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Law of Agency: Principal and Agent Relationship


The principal-agent relationship is an arrangement where one entity lawfully selects another person to act on its behalf. In a principal-agent relationship, the agent works on behalf of the principal and should not have the conflict of the interest in carrying out the act. The relationship between the principal and the agent is called the law of agency. The rule of agency establishes guidelines for such a relationship.

In this article, we will explain to you the topics such as:

  • Who is an agent?
  • Who is a principal?
  • How to createan agency?
  • Types of agency
  • What are the types of agents?
  • What are the legal duties of agent and principal?
  • Rights of an agent
  • Termination of agency

What is the meaning of an Agent and a Principal under the Law of Agency?

The Indian Contract Act, 1872 defines an “Agent” under section 182 as a person who is employed to do any act for another person or to represent another party in dealing with the third party whereas the person for whom such act is represented is called the principal. Therefore, the person who has delegated his or her authority will be the principal.

For example Joe appoints Mary to deal with his bank transactions. In this case, Joe is the Principal, Mary is the Agent and the bank is the third party.

How to create an Agency under the Law of Agency?

An agency can create in two ways:

  • Express Authority: It means an agent has actually been told by the contract that the agent may act on behalf of the principal.
  • Implied Agreement: Implied authority is that authority where an agent has by virtue of being reasonably necessary to carry out his or her express authority.
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What are the types of agents under the Law of Agency?

Here are the types you must know such as:

  • Sub-Agent is the agent who is appointed by another agent.
  • General Agent is the one who is employed to transact all the acts which are connected to the particular activity. Example: Manager of the firm.
  • Universal Agent is one who has an unlimited authority who is authorized to do all such acts which the principal can lawfully do.
  • Co-Agent is when the agent appoints the other agent to do any act jointly.
  • Special Agent is one who is authorized to do any act which is given by the principal in some particular transactions.
  • Substitute Agent is an agent to be appointed by the principal in the absence of the present agent.
  • Auction Agent is an agent who acts as the seller to the principal.
  • The broker is an employed agent to purchase and sell the goods on behalf of the principal.
  • Commission Agent is the one who buys the goods or sells the goods on behalf of the principal on the best possible terms.

What are the legal duties of agents under the Law of Agency?

Agents are required to act up to the following duties and standards:

  • Loyalty: An agent owes his principal-agent agreement by a general obligation of allegiance. It stands that the agent must subordinate his or her interests to those of the principal if they fall within the agency relationship in addition.
  • Act by the terms and the conditions of a contract: It is essential to perform following the words and the requirements provided in the agreement with reference.
  • Care, competence and diligence: In this, the agent needs to take the proper amount of care and steps which is required in any difficult situation.
  • Ethical conduct: This requires that the agent act in a way that does not injure the critical endeavor. The agent must take a reasonable attempt to provide the principal with the relevant facts and the information.
  • Lawful instruction: It is essential to act following the commitment to meet the principal’s right instruction.
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What are the legal duties of the Principal under the Law of Agency?

The principal also owes agents several duties:

  • Contract: If the principal breaches his or her obligations, then the agent can recover based on the breach of contract claim.
  • Indemnify: In this case when the agent unknowingly did any act without his or her knowledge, then the principal has to guarantee the agent for his or her liability.
  • Good faith: The principal must refrain from taking actions that could result in the loss for the agent when the agent has not done any fault.

What are the rights of an Agent?

An agent has the following five rights such as:

  • Right to retainer: An agent can claim the advance payment for his or her services before completing his or her task.
  • Right to the remuneration: Under common law, an agent is only entitling to remuneration for his or her services as an agent if the term of an agency agreement is provided.
  • Right to compensation: In this, the agent can claim the compensation when he or she found being cheated.
  • The right of lien on the principal’s property: The right of lien is normally restricted to a right of possession of the goods. It confers no right on the agent to sell or charge or otherwise dispose of the same with this similarity.
  • Directly to be indemnified: An agent has a right to indemnified by his or her principal for all the expenses which caused loss.

How the Agency Get Terminates?

The agency will get terminate in the following situations such as:

  • Death
  • Insanity
  • Insolvency
  • Destruction
  • Alien Enemy
  • Expiry of Time
  • Contract is Completed
  • Revocation
  • Mutual Agreement
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However,the contract establishes a relationship of the agency which prevalent in business laws for the law of agency. These can be express or implied. An agency creates when a person delegates his or her authority to another person. It is when a person appoints them to do any specific job in the specified areas of work. This topic is defined under the Indian Contract Act, 1872. The establishment of principal-agent relationship confers rights and the duties on both parties. There are many examples of the connection such as insurance agency, advertising agency, travel agency, factors, etc.

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