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Bangladesh University of Professionals

TERM PAPER
On
Legal Rules regarding Agent and Principal
Course title: The Legal Environment of Business
EMBA-9
Section: B

Submitted To:
Dr. Zulfiquar Ahmed
Chairman & Associate Professor
Dept. of Law
Bangladesh University of Professionals (BUP)

Submitted By:
Nargis Akter
ID: 1509002

Date of Submission: December 17, 2016


Law of agency
The law of agency is an area of commercial law dealing with a set of contractual, quasi-
contractual and non-contractual fiduciary relationships that involve a person, called the agent,
that is authorized to act on behalf of another (called the principal) to create legal relations with
a third party. It may be referred to as the equal relationship between a principal and an agent
whereby the principal, expressly or implicitly, authorizes the agent to work under his or her
control and on his or her behalf. The agent is, thus, required to negotiate on behalf of the
principal or bring him or her and third parties into contractual relationship. This branch of law
separates and regulates the relationships between:

 Agents and principals (internal relationship), known as the principal-agent relationship;


 Agents and the third parties with whom they deal on their principals' behalf (external
relationship); and
 Principals and the third parties when the agents deal.

In India, section 182 of the Contract Act 1872 defines Agent as “a person employed to do any
act for another or to represent another in dealings with third persons”

What is the 'Principal-Agent Relationship'?

The principal-agent relationship is an arrangement in which one entity legally appoints another
to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the principal
and should not have a conflict of interest in carrying out the act. The relationship between the
principal and the agent is called the "agency," and the law of agency establishes guidelines for
such a relationship.

BREAKING DOWN 'Principal-Agent Relationship'

The formal terms of a specific principal-agent relationship are often described in a contract. For
example, when an investor buys shares of an index fund, he is the principal, and the fund
manager becomes his agent. As an agent, the index fund manager must manage the fund,
which consists of many principals' assets, in a way that will maximize returns for a given level of
risk in accordance with the fund's prospectus.
The principal-agent relationship can be entered into by any willing and able parties for the
purpose of any legal transaction. In simple cases, the principal within the relationship is a sole
individual who assigns an agent to carry out a task; however, other relationships under this
guise have a principal that is a corporation, a nonprofit organization, a government agency or a
partnership. The agent is most often an individual capable of understanding and ultimately
carrying out the task assigned by the principal. Common examples of the principal-agent
relationship include hiring a contractor to complete a repair on a home, retaining an attorney
to perform legal work, or asking an investment advisor to diversify a portfolio of stocks. In each
scenario, the principal is the individual seeking out the service or advice of a professional, while
the agent is the professional performing the work.

Principal and Agent Responsibilities

Whether the principal-agent relationship is expressed clearly through a written contract or is


implied through actions, the principal-agent relationship creates a fiduciary relationship
between the parties involved. This means the agent acting on behalf of the principal must carry
out the assigned tasks with the principal's best interest as priority. The agent is responsible for
completing tasks given by the principal so long as the principal provides reasonable instruction.
Additionally, the agent has an obligation to perform tasks with a certain level of skill and care
and may not intentionally or negligently complete the task in an improper manner. A duty of
loyalty is also implied within the principal-agent relationship, which requires the agent to
refrain from putting himself in a position that creates or encourages a conflict between his
interest and the interest of the principal.

What is the liability of an agent or principal?

A principal will be liable for the actions of its agent as long as the agent acts within the scope of
the agency agreement. Therefore, as long as the agent's actions are taken in furtherance of the
principal's interests pursuant to the agency agreement, then any legal liability that arises will
fall on the principal.
If a person is wronged by an agent, they have the option of suing either the principal or the
agent. If they sue the agent, the agent may enforce its right to be indemnified by the principal.
For this reason, it is very important to be aware of the scope of an agent's powers under the
agency agreement.

There may be some situations in which the agent is directly responsible for their own actions,
for example, in cases of gross negligence or fraud by the agent, or where the agent is appointed
by a deed.

There may also be some situations where a principal is liable even where the agent acted
beyond the scope of their authority. Accordingly, as a principal it is important to be careful who
you engage as an agent and to have appropriate protections in the agency agreement.

Termination

The internal agency relationship may be dissolved by agreement. Under sections 201 to 210 of
the Indian Contract Act 1872, an agency may come to an end in a variety of ways:

Withdrawal by the agent – however, the principal cannot revoke an agency coupled with
interest to the prejudice of such interest. An agency is coupled with interest when the agent
himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned
by an upcountry constituent to a commission agent for sale, with poor to recoup himself from
the sale proceeds, the advances made by him to the principal against the security of the goods;
in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold
and debts satisfied, nor is the agency terminated by death or insanity (illustrations to s. 201);

 By the agent renouncing the business of agency;


 By discharge of the contractual agency obligations.

Terminated by operation of law-


 By the death of either party;
 By the insanity of either party;
 By the bankruptcy (insolvency) of either party;

The principal also cannot revoke the agent’s authority after it has been partly exercised, so as
to bind the principal (s. 204), though he can always do so, before such authority has been so
exercised (s. 203). Further, under s. 205, if the agency is for a fixed period, the principal cannot
terminate the agency before the time expired, except for sufficient cause. If he does, he is liable
to compensate the agent for the loss caused to him thereby. The same rules apply where the
agent, renounces an agency for a fixed period. Notice in this connection that want of skill,
continuous disobedience of lawful orders, and rude or insulting behavior has been held to be
sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one
party to the other; otherwise, damage resulting from want of such notice, will have to be paid
(s. 206). Under s. 207, the revocation or renunciation of an agency may be made expressly or
implicitly by conduct. The termination does not take effect as regards the agent, till it becomes
known to him and as regards third party, till the termination is known to them (s. 208).

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

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