the right to either  ratify  or  disown  the act.

•  Ratification  means approving a previous action or agreement.
• Ratification can be  express  , where it is clearly stated, or  implied  , where it is indicated through the conduct of the principal.

 Example: 

•  Scenario:  On January 10, 2022, X, acting as Y's agent, purchases goods from Z on credit without Y's permission.
•  Ratification:  On January 20, 2022, Y informs X that he will take responsibility for the payment of the purchases, despite not giving permission at the time of the purchase.
•  Effect:  Y's statement on January 20 constitutes a ratification of X's purchase, making Y responsible for the payment.

Essentials of a Valid Ratification 

Ratification can be either expressed or implied. It is considered expressed when explicitly stated, and implied when inferred from the conduct of the person on whose behalf the acts are performed.

Example 10:  If A buys goods for B without authority, and B later sells those goods to C on his own account, B's actions imply a ratification of A's purchase.

Example 11:  If A lends B's money to C without B's authority, and B subsequently accepts interest from C on the money, B's actions imply a ratification of the loan.

Knowledge Required for Valid Ratification [Section 198]:For a valid ratification to occur, the person must have accurate and complete knowledge of the facts involved in the case. Example 12:  If A is authorized by P to buy certain goods at market rate but buys them at a higher rate, and P accepts the purchase without knowing that the goods belonged to A, the ratification is not binding on P when he discovers the truth.The Whole Transaction Must Be Ratified [Section 199]:A transaction can be ratified in its entirety or rejected in its entirety. The principal cannot selectively ratify parts of the transaction that are beneficial while rejecting others.Ratification Cannot Injure Third Persons [Section 200]:Ratification does not apply when the interests of third parties are affected. If a third party acquires rights in the meantime, ratification cannot relate back to the date of the contract.Example 13:  If A, without authorization from B, demands the delivery of B's chattel from C, who is in possession of it, B cannot ratify the demand to make C liable for damages.Example 14:  If A holds a lease from B that is terminable on three months’ notice, and C, an unauthorized person, gives notice of termination to A, B cannot ratify the notice to make it binding on A.Ratification within a Reasonable Time Frame:Ratification must occur within a reasonable time frame to be valid.Communication of Ratification:Ratification must be communicated to the other party involved in the transaction.Act to be Ratified Must be Valid:

The act to be ratified should not be void or illegal. Examples of void or illegal acts include payment of dividends out of capital, forgery of signatures, criminal offenses, or any actions not permitted by law.

Extent of Agent's Authority 

The authority of an agent is determined by two principles: (a) in normal circumstances and (b) in emergency situations.

Agent’s Authority in Normal Circumstances 

• According to  Section 188  of the Indian Contract Act, an agent with the authority to perform a specific act also has the authority to carry out any lawful actions that are necessary to complete that act.
• For example, if an agent is authorized to conduct a business, they have the authority to do everything lawful that is necessary or typically done in the course of running that business.

Example 15:  If A is hired by B in London to recover a debt owed to B in Mumbai, A can use any legal means necessary to recover the debt and can provide a valid discharge.

Example 16:  If A appoints B as his agent to run a shipbuilding business, B has the authority to purchase materials like timber and hire workers necessary for the business.

Agent’s Authority in an Emergency 

In emergency situations, as per  Section 189  , an agent has the authority to take any actions necessary to protect their principal from potential loss, similar to what a person of ordinary prudence would do in a similar situation.

For a valid agency to exist in an emergency, the following conditions must be met:

 (i)  The agent should not have the opportunity to communicate with the principal in the available time.

 (ii)  There should be a genuine and urgent commercial necessity for the agent to act promptly.

 (iii)  The agent must act in good faith and for the benefit of the principal.

 (iv)  The agent should choose the most reasonable and practical course of action under the circumstances.

 (v)  The agent must possess the goods belonging to the principal that are subject to the contract.

 Example 17:  An agent authorized to sell goods may also repair them if necessary.

 Example 18:  If B receives perishable goods consigned by A in Srinagar with instructions to send them immediately to C in Tamandu, B is authorized to sell the goods if they start to perish before reaching their destination.

