Contents

1. INTRODUCTION – CREATION OF AGENCY .......................................... 1

1.1 Creation of Agency .............................................................................................. 1

1.1.1 By Express Contract ................................................................................................ 1

1.1.2 By Implied Contract ................................................................................................. 2

1.1.3 By Ratification ......................................................................................................... 4

2. TERMINATION OF AGENCY BY ACT OF PARTIES............................... 5

2.1 Mutual Consent .................................................................................................... 5

2.2 Breach of Contract ............................................................................................... 5

2.3 Renunciation of Agency by Agent ....................................................................... 6

2.4 Revocation of Authority by Principal .................................................................. 6

2.4.1 Irrevocable Authorities ............................................................................................ 7

3. TERMINATION OF AGENCY BY OPERATION OF LAW ....................... 8

3.1 On Completion of Business.................................................................................. 8

i|Page
 3.2 By Death of Parties .............................................................................................. 8
3.3 By Insanity or Insolvency of Parties .................................................................... 9

3.4 By Efflux of Time ................................................................................................ 9

3.5 By Destruction or Loss of Subject-Matter ......................................................... 10

3.6 By Change of Law.............................................................................................. 10

4. EFFECT OF TERMINATION OF AGENCY.............................................. 11

5. CASE LAWS ................................................................................................ 13

5.1 P.G. NATARAJAN V. LIC INDIA AND ORS. A.I.R. 2016 14 SCC 232. .......... 13

6. BIBLIOGRAPHY .................................. ERROR! BOOKMARK NOT DEFINED.

ii | P a g e
 1. INTRODUCTION – CREATION OF AGENCY

'Agency' is another kind of contract where contractual right can be conferred and
contractual liabilities can be imposed on a stranger. Although, there is no specific
provision in the Indian Contract Act, which defines the term 'agency', but agency is
implicit under §182 of the Act. On the basis of this section an 'agency' may be defined as
a contract by which an agent is employed by a principal to act on behalf of the principal
or to represent
the principal in dealings with the outside world. In other words, 'the relation of agency
arises when one person has authority to act on behalf of another. 'Representation' is an
essential element of agency. A person who is major and who is of sound mind may
1
employ an agent. On the other hand, even a minor can be appointed an agent but where
an agent is minor, the principal will be bound for his act to the third person, but the minor
2
will not be responsible to the principal. All the essentials of a contract except
3
consideration are necessary for creating an agency.

1.1 Creation of Agency

An agency may be created in any one of the following ways- by express contract; implied
contract; by ratification.

1.1.1 By Express Contract

An express contract can be made orally or in writing. In general sense, an agency is

creation of a contract. The contract of agency is based upon a proposal, acceptance,
4
promise, promisor, promisee, consideration and agreement. An agency created by a
contract gives authority to the agent. The word 'authority' signifies the power of the agent
to affect legal relations of the principal. Authority may be express or implied. An 'express

1 §183, The Indian Contract Act, 1872.

2 Foreman v. Great Western Rly Co. 1878 38 LT 851.
3 §185, The Indian Contract Act, 1872.
4 Satyadeva Narayan Sinha and others v. Triveni Prasad and others, A.I.R. 1936 Pat, 153.
1|Page
 5
authority' of an agent is created by an express contract between principal and agent. It
may be created orally or in writing. An agent by power of attorney can be appointed by a
6
sole principal and also by co-principals. Ordinarily, an agent who has an express
authority is required to act in accordance with terms of the contract. In other words, an
express authority includes an implied authority to do every lawful thing which is
7
necessary in order to do such an act. But the agent has also an implied authority to do
such acts which are necessary to do the agreed act or such acts which are required by
usage of the business.

1.1.2 By Implied Contract

An implied contract is inferred from the conduct of offeror and acceptor. Thus, an agency
may also be created by an implied contract. An authority is said to be implied when it is
to be inferred from the circumstances of the case or the ordinary course of dealing It is to
be noted that an implied authority may. arise in two ways: (1) in ordinary circumstances
and (ii) in an emergency.

