Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Authority, Duties and Termination of Agency Explained

Updated 10 October 2026 · Fact-checked

An agent acts for a principal and creates legal relations with third parties. The agent's authority may be express, implied or arise in an emergency. The agent owes duties such as obeying instructions, skill, accounts and no secret profit. Agency ends by agreement, revocation, renunciation, completion, expiry, death or insanity of either party, or the principal being adjudicated insolvent.

Understand Authority, Duties and Termination of Agency

An agent is a person employed to do an act for another or to represent another in dealings with third parties. The person for whom the act is done is the principal. Under the Indian Contract Act, 1872, you do not need consideration to create an agency. The principal must be a major and of sound mind (s.183). A person who is not a major or not of sound mind may be appointed an agent (s.184), but he is not responsible to the principal. The principal remains bound to third parties for what that agent does within his authority.

The agent's authority decides how far the principal is bound. Express authority is given in words, spoken or written. Implied authority comes from the conduct of the parties, the nature of the job or the usage of trade. For example, a shop manager can buy stock and sell goods in the usual way. Authority in an emergency (s.189) lets an agent do what a prudent person would do to protect the principal from loss, when there is no time to ask the principal. If the principal holds out a person as his agent, he may be bound by estoppel. This is sometimes called ostensible authority. It is not a separate statutory type of authority.

The agent owes duties. Follow the principal's directions, or the custom of the business if there are none. Use reasonable skill and diligence. Render proper accounts. Communicate with the principal in difficulty. Do not deal on your own account without the principal's consent. Do not make a secret profit. Hand over the money and property you receive for the principal. The agent must not delegate work he is expected to do himself, except where trade custom or the nature of the work allows it.

The principal also has duties and the agent has rights. The agent can claim agreed remuneration, retain money and goods for dues (lien), and be indemnified for lawful acts done in good faith. The principal is bound by acts within the agent's authority. If an agent acts without authority, the principal can ratify the act, that is, accept it afterwards, with full knowledge of the facts. Ratification may be express or implied by the principal's conduct (s.197). It relates back to the date of the act, but under s.200 it cannot be used to make a third person liable in damages or to end a third person's right or interest. It must cover the whole act and cannot harm a third party.

A sub-agent is appointed by the agent and works under the agent's control. The agent is responsible to the principal for the sub-agent's acts. A substituted agent is named by the agent on the principal's instruction and works for the principal directly. For a substituted agent, the agent is liable only for want of due care in choosing him, not for his acts. Agency ends by agreement or expiry of time, which textbooks accept as modes of termination. It also ends by the modes listed in s.201: revocation by the principal, renunciation by the agent, completion of the business, death or insanity of either the principal or the agent, or the principal being adjudicated insolvent. Revocation is not allowed where the agent has an interest in the subject matter (s.202). The principal cannot revoke after the authority has been partly exercised, as far as that part goes (s.204). Reasonable notice of revocation or renunciation must be given (s.206). Without it, the loss caused may have to be made good to the other party.

Key formulas to remember

Creation of agency: No consideration is needed to create an agency; The principal must be a major and of sound mind (s.183). A person who is not a major or not of sound mind may be an agent (s.184), but is not responsible to the principal. The principal remains bound to third parties.
Types of authority: Express + Implied + Emergency; Implied authority arises from conduct, nature of the job or trade usage. Ostensible authority (holding out) is agency by estoppel, not a statutory type.
Agent's main duties: Obey directions, use skill and care, render accounts, communicate, no secret profit, no dealing on own account without consent, pay over sums received; Breach of a duty makes the agent liable to the principal.
Agent's rights: Remuneration + Retention (lien) + Indemnity; Indemnity applies to lawful acts done in good faith within authority.
Sub-agent vs substituted agent: Sub-agent: agent's own appointee. Substituted agent: named on the principal's instruction, acts for the principal.; The agent is liable to the principal for a sub-agent's acts. For a substituted agent, the agent is liable only for want of due care in choosing him.
Ratification: Ratification = acceptance by principal, with full knowledge, of an act done without authority; it may be express or implied by conduct (s.197); The act must be ratified as a whole. Under s.200 it cannot make a third person liable in damages or end a third person's right or interest. The principal must have been in existence and competent when the act was done.
Termination of agency: Agreement, expiry of time, revocation, renunciation, completion, death or insanity of either party, principal's insolvency; Agreement and expiry of time are accepted textbook modes. Section 201 lists revocation, renunciation, completion, death or insanity, and the principal's insolvency. No revocation when the agent has an interest in the subject matter (s.202). Reasonable notice of revocation or renunciation is needed (s.206).

How to solve Authority, Duties and Termination of Agency questions

Most questions test who is bound, who is liable or whether the agency has ended. Read the facts and match them to a rule.