Sub-Agents 

When an Agent Cannot Delegate: 

An agent is not allowed to legally hire another person to carry out tasks that they have agreed to perform personally, either explicitly or implicitly, unless it is customary in the trade to use a sub-agent, or if the nature of the agency requires the use of a sub-agent.

Definition of a "Sub-agent": 

A sub-agent is defined as an individual who is hired by the original agent and acts under the agent's control in carrying out tasks related to the agency's business. This is outlined in Section 191 of the Indian Contract Act.

Analysis of Sub-Agency in Delegation 

• Sub-agency occurs when an agent appoints another agent to carry out tasks. However, this appointment is not lawful because the agent acts as a delegatee, and a delegatee cannot delegate further.
• This principle is rooted in the Latin maxim "delegatus non potest delegare," highlighting the limitations of delegation in modern law.
• In an agency contract, the principal delegates work to the agent, who then further delegates to the sub-agent.
• Agency contracts are fiduciary in nature, based on the trust and confidence the principal places in the agent. This is why a delegatee cannot delegate further.

When an Agent Can Appoint a Sub-Agent(1)  If the original terms of appointment allowed it.(2)  If trade customs permit such appointments.(3)  In unforeseen emergencies during the agent's employment. Representation of Principal by Properly Appointed Sub-Agent  [Section 192]:

• When a sub-agent is correctly appointed, the principal is accountable to third parties for the sub-agent's actions.
• The agent is liable to the principal for the sub-agent's actions.
• The sub-agent is accountable to the agent for their actions, but not to the principal, unless in cases of fraud or intentional wrongdoing.

 Agent's Responsibility for Unauthorized Sub-Agent Appointments  [Section 193]:

• If an agent appoints a sub-agent without proper authority, they are liable for the sub-agent's actions to both the principal and third parties.
• The principal is not responsible for the sub-agent's actions.
• The sub-agent is only accountable to the agent, not to the principal.

Example19: In a case where A, a carrier, agreed to transport 60 bags of cotton waste and delegated the task to B, another carrier, A was held liable for damages during transit, even though B was the carrier responsible.

Substituted Agent 

A substituted agent is an individual appointed by an agent, with the principal's knowledge and consent, to act on behalf of the principal in the agency's business. Unlike sub-agents, substituted agents are direct agents of the principal.

Relationship Between Principal and Appointee by Agent:

• When an agent, authorized either explicitly or implicitly, names another person to act for the principal in the agency's business, this person becomes the principal's agent for the specified part of the agency's business, not a sub-agent.

Example 

• In a scenario where A instructs B, his solicitor, to auction his estate and hire an auctioneer, and B selects C, an auctioneer, to conduct the sale, C acts as A's agent for the sale, not as a sub-agent.

Difference between a Sub-Agent and a Substituted Agent

Sub-Agent: 

• Works under the control and directions of the agent.
• The agent delegates a part of his own duties to the sub-agent.
• There is no privity of contract between the principal and the sub-agent.
• The sub-agent is responsible to the agent alone and not to the principal.
• The agent is not responsible to the principal for the acts of the sub-agent.
• The sub-agent has no right of action against the principal for remuneration due to him.
• Sub-agents may be improperly appointed.

 Substituted Agent: 

• Works under the instructions of the principal.
• The agent does not delegate any part of his task to a substituted agent.
• Privity of contract is established between the principal and the substituted agent.
• A substituted agent is responsible to the principal and not to the original agent who appointed him.
• The substituted agent can sue the principal for remuneration due to him.
• Substituted agents are generally expected to be appointed properly according to the principal's instructions.

Duties and Obligations of an Agent 

1. Duty to Follow Instructions or Customs 

• An agent is required to conduct the business of the principal according to the directions given by the principal, as per Section 211 of the law.
• If there are no specific directions from the principal, the agent should follow the customs that are prevalent for similar business activities in the location where the agent operates.
• If the agent acts contrary to these instructions or customs and causes a loss to the principal, the agent must compensate the principal for the loss. Conversely, if the agent makes a profit in such a situation, the agent must account for it to the principal.

Examples: 

• Example 24: If A, an agent managing B's business, fails to invest available funds for interest, which is customary, A must compensate B for the lost interest.
• Example 25: If B, a broker, sells A's goods on credit contrary to usual practice and faces a loss due to C's insolvency, B must indemnify A for the losses.