Agency by an act of necessity - An agency of necessity arises due to some emergency

circumstances. In an emergency a person is authorized to do what he cannot do in
ordinary circumstances. Thus, where an agent is authorized to do a certain activity, and
while doing such an act, an emergency arises, he acquires an extra-ordinary or special
authority to prevent his principal from loss. The agency of necessity may arise in either of
' the following two ways :- (i) where agency exists; (ii) where no agency exists. But
emergency must have occurred; the emergency must be of such a nature that principal
cannot be contacted; the agent must have acted bonafide i.e. honestly; the agent must
have acted reasonably; agent's act done in an emergency must have been done with the
intention to safeguard his principal's interest. If all these conditions are fulfilled, only
then agent’s action can be justified. The extent of agent’s authority must be read
conjunctively with §211 and §214 of the act.

5 §186, Indian Contract Act, 1872.

6 Syed Abdul Khader v. Rami Reddi A.I.R. 1979 S.C. 553.
7 §188, Indian Contract Act, 1872.

2|Page
 8
Agency by Estoppel - An agency by estoppel is based on the principle of estoppel . It
lays down that when one person by declaration, act or omission has intentionally caused
or permitted another person to believe a thing to be true and to act upon such belief, he
shall not be allowed to deny his statement or he shall be stopped to deny his statement or
conduct. This agency is implicit under § 237 of the Indian Contract Act. According to §
237 of the Contract Act an agency by estoppel may be created when following essentials
are fulfilled: (1)the principal must have made a representation;(2)the representation may
be express or implied; (3)the representation must state that the agent has an authority to
do certain act although really he has no authority; (4)the principal must have induced the
third person by such representation; and (5) the third person must have believed the
representation and made the contract on the belief of such representation.

Agency between Husband and Wife - In the general sense, neither a wife is an agent of
her husband nor is a husband the agent of his wife. But, a relationship of an agency may
exist between them either by an express appointment or by estoppel or by ratification. In
certain circumstances law empowers a married woman even without her husband's
authority to bind her husband by her contracts on the ground of necessity to pledge her
9
husband's credit. It resembles with the quasi-contractual relationship rather than agency
created by express, implied or apparent authority. An example of 'implied agency'
between husband and wife may be seen where the wife purchases household necessaries
on credit. A wife who lives with her husband is supposed to have an implied authority of
her husband to purchase goods of domestic necessity on credit. However following
limitations have been imposed to determine agency relationship: - (1) the husband and
wife should live together; (2) there must be a domestic establishment; (3) the wife must
be in charge of such domestic establishment; (4) the wife must have pledged the credit of
her husband only for necessaries; (5) the husband will not be liable if he pays reasonable

8 §115, Indian Evidence Act, 1872.

9 Kanhayalal v. Indarchandji, A.I.R. 1974 Nag. 84.

3|Page
allowances to his wife for her needs. The husband is not liable even though the fact of
10
allowances is not known to the seller .

1.1.3 By Ratification

§ 196 of the Indian Contract Act provides that an agency can be created by ratification. It
says that when an act is done by one person on behalf of another without his knowledge
or authority, the person on whose behalf such act is done may ratify the act. The agency
created by ratification is also called as an 'ex-post facto agency'.

Following are its essentials: - (1) The act must have been done on behalf of another. The
person who does the act must profess at the time of its doing that the act is done not for
himself but on behalf of another; (2) The act must have been done without knowledge or
authority of ratifier; (3) The ratifier must be competent to contract. The ratifier must be
competent to make the contract both at the time when it was made and at the time when it
was ratified; (4) The ratifier; must be in existence at the time when the act was done. The
ratifier may be a natural person or a juristic person; (5) The ratifier must be the same
11
person for whom the act was done ; (6) The contract must subsist at the time of
ratification. The ratification may be done only of such contract which exists at the date of
12
ratification; (7) The ratification may be express or implied ;(8) The ratifier must have
full knowledge of the facts. § 198 of the Contract Act states that no valid ratification can
be made by a person whose knowledge of the facts of the case is materially defective,
Same has been verified by the court in Premila Devi v. People's Bank of Northern India
13
Ltd. and in Lakshmi
14
Ratan Cotton Mills Co. v. J.K. Jute Mills Co. ; (9) The ratification must be of the whole
15
act ; (10) The ratification must be of lawful acts, even a voidable or fraudulent contract
can be ratified. But, the question of ratification of a void contract does not arise, but still a
minor's agreement can be ratified even though it is a void ab-initio; (11) The ratification

