legal aspect unit 1b.pptx

Performance and
Discharge of Contract

Performance of a Contract Defined
The term ‘performance of contract’ means that both the
promisor and the promisee have fulfilled their respective
obligations, which the contract placed upon them.
For instance, A visits a stationery shop to buy a calculator.
The shopkeeper delivers the calculator and A pays the price.
The contract is said to have been discharged by mutual
performance.

Promises bind the representatives of the promisor in case of the
death ofthe latter before performance, unless a contrary intention
appears in the contract.

Types of Performance
• Actual Performance
When a promisor to a contract has fulfilled his obligation in
accordance with the terms of the contract, the promise is said to
have been actually performed.
For example, A agrees to deliver 10 bags of cement at B’s
factory and B promises to pay the price on delivery. A delivers
the cement on the due date and B makes the payment. This is actual
performance.

• Substantial performance
W here the work agreed upon is almost finished. The
court then may order that the money must be paid, but
deducts the amount needed to correct minor existing
defect.

This is where one of the parties has performed the contract, but
not completely, and the other side has shown willingness to
accept the part performed. Partial performance may occur
where there is shortfall on delivery of goods or where a
service is not fully carried out.
Partial performance

• Attempted Performance
When the performance has become due, it is sometimes
sufficient if thepromisor offers to perform his obligation
under the contract. This offer is known as attempted
performance or more commonly as tender.

By Whom Can a Contract Be Performed?
• Promisor
• Agent
• Legal representative
• Third person
• Joint promisors

Discharge of a Contract
Discharge of a contract implies termination of
contractual obligations. Thisis because when the parties
originally entered into the contract, the rightsand duties
in terms of contractual obligations were set up.

A contract is deemed to be discharged, that is, concluded,
and no longerbinding, in the following circumstances.
1. Performance : Where both the parties have either carried out
or tendered (attempted) tocarry out their obligations under the
contract, it is referred to as discharge of the contract by
performance.
2. Agreement : Discharge by substituted agreement arises when a
contract is abandoned, or the terms within it are altered, and
both the parties are in conformity over it.
3. Lapse of time : A contract stands discharged if not enforced
within a specified time calledthe ‘period of limitation’

4. Impossibility of performance : The performance of a
contractual obligation may become subsequently impossible on a
number of grounds like Objective impossibility of performance ,
Commercial impracticability ,
5. Operation of law : Unauthorized material alteration of a written
document , insolvency, merger
6. Accord and satisfaction: To discharge a contract by accord and
satisfaction, the parties must agree to accept performance that is
different from the performance originally promised.
7. Breach: The breach may give to the aggrieved party the right to
terminate the contract, but it is for the non-breaching side to
decide whether or not to exercise that option.

Caselets
1. On 14 May 2007, P entered into a contract to purchase a
motor vehicle from D, an auto dealer, and paid `10,000 as
down payment. P informed D that he intended to use the
vehicle for camping during the summer. The vehicle was
supposed to be delivered during June, but no delivery was
made through August. P seeks to cancel the contract and
to obtain a refund of the `10,000. Will he succeed?
2. A flat was to be decorated and furnished for `50,000.
When the work was over, the customer only paid `26,000
by installments. Then, because of defects to a bookcase
and a wardrobe that would cost about 15,000 to put right,
he refused to pay the remaining sum of `24,000. Decide.

Remedies for breach of
Contract

Once a party fails to perform or performs
inadequately, the other party—the non-breaching
party—can choose one or more of several remedies.
The most common remedies available to an aggrieved
party are rescission, damages, specific performance,
injunction, and quantum meruit.

• Rescission
Rescission is the revocation of a contract. Section 39
of the Contract Act provides that when a party to a
contract has refused to perform, or disabled itself from
performing in its entirety, the promisee may put an end
to the contract.

For example, A promises to supply a PC for B’s office on a
certain date on cash-on-delivery (COD) basis. However, A fails
to deliver the computer on the agreed date. B is absolved of
the liability of paying the price and entitled to rescind the
contract.