2. Duty of Reasonable Care and Skill 

• An agent is obligated to conduct the principal's business with a level of skill that is generally possessed by individuals engaged in similar businesses, as outlined in Section 212. This is unless the principal is aware of the agent's lack of skill.
• The agent must consistently act with reasonable diligence and utilize the skill they possess. If the agent's neglect, lack of skill, or misconduct directly causes harm, they are responsible for compensating the principal. However, they are not liable for losses or damages that are indirectly or remotely caused by such issues.

Examples: 

• Example 26: If A, a Kolkata merchant, has an agent B in London who fails to remit money promptly, causing A's insolvency, B is liable for the money and interest from the due date, as well as any direct losses like exchange rate variations, but not for indirect losses.
• Example 27: If an agent sells goods to B on credit without conducting proper inquiries into B's solvency, and B is insolvent at the time of sale, the agent must compensate the principal for the loss incurred.

Duties of an Agent 

Duty to render proper accounts: As per  Section 213  of the Indian Contract Act, an agent is obligated to provide accurate accounts to their principal when requested. It's important to note that rendering accounts goes beyond merely presenting them; it involves supporting the accounts with relevant vouchers, as highlighted in the case of Anandprasad vs. Dwarkanath.

Agent's duty to communicate with principal: According to  Section 214  of the Indian Contract Act, an agent has the responsibility to communicate with their principal and seek instructions diligently in difficult situations. This means the agent should make all reasonable efforts to keep the principal informed and obtain their guidance when facing challenges.

Duty not to deal on his own account: An agent must not engage in transactions for their own benefit without obtaining the principal's consent first. If the agent acts without consent, the principal has the right to:

• Reject the transaction (as per  Section 215  ).
• Demand any benefits the agent gained from the transaction (as per  Section 216  ).

Example 30:  A instructs B to sell A's estate. B, instead, buys the estate for himself under C's name. If A discovers B's actions and can prove B's dishonest concealment of important facts or that the sale is detrimental to A, he can reject the sale.

Example 31:  In a similar scenario, A tells B to sell A's estate. Before the sale, B finds an undisclosed mine while inspecting the estate. B informs A of his intention to buy the estate but hides the mine's discovery. A agrees to the sale without knowing about the mine. If A later learns that B was aware of the mine at the time of purchase, A can decide to reject or accept the sale.

Example 32:  A directs B, his agent, to purchase a specific house on his behalf. B informs A that the house is not available and proceeds to buy it for himself. Upon discovering B's actions, A has the right to compel B to sell the house to him at the price B paid.

Rights of an Agent

(i) Right to Retain Out of Sums Received on Principal's Account:  Under Section 217, agents have the right to retain certain amounts from sums received on behalf of the principal. This includes:

• Moneys due to the agent for advances made.
• Expenses properly incurred by the agent in conducting the business.
• Any remuneration payable to the agent for their role.

This right can be exercised on any sums received in the course of the agency.

(ii) Right to Remuneration [Section 219]:  Agents are entitled to remuneration as per the contract in the normal course. If no specific amount is agreed upon, agents are entitled to usual remuneration customary in the business. However, agents guilty of misconduct are not entitled to any remuneration for the part of the business they have misconducted [Section 220].

Example:  If Agent B recovers ₹1,00,000 from C and invests ₹90,000 in good securities but ₹10,000 in poor securities leading to a loss of ₹2,000 for A, B is entitled to remuneration for recovering ₹1,00,000 and investing ₹90,000. B is not entitled to remuneration for the poor investment and must indemnify A for ₹2,000.

Agent's Lien on Principal's Property: According to Section 221, an agent has the right to retain the goods, papers, and other property of the principal until they have been paid or accounted for the commission, disbursements, and services owed to them. This right exists unless there is a contract stating otherwise.

Conditions for Agent's Lien 

•  Lawful Entitlement:  The agent must be lawfully entitled to receive a sum of money from the principal for commission earned, disbursements made, or services rendered in the proper execution of agency business.
•  Ownership of Property:  The property over which the lien is exercised must belong to the principal and should have been received by the agent in their capacity and during the course of ordinary duties as an agent.
•  Lawful Possession:  If the agent obtains possession of the property by unlawful means, they cannot exercise a particular lien.