10 Girdhari Lai v. Crawford, I.L.R. l885 9 All 147.

11 Mani v. State of Madras, A.I.R. 1954 Mad. 190.
12 §197, Indian Contract Act, 1872.
13 Premila Devi v. People's Bank of Northern India Ltd A.I.R. 1938 P.C. 284.
14 Lakshmi Ratan Cotton Mills Co. v. J.K. Jute Mills Co. A.I.R. 1957 All. 311.
15 §199, Indian Contract Act, 1872.

4|Page
 16
must not injure the third person . It is to be noted that the ratification 'relates back' to the
date when the act was originally done. It follows from the above discussion that only an
executed contract or act can be ratified.

2. TERMINATION OF AGENCY BY ACT OF PARTIES

A contract of agency is a species of the general contract. As such, an agency may

terminate in the same way as a contract is discharged except where the agency is
irrevocable. The relation of principal and agent can only be terminated by the act or
agreement of the parties to the agency or by operation of law. An agency may be ended
by an act of parties in any one of the following manners.

2.1 Mutual Consent

An agency may be terminated by mutual consent of the parties i.e. principal and agent.
Thus, as parties are at liberty to make any contract they please, so also they are at liberty
to unmake any contract that exists between them. Where the parties agree to terminate
their contract of agency, their relationship will come to an end. However, the termination
of the agency by mutual consent should not prejudice third party's interest. That is, the
contractual rights of the third party with whom the agent has contracted cannot be
impaired by such termination. The third party is entitled to sue the principal irrespective
of the fact that the agency has been terminated.

2.2 Breach of Contract

A breach of contract of agency also brings the agency to an end. That is, an agency may
17
be terminated by breach of contract. The breach may be caused either by the principal
or by the agent. But, the party who suffers any loss due to such breach is entitled to
receive compensation from the party who causes such breach. It is also noted that such

16 §200, Indian Contract Act, 1872.

17 Development of Industries (India) Pvt.Ltd. v. Commissioner of Income Tax, A.I.R. 1968 Cal. 492.

5|Page
breach should not adversely affect the interest of the third party who had made contract
with the agent. Despite, such breach the third party can sue the principal for enforcement
of a contract made with him by the agent before the breach.

2.3 Renunciation of Agency by Agent

According to §201 of the Indian Contract Act, an agency can be terminated by the agent
by renouncing the business of the agency. The object behind giving such power to the
agent is to protect the agent from acting against his will. However, where an agency is
created for a definite period or accomplishment of a particular object, its renouncement
by the agent will make the agent liable to compensate the principal for any loss resulting
from such renouncement. But, where the agency is not to continue for a fixed period, the
agent has right renunciate the employment at any time by giving 'reasonable notice. It
may be made expressly or impliedly. renunciation may be affected merely by the
18
abandonment of business of the agency.

2.4 Revocation of Authority by Principal

According to § 201 of the Indian Contract Act, any agency comes to an end when the
principal revokes his authority given to the agent. The principal cannot, therefore, be
compelled to take services of agent who has turned disloyal. The revocation equally
19
applies where an agency is created for a fixed period . The best mode for revocation of
20
his authority by the principal is by giving a reasonable notice to the agent. Notice must
be given so as to give sufficient time to agent to safeguard one’s interests. In J.K. Sayani
21
v Bright Brothers (P) Ltd. court was of the view that where an agency has been created
for a fixed period, compensation would have to be paid for its premature termination, if
22
the termination is without sufficient cause The revocation may be express or implied .
An implied revocation can be inferred from conduct of the principal. Where there are

18 Atul Chander Ghosh v. Lakshman Chander Sen, I.L.R. 1909 36 Cal. 609.
19 §205, Indian Contract Act, 1872.
20 §206, Indian Contract Act, 1872.
21 J.K. Sayani v Bright Brothers (P) Ltd AIR 1980 Mad 162.
22 §207, Indian Contract Act, 1872.