 Damages
A breach of contract also entitles the non-breaching or injured
party to suefor monetary damages besides rescinding the
contract. Damages are designed to compensate the aggrieved
party for the loss sustained in thebargain

• Specific Performance
Where damages represent inadequate or unjust
remedy,for example, where the subject matter of the
contract is unique or wherethere are no standards to
ascertain the quantum of loss, the non-breachingparty
may approach the court for the grant of an order for
specific performance of the contract.

• Injunction
An injunction is an equitable remedy and, therefore,
only granted at the discretion of the court. It is awarded
in circumstances in which damages would not be an
adequate remedy to compensate the claimant.

Injunction orders are of two types—prohibitory and mandatory.
Prohibitory injunction
This orders the defendant to restrain from committing a breach of a negative
contractual obligation, i.e., where he/she does something, which he/she had
promised not to do. For instance, G agreed to source all the electric power required
forhis house from M but started buying part of his requirement from some other
company. He was restrained by an injunction order from buying electricity from
the other source.
Mandatory injunction
This, on the other hand, compels the performance ofa positive contractual
obligation, for example, compelling an employee to do any work or attend at any
place in order to do any work.

Quantum Meruit
Quantum meruit is a Latin term meaning, ‘as much as
is merited’ or ‘as much as earned’. In the context of
contract law, it means something along the lines of
‘reasonable value of services rendered’

The concept of quantum meruit applies to the
following situations:
1. When a person employs (impliedly or expressly)
another person to do work for him, without any
agreement as to his compensation, the law implies a
promise from the employer to the workman that he
will pay for the services, as much as the workman
may deserve or merit.
2. When there is an express contract for a stipulated
amount and mode of compensation for services, the
plaintiff cannot abandon the contract and resort to an
action for a quantum meruit.

3. If a contract is divisible and a party to a contract
is prevented from fulfilling its contractual
obligations by the other party, then obviously he will
not be in default.
4. If an indivisible contract is completely executed,
but badly, the person who has performed will be
entitled to a lump sum less deduction to overcome
the defect in the perormance.

Quasi-contractual Relationships: Other Remedies
• If a person incapable of entering into a contract, or anyone whom he is
legally bound to support, is supplied by another person with necessaries
suited to his condition in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapableperson .
• Where a person lawfully does anything for another person, or delivers
anything to him, not intending to do so gratuitously, and such other person
enjoys the benefit thereof, the latter is bound to make compensation to the
former in respect of, or to restore, the thing so done or delivered

 A person who finds goods belongingto another and
takes them into his custody is subject to the same
responsibility as a bailee .
 A person to whom money has been paid or
anything delivered by mistake or under coercion
must repay for or return it

Special Contracts
• Contract of Indemnity
• Contract of Guarantee
• Contract of bailment
• Contract of Pledge
• Contract of agency

Contract of Indemnity
Section 124 defines the term ‘contract of indemnity’ as
A contract, by which one party promises to save the other
from loss caused to him by the conduct of the promisor himself,
or by the conduct of any other person, is called a contract of
indemnity’

Essentials of a Valid Contract of Indemnity
1. The indemnifier promises to make good the loss or to
compensate the party (indemnified) who has suffered some loss
due to the conduct of the promisor or any other person acting on its
behalf, or specified by it. In its wider sense, a contract of indemnity
also includes a promise of indemnity against loss arising from any
causewhatsoever, for example, fire, accident, or natural calamity.
2. A contract of indemnity is primarily a contingent contract. The
liability of the indemnifier arises only at the occurrence of the
contingency, i.e., when the indemnity-holder suffers a loss.

3. The liability of an indemnifier commences as soon
as the liability of the indemnity holder to pay becomes
clear and certain, although he has himself not paid
anything.