Loss of Agent's Lien 

•  Loss of Possession:  The agent's lien is lost when they lose possession of the property.
•  Waiver of Right:  The agent may waive their right to lien, either through an express or implied agreement.

Contractual Limitations 

• The agent's lien is subject to any contract that specifies otherwise.

Note:  The specifics of agency law regarding liens can vary by jurisdiction, so it is advisable to consult local laws for precise application.

Right to Indemnity 

Right of Indemnification for Lawful Acts [Section 222] 

• The principal is obligated to indemnify the agent for all consequences arising from lawful acts performed within the scope of their authority.
•  Example:  If 'A' in Delhi appoints 'B' in Mumbai as an agent to sell merchandise, and 'B' faces legal issues due to 'A's failure to deliver the merchandise, 'A' must protect 'B' from such litigations and associated costs.

Right of Indemnification Against Acts Done in Good Faith [Section 223] 

• When an agent acts in good faith following the principal's instructions, they are entitled to indemnification for any loss or damage from the principal.
•  Example:  If 'P' appoints 'A' as an agent to sell goods that do not belong to 'P', and third parties sue 'A' for this act, 'A' is entitled to reimbursement for acting in good faith.

Non-Liability of Employer for Criminal Acts [Section 224] 

• When one person employs another to perform a criminal act, the employer is not liable to indemnify the agent for the consequences of that act, whether explicitly or implicitly.
•  Example:  If 'A' hires 'B' to harm 'C' and agrees to indemnify 'B' for the consequences, 'A' is not liable to indemnify 'B' for damages incurred.

Right to Compensation for Injury Due to Principal's Neglect [Section 225] 

• The principal must compensate the agent for injuries caused due to the principal's neglect or lack of skill.
•  Example:  If 'A' hires 'B' as a bricklayer and 'A' sets up the scaffolding poorly, causing injury to 'B', 'A' is obligated to compensate 'B'.

Principal’s Liability to Third Parties

When an agent acts on behalf of a principal, the liability for the actions taken typically rests with the principal, not the agent. This is because the agent is acting within the scope of their authority and is not personally liable unless there is a specific agreement stating otherwise.

Principal’s Liability for the Acts of the Agent (Section 226):

• A principal is liable for the actions of an agent when those actions are within the scope of the agent’s authority.
•  Example 40:  If A buys goods from B, knowing B is an agent but not knowing the principal, B’s principal is entitled to claim the price from A. A cannot set off a debt from B against this claim.
•  Example 41:  If A, as B’s agent, receives money from C that is due to B, C is discharged from the obligation to pay B.

Principal’s Liability when Agent Exceeds Authority (Section 227): When an agent exceeds their authority, if the part of their actions within authority can be separated from the part beyond authority, only the actions within authority are binding between the agent and principal.

•  Example 42:  If A authorizes B to procure insurance for ₹4,00,000 on a ship, and B secures a policy for the same amount on the cargo as well, A is obligated to pay the premium for the policy on the ship but not for the one on the cargo.

Principal Not Bound When Excess of Agent’s Authority Is Not Separble (Section 228): If an agent acts beyond their authority and the actions beyond authority cannot be separated from those within it, the principal is not bound to recognize the transaction.

•  Example 43:  If A authorizes B to buy 500 sheep and B buys 500 sheep and 200 lambs for ₹6,00,000, A may repudiate the entire transaction.
•  Example 44:  If A authorizes B to draw bills up to ₹200 each and B draws bills for ₹1,000 each, A may repudiate the whole transaction.

Exception: Liability of Principal Inducing Belief (Section 237):

• If a principal induces third parties to believe that an agent’s unauthorized acts or obligations are within the agent’s authority, the principal is bound by those acts or obligations.

Personal Liability of Agent to Third Parties 

Agents and Contracts 

• In general, agents cannot enforce contracts on their own behalf or be held personally responsible for them, unless there is a specific agreement allowing this.
• Agents act on behalf of their principals, and it is the principals who are bound by the contracts made by the agents.
• For example, if an agent signs a contract with a third party on behalf of the principal, the third party cannot sue the agent personally unless there is an agreement stating otherwise.