6|Page
sub-agents appointed by the agent termination of agent1s authority causes termination of
23
authority of sub-agents also.

2.4.1 Irrevocable Authorities

Agency coupled with interest - Where the agent has an interest in the subject matter of
agency the agency cannot be revoked. § 202 of the Indian Contract Act provides that
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 any express contract, be terminated to the
prejudice of such interest. Following must be present for application of the doctrine of
agency coupled with an interest. the interest of the agent must be an existing interest i.e.
it must exist at the time of creation of agency. a subsequent or independent interest is of
no use for this purpose. For example, where under an agency the agent is to receive
24
commission, the agency cannot be an agency coupled with an interest.

Where contract prohibits revocation – Even such an authority is revocable. The

principal can revoke the authority regardless of the fact that he had promised not to
revoke it. But, such revocation will be treated just like a breach of contract and the
principal may be held liable for arbitrary termination.

Where authority is partly exercised - Partly exercised authority is irrevocable. This

principle is Incorporated in § 204 of the Indian Contract Act. The section says that the
principal cannot revoke the authority given to his agent after the authority has been partly
exercised.

23 §210, Indian Contract Act, 1872.

24 M.John Kotaiah v. A. Divakar, A.I.R. 1985 A.P. 30.

7|Page
 3. TERMINATION OF AGENCY BY OPERATION OF LAW

3.1 On Completion of Business

The termination of agency on completion of business takes effect automatically by

operation of law. Neither party is required to give notice of termination. It is even
terminated after completion of work by any other party and not by agent. According to §
201 of the Indian Contract Act an agency terminates on completion of the business. The
question whether an agency will terminate on the completion of business is a question
25
which will be determined on the facts and circumstances of the case. For instance, an
agency for sale of a property terminates as soon as the sale is completed and does not
26
continue until payment. But, Allahabad and Calcutta High Courts have expressed a
view contrary to that of Madras High Court and have held that the agency is not
terminated on completion of sale but continues until payment of sale proceeds to the
27
principal. views expressed by Allahabad and Calcutta High Court appears to be more
logical and practical than that of the Madras High Court.

3.2 By Death of Parties

The termination takes place automatically on the death of either of the two. When the
principal dies the relationship of agency comes to an end because the agent cannot act on
28
behalf of a non-existent person. But, where an agency is coupled with an interest,1 it
cannot cease to exist on principal's death. It should continue until the agent receives his
interest. according to § 208 of the Indian Contract Act if an agent without knowing the
fact of principal's death enters into a contract with third party, the contract will be
enforceable. The English law differs on the point. notice of death of principal to the agent
is not necessary under the English law. § 209 of the Indian Contract Act lays down that
when an agency is terminated by principal's death, the agent is bound to take on behalf of

25 Khila Dhish v. Mool Chand, A.I.R. 1969 3 SCC 411.

26 Venkatachalam Chetty v. Narayan Chetty, A.I.R. 1916 Mad. 281.
27 Fink v. Baldeo Das, I.L.R. l899 26 Cal. 715.
28 Karam Bibi v. Mehr All, A.I.R. 1933 L. 876.

8|Page
representatives of his deceased principal, all reasonable steps to protect the interest
entrusted to him. But, merely because an agent is acting on behalf of deceased principal1s
representatives he cannot be deemed to be their agent. An agency also terminates when
the agent dies. It does not devolve on his heirs. But, where an agency is coupled with
interest it does not terminate on agent's death; it passes on to his personal representatives.
Where there are joint agents, death of one of them terminates agency so far as he is
concerned but continues as regards the surviving agent in the absence of a contrary
29
intention.