Rights of an Indemnity Holder
• The indemnity holder is entitled to all damages plus all
costs of the suit and promised money provided he/she has
acted intra-vires (within powers).
• Besides, if he (indemnity holder) has incurred a liability
and that liability is absolute, he has the right to require the
indemnifier to put him/herin a position to meet the claim

Section 126 of the Indian Contract Act defines a contract of
guarantee as :
‘A contract of guarantee is a contract to perform the
promise, or discharge the liability, of a third person in case
of his default.’
Contract of Guarantee

• A contract of guarantee is a collateral engagement in which
the surety undertakes to be liable to the creditor for the debt of
another (i.e., the principal debtor) in case of his default.
• The person who gives the guarantee is called the surety, the
person in respect of whose default the guarantee is given is
called the principal debtor, and the person to whom the
guarantee is given is called the creditor.
• Aguarantee may be either oral or written [Section 126].

For instance, A applies for shares in a public limited
company and B assures the company that if A does not
pay the calls, B will. This is a contract of guarantee. The
primary liability to pay the calls made by the company
is that of A, but if he fails to pay, B will become liable to
pay. In this example, B is the surety, A is the principal
debtor, and the company is the creditor.

Consideration for Guarantee
There need not be any direct consideration X between the
surety and the creditor. Consideration received by the principal
debtor is sufficient for the surety.
Section 127 expressly provides to this effect, saying, ‘anything
done or any promise made, for the benefit of the principal
debtor, may be a sufficient consideration to the surety for
giving the guarantee.

Incapacity of the Principal Debtor
It is true that the parties to a contract of guarantee should be
competent to contract.
However, the incapacity of the principal debtor does not impair
the validity of a contract of guarantee.
A principal debtor may be a minor; in such a situation, the surety
would be regarded as the principal debtor and he/she will
personally become liable to pay.
In that case, the contract between the creditor and the surety is
treated as a primary and independent one, and not collateral.

Extent of Surety’s Liability
The liability of the surety is co-extensive with that of the principal
debtor unless it is otherwise provided by the contract [Section 128].
For instance, A guarantees to B the payment of a bill of
exchange by C, the acceptor. C dishonours the bill. A is liable not
only for the amount of the bill, but also for any interest and
charges that may have become due on it.
If A gives the guarantee for the principal amount of the bill,
and if B makes a default, A shall be liable only for the principal
amount, asthe bill bears.

Kinds of Guarantee
• Specific Guarantee
When a guarantee is given only for a single debt or a
specific transactiononly, it is called specific guarantee.
For example, A, a money lender, agrees to give a loan of
`10,000 to B, under the contract that if B does not repay the
loan, his friend C would repay the same. This is a contract of
specific guarantee and C’s liability would come to an end as
soon as Brepays the debt that he had guaranteed.

Continuing Guarantee
A guarantee that extends to a series of transactions is called a
continuing guarantee [Section 129].
Under this kind of guarantee, the surety undertakes responsibility for
a series of separable and distinct transactions over a periodof
time. For instance, a fidelity guarantee, in which the insurer
providescover for a business against theft by an employee, is a
continuing guarantee,as it remains in force for a period of time.

Rights of Surety
1. Rights against the principal debtor
2. Rights against the creditor
3. Rights against the co-sureties.

Rights Against the Principal Debtor
• Right of subrogation After discharging the debt, the surety
steps into the shoes of the creditor, i.e., subrogated to all the
rights of the creditor againstthe principal debtor.
• Right of indemnity A surety is entitled to be indemnified by
the principal debtor for whatever sum he has rightfully paid
under the guarantee.

Rights Against the Creditor
• Right to security A surety is entitled to the benefit of every
security which the creditor has against the principal debtor at
the time when the contract of surety is entered into, even if the
surety is unaware of the existence of the security,
• Right of set-off When the creditor calls upon the surety to pay
the guaranteed amount, the surety is entitled to plead any set-
off which the principal debtor may have against the creditor.
He can claim such a right not only against the creditor but also
against third parties who have derived their title from the
creditor.