Legal Provisions 

• This principle is outlined in Section 230 of the relevant legal framework, which emphasizes the role of agents as intermediaries acting for their principals.
• Agents have the authority to negotiate and enter into contracts on behalf of their principals, but the legal rights and obligations arising from those contracts are primarily between the principal and the third party.

Exceptions 

• There may be exceptions where agents can be held personally liable, such as when they exceed their authority or engage in fraudulent activities.
• However, in most cases, agents operate within the scope of their authority and act in the best interests of their principals, ensuring that the legal relationship remains between the principal and the third party.

Exceptions to the Rule of Personal Liability 

In certain exceptional situations, an agent is assumed to have agreed to be personally bound by the contract. These situations include:

1.  Contract with Foreign Principals:  When an agent enters into a contract for the sale or purchase of goods on behalf of a principal resident abroad, it is presumed that the agent is personally liable for the performance of the contract.
2.  Undisclosed Principal:  If the agent does not disclose the name of the principal, it is assumed that the agent is personally liable for the contract.
3.  Non-existent or Incompetent Principal:  When the principal, although disclosed, cannot be sued, the agent is presumed to be personally liable. For example, if an agent contracts on behalf of a minor (who cannot be held liable), the agent becomes personally liable unless the other party is aware that the principal is a minor.
4.  Pretended Agent:  If an individual pretends to be an agent without actual authority, and the principal does not rectify the situation but disowns the act, the pretended agent will be personally liable.
5.  Exceeding Authority:  When an agent exceeds their authority and misleads a third party into believing they have the necessary authority, the agent can be held personally liable for breaching the warranty of authority.

Rights of Third Parties in Contracts

Rights of Parties in a Contract Made by an Undisclosed Agent [Section 231] 

• When an agent enters into a contract with someone who is unaware that they are dealing with an agent, the principal has the right to enforce the contract. However, the other party to the contract has the same rights against the principal as they would have had against the agent if the agent were the principal.
• If the principal reveals their identity before the contract is finalized, the other party can refuse to complete the contract if they can prove that they would not have agreed to it if they had known the principal's identity or that the agent was not the principal.

Example 51: 

• SS buys an IPL match ticket at Wankhede Stadium through AB because the stadium management wouldn't issue the ticket directly to him for personal reasons.
• The stadium management has the right to cancel the contract and deny SS entry to the stadium.

Performance of Contract with Agent Acting as Principal [Section 232] 

• When an agent acts on behalf of a principal without disclosing their agency, and the principal seeks to enforce the contract, the principal can do so, but subject to the rights and obligations between the agent and the other party.

Example 52: 

• A owes B 50,000 rupees and sells 1,00,000 rupees worth of rice to B while acting as an agent for C without B's knowledge.
• C cannot force B to accept the rice without allowing B to set off A’s debt.

Right of Person Dealing with Personally Liable Agent [Section 233] 

• In situations where the agent is personally liable, a person dealing with the agent can hold the agent, the principal, or both liable.

Example 53: 

• A contracts with B to sell 100 bales of cotton and later discovers that B was acting as an agent for C.
• A has the right to sue either B, C, or both for the price of the cotton.

Consequence of Inducing Agent or Principal to Act on Belief [Section 234] 

• When a person contracts with an agent and induces the agent to believe that only the principal will be held liable, or induces the principal to believe that only the agent will be held liable, they cannot later hold the agent or principal liable respectively.

Modes of termination of Agency: 

•  Completion of business:  An agency automatically ends when its business is completed. For instance, the authority of an agent appointed to sell goods ceases when the sale is finalized.
•  Death or insanity:  An agency is automatically terminated upon the death or insanity of either the principal or the agent. Similarly, the winding up of a company or the dissolution of a partnership has the same effect. However, acts performed by the agent before their death remain binding.
•  Principal’s insolvency:  An agency may terminate if the principal is declared insolvent, depending on jurisdiction and specific circumstances.
•  Expiry of time:  If an agent is appointed for a fixed term, the agency ends with the expiration of the term, regardless of whether its purpose has been achieved. An agency automatically concludes on the expiry of its term.