3.3 By Insanity or Insolvency of Parties

an agency comes to an end when the principal or the agent becomes insane. When the
principal becomes insane the agency terminates only when the fact of principal' s insanity
is known to the agent. Therefore, if the agent, in ignorance of principal's insanity enters
into a contract with a third party who also does not know the principal's insanity, the
contract is binding. Similarly, an agency ceases to exist at insanity of the agent. It
terminates as soon as the agent becomes insane. The main object behind agency is to
appoint such person as an agent who may be competent to do the principal's act.
Therefore, when the agent becomes s insane he would, obviously become unfit for doing
the required job and thus, further continuation of agency would defeat the basic purpose
of agency.
When any party is adjudicated insolvent, the agency terminates. The principal is
represented by the agent. The purpose of such representation is to confer rights and
impose liabilities on the principal and agent also. Accordingly, the third party with whom
the agent makes the contract can sue the principal. Similarly, agent is responsible to
principle for his acts. But, when the principal or agent becomes insolvent he is discharged
of the liabilities.

3.4 By Efflux of Time

29 Raghurnall v. Luchmandas, A.I.R. 1017 Cal. 52.

9|Page
An agency constituted for a fixed time ceases to exist automatically when the time so
fixed expires. An exercise of authority by agent after expiry of fixed time, therefore,
30
becomes ineffective. It has been rightly observed by Mookerji J. in Lalljee v. Dadabhai
that where an agent has been appointed for a fixed term, the expiration of the term puts an
end to the agency whether the purpose of agency has been accomplished or not. It is
submitted that the time fixed should be reasonable. In certain cases, an agent, being
forced by his poor economic conditions may agree to do certain act within a fixed period.
In another case, the agency was to run a petrol pump for a specific period, it was held that
the agent was bound to vacate the premises on expiry of the period. An agency comes to
31
an automatic end on the expiry of its term.

3.5 By Destruction or Loss of Subject-Matter

In the event of destruction of subject-matter of agency, the agency terminates. An agency

may be created to deal with certain subject-matters, e.g., house, goods etc. Therefore,
when such subject- matter is destroyed by any supervening event, it would be impossible
for the agent to exercise his authority and consequently, the contract of agency frustrates
under §56 of the Indian Contract Act. For example, A appoints B his agent to sell a car
But, before sale the car is destroyed in a fire accident. The contract of agency frustrates
i.e. the authority of the agent is automatically revoked under §56 of the Contract Act.

3.6 By Change of Law

It is well settled that §56 of the Indian Contract Act also applies where after formation of
a contract but before its performance, a change of law renders the performance of the
contract illegal and thereby void. Therefore, a contract of agency will come to an end
when a change in law causes the execution of agent's authority unlawful. The agency
terminates regardless of the fact that the agent has notice of such change. But, under
English law an agency terminates due to change in law only when two conditions are
fulfilled. Firstly, the agent must have notice of such change and secondly, he could infer

30 Lalljee v. Dadabhai, A.I.R. 1916 23 Cal.

31 Sukhdev v Commr of Endowments, A.I.R 1998 A.P. 403.

10 | P a g e
that if the principal knew the circumstances of change in legal position he would not
32
consent to further exercise of the agent's authority.

4. EFFECT OF TERMINATION OF AGENCY

Sometimes former agents continue to act on their ex-principals 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. It is to be noted that
the termination of an authority of an agent as regards the agent takes effect when it
becomes known to him and as regards third persons when it becomes known to them.
Third parties who are unaware of the termination may reasonably believe that an ex-agent
still has authority. To protect third parties who rely on such a reasonable appearance of
authority, an agent’s apparent authority often persists after termination. Thus, a former
agent may be able to bind the principal under his apparent authority even though the
agency has ended. Aapparent authority ends only when the third party receives
appropriate notice of the termination, that is, when it is no longer reasonable for a third
party to believe that the agent has actual authority. Principals to protect themselves
against unwanted liability, will want to notify third parties themselves. This can be
accomplished by-