Rights against the co-sureties
Where more than one person has guaranteed a single debt,
they are called co-sureties. In such cases, the liability of co-
sureties becomes joint and several. They are liable to
contribute, as agreed, towards the payment of guaranteed debt.
But in the absence of any agreement, if one of the sureties
has paid the entire debt to the creditor, he has a right to have
contribution from the co-sureties who are equally bound.

Discharge of Surety
1. By notice of revocation
2. By death of surety
3. By novation
4. By variance in terms of contract
5. By release or discharge of principal debtor
6. By arrangement between the principal debtor and the creditor
7. By impairing surety’s remedy
8. By loss of security
9. By invalidation of the contract.

• Notice of Revocation
Ordinarily a guarantee cannot be revoked if the liability
has already been accrued. But Section 130 provides
for revocation of continuing guarantee. For example, if
A has stood surety for a `5,00,000 home loan of B from
a bank and the money has been disbursed, then A
cannot revoke the guarantee, as the liability has
accrued.
• Death of Surety
In case of a continuing guarantee, the death of the
surety, in the absence of any contract to the contrary,
discharges him from liability as regards future
transactions (i.e., transactions after his death).

• Novation
If the parties to a contract (of guarantee) agree to substitute it
with a new contract, the original contract need not be performed
and so the surety stands discharged with regard to the old contract.
• Variance in Terms of Contract
Any variance or alteration in the terms of the contract made
between the principal debtor and the creditor, without the surety’s
consent, discharges the surety as to the transactions taking place
subsequent to the variance [Section 133].

Release or Discharge of Principal Debtor
• Arrangement Between Principal Debtor and Creditor
Where the creditor, without the consent of the surety, arrives at a settlement with
the principal debtor, or promises to give him more time, or promises not to sue
him by a contract between the creditor and the principal debtor, the surety is
absolved from the liability, unless the surety assents to such contract.
• Impairing Surety’s Remedy
If the creditor commits any act, which is inconsistent with the rights of the
surety, or fails to perform any act that his duty to the surety requires him to do,
such that the eventual remedy of the surety himself against the principal debtor is
impaired- the surety is discharged from his liability.

• Loss of Security
If the creditor loses, or without the consent of the
surety, parts with such security, the surety is discharged
to the extent of the value of the security.
• Invalidation of Contract
A surety is also discharged upon invalidation of the
contract (i.e., betweenthe creditor and the surety).

Contracts of Bailment
Section 148 defines the term ‘bailment’ as : A bailment is the
delivery of goods by one person to another for some purpose, upon a
contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the directions of
the person delivering them’

Essentials of Bailment
• Bailment is based on a contract between two persons, namely, the
bailor and the bailee.
• Goods form the subject matter of the bailment.
• Delivery of goods is the essence of bailment.
• Delivery of goods may be actual or constructive.
• Bailment signifies change of possession of goods from one person to
another. But there is no change in the ownership.
• The bailor delivers his goods to the bailee for some definite purpose.
• Every bailment pre-supposes a condition that the goods bailed would
be returned to the bailor,

Kinds of Bailment
• Gratuitous bailment
A bailment with no consideration is called a gratuitous
bailment. In this kindof bailment, neither the bailor nor
the bailee is entitled to any remunerationor reward.
• Non-gratuitous bailment
Contrary to gratuitous bailment, a non-gratuitous bailment
or bailment for reward is one that involves some
consideration passing between the bailorand the bailee.
For example, A hires B’s car. Here B is the bailor and
receives the hire charges, and A is the bailee and enjoys
theuse of the car.