Revocation of Authority

Termination of Agency as per Section 201

• Termination of agency refers to the ending of the legal relationship between the principal and the agent. Section 201 of the relevant law outlines various modes of termination, including: 

Revocation by the Principal: The principal can terminate the agency by revoking the authority granted to the agent. This revocation can occur at any time before the agent has exercised the authority in a way that binds the principal (as per Section 203). However, once the authority has been partly exercised in relation to specific acts and obligations, the principal cannot revoke it for those acts (as per Section 204). 

• Example 54: If A authorizes B to buy 1,000 bales of cotton on A's behalf, and B buys the cotton in his own name, A cannot revoke B's authority regarding the payment for the cotton. 
• Example 55: If A authorizes B to buy 1,000 bales of cotton on A's behalf and B buys the cotton in A's name without making himself personally liable for the price, A can revoke B's authority to pay for the cotton. 

Compensation for Premature Revocation by Principal (Section 205): If the principal revokes the agency prematurely and without sufficient cause, they must compensate the agent for such revocation. 

Notice of Revocation (Section 206): When the principal revokes the authority with justification, they must provide reasonable notice of the revocation to the agent. Failure to do so may result in the principal being liable to compensate the agent for any damages caused. 

Express or Implied Revocation (Section 207): Revocation of agency can be expressed or implied based on the conduct of the principal. For example, if A empowers B to let A's house and later A lets it himself, it implies the revocation of B's authority. 

• Example 56: A empowers B to let A’s house. Afterwards A lets it himself. This is an implied revocation of B’s authority.

Renunciation by Agent (Section 206): An agent can renounce the agency in the same manner as the principal can revoke it. If the agency is for a fixed period, the agent may need to compensate the principal for any premature renunciation without sufficient cause. A reasonable notice of renunciation is also necessary. 

Completion of Business: An agency is automatically terminated when its business is completed. For instance, the authority of an agent appointed to sell goods ceases when the sale is finalized. 

Death or Insanity: An agency is automatically terminated upon the death or insanity of the principal or the agent. Similar effects occur with the winding up of a company or the dissolution of a partnership. Acts performed by the agent before their death remain binding. 

Principal's Insolvency: An agency ends when the principal is adjudicated insolvent. 

Expiry of Time: If an agent is appointed for a fixed term, the agency ends with the expiration of the term, regardless of whether the purpose of the agency has been achieved. An agency automatically concludes upon the expiry of its term. 

When does Agency become Irrevocable?

Agency  becomes irrevocable when the agent has a personal interest in the subject matter of the agency. According to  Section 202  of the relevant legal framework, if the agent has an interest in the property that is the subject of the agency, the agency cannot be terminated in a way that harms that interest without an explicit contract.

Example 57:  If A authorizes B to sell A's land and pay himself from the proceeds for debts owed by A, A cannot revoke this authority. This authority cannot be terminated by A's insanity or death.

Example 58:  If A consigns 1000 bales of cotton to B, who has made advances to A on this cotton, and instructs B to sell the cotton and repay himself from the sale proceeds, A cannot revoke this authority. This authority cannot be terminated by A's insanity or death.

Effects of Termination 

 When Termination Takes Effect 

• As to Agent: Termination of an agent's authority takes effect when it becomes known to the agent.
• As to Third Persons: It takes effect when it becomes known to third persons.

Example 59:

• A hires B to sell goods and offers a 5% commission.
• A revokes B's authority by letter.
• B sells the goods for ₹1,00,000 before receiving the revocation.
• The sale is valid, and B earns ₹5,000 commission.

Example 60:

• A instructs B to sell cotton in Mumbai, then revokes the authority and asks B to send the cotton to Chennai.
• B, unaware of the revocation, sells the cotton to C, who only knows of the initial instruction.
• C's payment to B is valid against A.

Example 61:

• A instructs B to pay money to C.
• A passes away, and D becomes the executor of A's will.
• B pays C before learning of A's death.
• The payment is valid against D.

Agent’s Duty on Termination by Principal’s Death or Insanity

• When an agency is terminated due to the principal's death or mental incapacity, the agent is obligated to take reasonable steps to protect and preserve the entrusted interests on behalf of the principal's representatives.

Termination of Sub-Agent's Authority

• The authority of a sub-agent appointed by an agent terminates when the authority of the agent is terminated.