 a direct personal statement to the third party; or

 a writing delivered to the third party personally, to his place of business, or to

some other place reasonably believed to be appropriate; or

 can be accomplished by advertising the agency’s termination in a newspaper of

general circulation in the place where the agency business regularly was carried

32 Marshall v. Glanvill A.I.R. 1917, 2 K.B. 87.

11 | P a g e
 on. If no suitable publication exists, notification by other means reasonably likely
to inform third parties—for example, posting a notice in public places or at a
website—may be enough.

Termination of Agency also puts some liabilities on parties. As an agent, one must restore
all the goods and immovable property in his possession to the principal. In case of
33
Southern Roadways Ltd. Madurai v. S.M. Krishnan , the agent of the appellant company
was in possession of godown of the company. The agency was terminated but he
continued to remain in possession of the same. The Supreme Court held that the agent has
no right to remain in possession of the property after termination of his agency. Agent has
duty to take all reasonable steps for protection and preservation of the interests entrusted
34
to him.

On the other hand, some liability arises for principal also. Where an agency is to continue
for a definite period, a termination of agency before expiry of that period is premature
and the principal is liable to compensate the agent provided the termination was without
sufficient cause. Thus, where the principal revokes his agent's authority without giving
him a reasonable notice, he is liable to compensate the agent for loss which he suffers due
to such revocation.

Also, where there are sub-agents appointed by the agent termination of agent1s authority
35
causes termination of authority of sub-agents also. The termination of the agent's
authority automatically results in the termination of sub-agency because the authority of
the sub-agent is dependent on that of the agent.

33
Southern Roadways Ltd. Madurai v. A.I.R. 1990 S.C. 673.
34 §209, Indian Contract Act, 1872.
35 §210, Indian Contract Act, 1872.

12 | P a g e
 5. CASE LAWS

5.1 P.G. NATARAJAN V. LIC INDIA AND ORS. A.I.R. 2016 14 SCC 232.

On 19-4-2004, appellant was given a notice that he has misconducted himself with
respect to two insurance policies by suppressing the facts of their earlier cases. Had those
facts been disclosed, then those persons were unable to get new policy. It was, thus,
proposed to terminate the agency of the Appellant Under Rule 16(1)(b) for committing
fraud by suppressing the existence of previous policy details of two policy-holders. and
thereby acting in a manner prejudicial to the interests of the Corporation. Final order
dated 21.04.2004 was passed stating that the Appellant had "tried to defraud the
Corporation, thereby acting in a manner prejudicial to the interest of the Corporation". On
that basis, the agency of the Appellant was terminated and the renewal commission was
also forfeited. the Appellant approached the High Court of Kerala by filing a writ
petition. Learned Single Judge dismissed the writ petition. Then he appealed in Supreme
Court. SC also dismissed his case by referring to section 15 and 16 of ‘Life Insurance
Corporation of India (Agents) Regulation, 1972’. §15(c) talks about that agency will be
terminated if an agent in any judicial proceeding, has been found to have knowingly
participated in or connived at any fraud, dishonesty or misrepresentation against the
Corporation or any of its subsidiaries or against any person having official dealings with
the Corporation or any of its subsidiaries, his appointment shall be liable to be terminated
without notice. §16(1)(b) also lays down a condition for termination of agency, it reads as
if an agent acts in a manner prejudicial to the interests of the Corporation or to the
interests of its policyholders; provided that a reasonable notice has been provided to
agent and should be brought into notice of agent in writing. It was held by SC that; The
agency of the Appellant was cancelled on the ground that the acts of the Appellant were
prejudicial to the interest of the Corporation; The Corporation did not suffer any loss,
whatsoever, on account of grant of the aforesaid policies; and; though there was an
allegation that the acts of the Appellant were fraudulent, in the final order passed, the
finding given was that the Appellant attempted to defraud the Corporation.

13 | P a g e