1Identify the principal, the agent and the third party.
2Decide the type of authority: express, implied, emergency or none.
3If the agent had no authority, check whether the principal ratified the act with full knowledge.
4For duty questions, match the act to a duty: obedience, skill, accounts, no secret profit or no dealing on own account.
5For appointment of others, check if it is a sub-agent (agent's choice) or a substituted agent (on principal's instruction).
6For termination questions, name the mode: revocation, renunciation, completion, death, insanity or insolvency.
7Check for exceptions, such as an agent with an interest in the subject matter.
8Pick the option that matches the rule exactly, not the one that merely sounds fair.

Quickest way: Keyword-matching method

When to use it: Use this for one-line MCQs in the last 30 minutes of the paper.

Spot the keyword: secret profit, ratification, emergency, sub-agent or termination.
Recall the one rule linked to that keyword.
Remove options that add conditions the rule does not have, such as consideration for agency.
Choose the option that fits both the rule and its exception.

Common mistakes in Authority, Duties and Termination of Agency

Saying consideration is needed to create an agency.
Students apply the general rule for contracts.
Fix: Remember that agency is an exception. No consideration is required.
Mixing up sub-agent and substituted agent.
The two terms sound alike.
Fix: Sub-agent: appointed by the agent for his own work. Substituted agent: named by the agent on the principal's instruction and acts for the principal.
Thinking ratification can be partial or can hurt a third party.
Students treat ratification as a free choice for the principal.
Fix: Ratification must cover the whole act, needs full knowledge and cannot damage a third party.
Believing the principal can always revoke authority.
Students forget the exceptions.
Fix: Revocation is not allowed when the agent has an interest in the subject matter, and not after the authority is partly exercised, so far as that part goes.
Thinking the agent can never act without instructions.
Students ignore authority in an emergency.
Fix: In an emergency, the agent may do what a prudent person would do to protect the principal.
Treating a secret profit as the agent's reward.
Students think profit earned is always fair.
Fix: Any profit made without the principal's knowledge belongs to the principal.

Worked examples

Example 1

Ravi is appointed by Meera to sell her goods. Ravi sells them to Sunil, a friend, at the market price and quietly takes a ₹2,000 commission from Sunil. Meera finds out. What is Meera's right?

Show the solution

The agent has a duty not to make a secret profit.
Ravi received ₹2,000 from Sunil without Meera's knowledge.
Therefore this amount belongs to Meera.
Meera can claim it from Ravi and may also deny him his commission for the breach.

Answer: Meera can recover the ₹2,000 secret profit from Ravi.

Example 2

Arjun is Neha's agent to buy goods. Arjun has no instructions to sell, but he sells perishable goods in a storm to prevent total loss, and he cannot contact Neha. Is Neha bound?

Show the solution

Check authority: Arjun has no express or implied authority to sell.
Check emergency authority under s.189. Two conditions must be met: it was impossible to communicate with Neha in time, and Arjun acted as a prudent person would in his own case.
First condition: the goods are perishable and Arjun cannot contact Neha, so there was no way to ask her in time.
Second condition: selling perishable goods to prevent total loss is what a prudent person would do, and Arjun acted in good faith to protect Neha.

Answer: Yes. Neha is bound, since both conditions of s.189 are met and Arjun acted under authority in an emergency.

Exam tips

Learn the list of agent's duties as a set of keywords so you can match them quickly.
Always check the sub-agent and substituted agent definitions carefully, since options often swap them.
For termination questions, look for exceptions such as the agent's interest in the subject matter.
With no negative marking, attempt every question and eliminate options that add wrong conditions.

Practice questions from Meaning of Indemnity, Guarantee, Pledge, Agent

Authority, Duties and Termination of Agency in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Authority, Duties and Termination of Agency: frequently asked questions

What are the duties of an agent towards the principal?

The agent must follow the principal's directions, use reasonable skill and care, and render proper accounts. He must communicate with the principal in difficulty and not deal on his own account without consent. He must not make a secret profit and must pay over sums received.

What is the difference between a sub-agent and a substituted agent?

A sub-agent is appointed by the agent and works under his control. The agent is liable to the principal for the sub-agent's acts. A substituted agent is named by the agent on the principal's instruction and acts for the principal. For him, the agent is liable only for want of due care in choosing him.

What is ratification of agency?

Ratification is when the principal accepts, after the event, an act done on his behalf without authority. It may be express or implied by conduct. It needs full knowledge of the facts and must cover the whole act. It cannot injure a third party.

How does an agency end?

It can end by agreement, revocation by the principal or renunciation by the agent. It also ends on completion of the work, expiry of time, death or insanity of either the principal or the agent, or the principal being adjudicated insolvent. Revocation is not allowed where the agent has an interest in the subject matter.