Creation of Agency, Termination of Agency

An “agent” is a person employed to do any act for another, or to represent another in dealing with third  persons. The person for whom such act is done, or who is so represented, is called the “principal”.

The relationship between an agent and a principal is called an “Agency.” An agent therefore brings together his principal and a third person. Ex- A appoints B to Purchase a house for him. A is the principal, B is an agent and the relationship between them is that of Agency.


  1. Whatever a person competent to contract may do by himself, he may do through an agent, except for acts involving personal skill and qualifications. Like, a person cannot marry through an agent, a person cannot paint a picture through agent.
  2. The acts of an agent are acts of a principal for all legal purposes.

WHO MAY EMPLOY AN AGENT (Sec 183)- According to law, any person who is of the age of majority and who is sound mind, may employ an agent. Any person competent to contract may employ an agent, and a minor, a lunatic or a drunken person cannot employ an agent.

Who can be an agent (Sec 184)- “as between principle and third person any person may become agent” . thus even a minor, a lunatic or a drunken person can be employed as  an agent. However, in such case because runs a great risk as he cannot hold such an agent liable for misconduct or negligence.

Creation of Agency The following are different modes of creation of agency.

  1. Agency by Express agreement.
  2. Agency by Operation of law.
  3. Agency by Ratification.
  4. Agency by Implied authority.

1. Agency by Express agreement: Number of agency contract come into force under this method. It may be Oral or documentary or through power of attorney.

2. Agency by operation of law: At times contract of agency comes into operation by virtue of law.

For example: According to partnership act, every partner is agent of the firm as well as other parties. It is implied agency. On account of such implied agency only a partner can bind over firm as well as other partners, to his activities. In the same way according to companies act promoters are regarded as agents to the company

3. Agency by Ratification: Ratification means subsequent adoption of an activity. Soon after ratification principal – agent relations will come into operation. The person who has done the activity will become agent and the person who has given ratification will become principal.

  • Ratification can be express or implied. In case where adoption of activity is made by means of expression, it is called express ratification. For example: Without A`s direction, B has purchased goods for the sake of A. There after A has given his support (adoption) to B`s activity, it is called Ratification. Now A is Principal and B is agent.
  • The ratification where there is no expression is called implied ratification. For example: Mr. Q has P`s money with him. Without P`s direction Q has lent that money to R. There after R has paid interest directly to P. Without any debate P has taken that amount from R. It implies that P has given his support to Q`s activity. It is implied ratification.

4. Agency by implied authority: This type of agency comes into force by virtue of relationship between parties or by conduct of parties.

For example: A and B are brothers, A has got settled in foreign country without any request from A, B has handed over A`s agricultural land on these basis to a farmer and B is collecting and remitting the amount of rent to A. Here automatically A becomes principal and B becomes his agent. Agency by implied authority is of three types as shown below;

  • Agency by Necessity
  • Agency by Estoppel
  • Agency by Holding out.

(i) By Necessity: At times it may become necessary to a person to act as agent to the other in emergency situation where the property or interest of another is in danger . the conditions which enables a person to act as an agent of another in necessity are as follows:

  1. There should be a real necessity for acting on behalf of the principal.
  2. It should be impossible to communicate with the principle within the time available.
  3. The alleged agent should act bonafide in the interest of the principal.

For example: A has handed over 100 bags of butter for transportation, to a road transport company. Actually it is bailment contract assume that in the transit all vehicles has got stopped where it takes one week for further movement. So the transport company authorities have sold away the butter in those nearby villages. Here agency by necessity can be seen.

(ii) By Estoppel: Where a person, by his conduct or words spoken or written, willfully leads another to believe that a certain person is acting as his agenct, he is estopped later on from denying the truth of the fact that such a person is dealing as his agent.

Example:  In presence of A , B says to C that he (B) is A`s agent though it is not so actually. A has not restricted B from making such statement. It is agency by estoppel.

(iii) By Holding out: the principal is bound by the act of agent if on an earlier occasion he has made others believe that other person doing some act on his behalf is doing with his authority.

Example: Y is X`s servant and X has made Y accustomed to bring goods on credit from Z. On one occasion X has given amount to Y to bring goods from Z on cash. B bought goods on credit as usually and runs away with the money. This is agency by holding out and therefore X is liable to pay amount to Z.

Termination of Agency

An agent’s authority can be terminated at any time. If the trust between the agent and the principal has broken down, it is not reasonable to allow the principal to remain at risk in any transactions that the agent might conclude during a period of notice.

Agency can be terminated by following ways:

By Agreement

On the basis that agency relationship is created by agreement between the principal and the agent, such a relationship can also be brought to an end by mutual agreement between the parties, either in writing or orally[i] .

Termination by agreement may also occur if the agency relationship is terminated pursuant to the provisions of the agreement itself. The following situations may arise in this context:

If the agreement provides for the appointment of the agent for a specified period of time, the agency will come to an end automatically when that period of time expires.

If the agreement provides for the agency to terminate upon the occurrence of a specified event, the agency will come to an end upon the happening of the specified event.

By the Act of Parties

An agency may be terminated by the acts of the either principal or the agent as illustrated below:-

Performance by the agent

If an agent is appointed to accomplish a particular task or for a specific purpose, when the task is accomplished by the agent or the specific purpose is attained, the agency will terminate.

Revocation by the principal

The authority of an agent may be revoked at any time by the principal. However unilateral revocation otherwise than in accordance with the provisions of the agency agreement may render the principal liable to the agent for the breach of agency agreement.

Any word or conduct of the principal inconsistent with the continued exercise of the authority by the agent may operate as revocation of the agency.

Revocation’s of the agent’s power by the principal may not automatically discharge the principal from liability to a third party who is entitled to rely from liability to a third party who is entitled to rely from liability to a third party who is entitled to rely from liability to a third party who is entitled to rely on the apparent authority of the agent on ground’s of representation by the principal of previous course of dealing with the agent’s before notice of revocation is given to the third party .Therefore notice of revocation of an agent’s power should be given to the third party as soon as possible.

Renunciation by agent

An agent is entitled to renounce his power by refusing to act or by notifying the principal that he will not act for the principal[ii].

Unilateral termination of the agency by the agent before he has fulfilled the obligations to the principal under the agency agreement will render the agent liable to the principal for the breach of the agency agreement such as payment of damages for the loss suffered by the principal.

By Notice

If the agency agreement provides that the agency may be terminated upon either party serving on the other written notice of a specified duration.

However, if the agency agreement does not contain any termination provision, the general rule is that reasonable notice has to be given to the other party to terminate the agency.

By Operation Of Law:

An agency may terminate by the operation of law upon the occurrence of particular events:-

Where the party concerned is an individual:

  • By death
  • By insanity
  • By bankruptcy

Where the party concerned is a limited company

  • Winding up
  • Receivership

Frustration of the contract of agency.

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