Duties and Rights of the Bailor
Duties of the bailor
• Duty to disclose faults
• Duty to repay bailee’s expenses
• Duty to indemnify the bailee
• Duty to compensate bailee for breach of warranty
• Duty to claim back the goods

Rights of the bailor
• Right to enforce bailee’s performance
• Right to claim damages
• Right to claim compensation against unauthorised use of
goods
• Right to terminate the contract
• Right to demand return of goods along with accretion to, if
any

Duties and Rights of Bailee
Duties of the bailee
• Duty to take reasonable care of the goods whilst they are in
his possession
• Duty not to make any unauthorised use of the goods bailed
• Duty not to mix the goods bailed with his own goods
• Duty to return the goods in accordance with the contract
• Duty to return any accretion to the goods

Rights of the bailee
• Right to enforce bailor’s duties
• Right of Lien
• Right to sell the goods
• Right to return the goods to any of the joint-bailors
• Right to deliver goods to the bailor without title

Termination of a Bailment
• Unauthorised use of goods bailed
• Expiry of term of bailment
• Accomplishment of purpose
• Death of either party
• Destruction of subject matter

Finder of Lost Goods
The finder of goods occupies the positionof bailee only
against the true owner, since he keeps the goods found in
trust only for the real owner.

Duties and Rights of Finder of Lost Goods
1. To exercise reasonable care in preserving the goods found
2. To find the actual owner and restore the goods to him
3. Not to make any personal use of the goods found
4. Not to mix the goods found with his own goods
5. Not to set up any adverse title to the goods found

The law confers the following rights on a finder of goods.
• Retain the goods
• Sue the owner for reward
• Sell the found articles

Pledge
A pledge or pawn is a kind of bailment. It is the
bailment of a movable thing as security for the
repayment of a debt or performance of a promise.
The bailor in this case is called the Pawnor or
Pledgor, whereas the bailee is called the Pawnee or
Pledgee [Section 172].

Pledge and Bailment Compared
The contracts of pledge and bailment are similar in two of the
following respects
1. In both the cases, there is a delivery of movable goods or
property;
2. The goods are delivered back to the bailor or
pawnor afteraccomplishment of purpose or expiry of
stipulated time.

Pledge vs Bailment
Purpose
Pledge has a specific purpose, i.e., repayment of a debt or performance of a
promise, whereas bailment has a general purpose.
Use of goods
The pawnee has no right to make any use of the goods pledged. On the
other hand, in bailment the bailee uses the goods if the terms of bailment so
provide.

Rights of pawnee
• Right of retaining goods
• Right as to extraordinary expenses
• Right to sue when pawnor makes default
• Right to sale
• Right to have good title to the goods

Duties of pawnee
1. Duty to take reasonable care of the goods pledged
2. Duty not to make personal use of the goods pledged
3. Duty not to mix goods pledged with his own goods
4. Duty to return the goods pledged after the debt has been paid or the
promise has been performed
5. Duty not to commit any act that is inconsistent with the terms of pledge
6. Duty to deliver accretion, if any, to the goods pledged.

Rights and Duties of the Pawnor
Rights of pawnor
The pawnor has a right to get back the goods pledged plus increase
thereon, if any, by him, after paying off the amount of debt in full and
other charges (if applicable), or performing the promise.
Duties of pawnor
• Duty to repay the debt or perform the promise
• Duty to disclose defects in the goods pledged
• Duty to meet extraordinary expenses

According to Section 182 of the Contract Act, ‘an agent is a person
employed to do any act for another person, or to represent another
inhis dealings with third persons.
The person for whom such an act is done or who is so represented is
called the principal’.
Contract of Agency

General Rules Governing an Agency
• Whatever a person competent to contract may lawfully
do by himself, he may do the same through an agent.
• The process cannot be adopted in the transactions or acts
requiring personal skills and abilities.
• Contracts entered into through an agent, and
obligations arising from acts done by an agent, may be
enforced in the same manner and will have the same
legal consequences as if the contracts had been entered
into and the acts done by the principal in person

Essentials of Agency
• Intention and power to act on behalf of the principal
A person must be intended and adequately authorised to represent
another so that he/she can render the person so represented answerable
to a third person.
• Capacity of the parties it is essential that both the principal and the
third party should be competent to contract.
• Consideration not necessary Section 105 clearly provides, ‘No
consideration is necessary to create an agency’

Creation of Agency
The law recognises various modes to create a contract of agency,
namely,
1. Agency by express agreement
2. Agency by implied agreement
3. Agency by ratification
4. Agency by operation of law.

• Agency by express agreement
A contract of agency may be made through an express
agreement between a principal and his/her alleged agent.
The said agreement may be oral or in writing. The
agency so created is called ‘express agency’.
The usual form of a written contract of agency is the
‘Power of Attorney’, which gives the agent the
authority to act on behalf ofthe principal in accordance
with the terms and conditions therein.

Agency by implied agreement
A contract of agency may be implied from the circumstances of the
case, things spoken or written, or the ordinary course of dealing

An implied agency may take the following three
distinct forms:
1. Agency by estoppel
2. Agency by holding out
3. Agency by Necessity.

Agency by estoppel
Section 237, which deals with agency by estoppel, states, ‘When an agent
has, without authority, done acts or incurred obligations to third persons on
behalf of his principal, the principal is bound by such acts or obligations,
if he has by his words or conduct induced such third persons to believe
that such acts and obligations were within the scope of the agent’s
authority’.

For example
A tells B in presence and within hearing distance of P that he is P’s
agent. P does not contradict the statement. Later on B enters into a
contract with A, honestly presuming that A is P’s agent. P will be
bound by this contract for there is an agency by estoppel between him
and A.

Agency by holding out
The alleged principal by his/her words or conduct wilfully leads
another person to believe that the alleged agent is representing
him/her.
If someone enters into a contract with the person so representing
on that belief, then the person so represented (i.e., the alleged
principal) is stopped from denying the truth of such statements
subsequently.
In this way, agency, by holding out is a type of agency by estoppel,
where the agency by estoppel is created by the actions of the
agent, the agency by holding out comes into existence by the
actions of the principal.

For example, P allows his servant to purchase certain
goods from B’s shop on credit and later on he pays for the
goods. It is repeated many times. Later on, when the
servant was not in P’s employment, he purchased goods
on P’s credit from the same shop and disappeared. B can
recover the price from P on the basis of the doctrine of
holding out.

Agency by necessity
Sometimes, owing to the exigencies of circumstances,a person may be
compelled to act as an agent to the other without requiringor seeking the
consent of the latter. Such an agency is called the agency by necessity.
For example, a shipmaster can borrow money at a port where the shipping
company has no agent, to get the ship repaired or fuelled so as to complete
the voyage. In this case, the shipmaster becomes an agent by necessity.

Agency by ratification
Where a person without being authorised, purports to act as
agent, or a duly authorised agent acts beyond his/her authority,
the principal may elect to ratify or disown such acts.
If he chooses to ratify the agent’s transactions supposedly
based on his behalf, an agency by ratification arises. The
effect of ratification is that it renders the ratifier (i.e., the
principal) bound to the contract as if he had expressly
authorised the person to transact the businesson his behalf.

Rules governing agency by ratification
1. An act will be regarded as a ratification only if the principal
had a free choice whether to do it or not.
2. The agent must purport (intend to seem) to act as an agent
3. The person ratifying must have contractual capacity [Section
196].
4. Ratification may be express or it may be implied in the
conduct of the person on whose behalf the acts are done
[Section 196].
5. The principal must exist when the act is done [Section 196].
Hence, a company cannot ratify pre-incorporation
agreements.

6. The principal at the time of ratification must have the full
knowledge of the material facts [Section 198].
7. The principal must ratify the whole of the transaction. This
implies that he cannot ratify at his will a part of the transaction and
repudiate the rest.
8. The act must be ratified in time. A contract cannot be ratified
after the time fixed for its performance. If no such time is fixed, it
must be ratified within a reasonable period of time, from the
principal’sacquiring notice of the unauthorised act.
9. Ratification cannot be made so as to subject a third party to
damage [Section 196], or terminate any right or interest of a
third person [Section 200].

Effect of ratification
The effect of ratification is to put the principal, agent, and the third
party into the position that they would have been if the agent’s acts
had been authorised from the beginning. Ratification, in fact,
relatesback to the time of the unauthorised act and not to the date
when the principal ratified the said act.

Agency by operation of law
An agency, under certain circumstances, also comes into existence by operation
of law. Such an agency comes into existence neither by an express agreement
nor by estoppel and ratification, but by the provisions of the lawof land.
Partnership firm is an universal example of this type of agency. When a
partnership is formed, every partner, by operation of law, automatically becomes
the agent of other partners and the firm.

Rights of Agent
1. Right to remuneration
2. Right of retainer
3. Right of lien
4. Right to be indemnified against consequences of lawful acts
5. Right to be indemnified against consequences of acts done in good faith

Duties of an Agent
1. Duty to act within the scope of the authority
2. Duty to follow instructions or customs
3. Duty to act with due care and skill
4. Duty to render accounts
5. Duty to communicate
6. Duty to remit sums
7. Fiduciary duty.

Rights and Duties of Principal Towards Agent
Personal Liability of Agent to Third Party
1. Where the contract expressly provides for the personal liability of the
agent.
2. Where an agent acts for a principal residing abroad
3. Where he/she does not disclose the name of the principal, he/she is
treated as a party to the contract, hence personally liable to third party
4. Where the principal, though disclosed, cannot be sued on account of
his/her being a minor, a foreign sovereign, or an ambassador, etc

5. When an agent enters into a contract with the third party in
his/her own name, concealing not only the name of the
principal but also the factthat there is a principal.
6. An agent is liable for breach of warranty of authority.
As per Section 235, when a person untruly represents
himself/herself to be the authorised agent of another and,
thereby, induces a third party to dealwith him/her as agent,
7. Where the custom or usage of a trade makes the agent
personally liable, he/she will be liable to the third party.
8. An agent’s authority is said to be coupled with interest
when the agent has a personal interest in the subject matter of
the contract

Principal’s Liability for Agent’s Acts
The effect of a contract made by an agent varies
according to the circumstances under which the agent
contracted.
1. When agent acts within the scope of his authority
2. When agent exceeds his authority
3. Principal is bound by notice given to agent
4. Liability of principal under doctrine of estoppel
5. Liability for agent’s torts or other wrongs
6. Liability of unnamed principal
7. Liability of undisclosed principal

Termination of Agency
Agency, as a contract, gets terminated by any event that
terminates a contract, such as by performance,
revocation, or destruction of subject matter, and
also in certain special ways. Accordingly, the various
modes of terminating an agency can broadly be
classified into the following two categories:
1. By act of the party
2. By operation of law.

Termination by Act of the Parties
• Revocation of authority by the principal
When can the principal revoke the agent’s authority
Revocation cannot be exercised in respect of partly
exercised authority
The principal cannot revoke the authority given to his
agent after the authority has been partly exercised, as
regards such acts and obligations that arise from acts
already done in the agency.

Compensation for revocation Where there is an express or
implied contract that the agency should be continued for any
period of time, the principal must make compensation to the
agent for any previous revocation of the agency without
sufficient cause [Section 205].
Notice of revocation Reasonable notice must be given of
revocation or renunciation, otherwise, the damage thereby
resulting to the agent must be made good to by the principal
[Section 206].
Revocation may be expressed or implied

Renunciation of authority by the agent
Section 206 says that reasonable notice must be given of
renunciation, otherwise, the damage thereby resulting to the
principal must be made good by the agent. Like, revocation,
renunciation may also be expressed or implied in the conduct of
that agent. For example, A employs B to sell his car within a
week. B fails to sell the car within the stipulated time. There is an
implied renunciation of authority on part of B.
By mutual agreement An agency, like any other agreement, can
be terminated, at any time by mutual agreement between the
principal and the agent.

Termination of Agency by Operation of Law
• Completion of business
• Death or insanity of the principal or agent
• Insolvency of the principal
• Expiry of time
• Destruction of the subject matter
• Dissolution of company
• Upon principal or agent becoming an alien enemy

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