Termination of Agency under Contract Act

By Simran, CNLU, Patna

Editor’s Note: The contract of agency is defined as one where one party-the principal, grants authority to another party- the agent, to act on behalf of and under the control of the principal to deal with a third party. An agency relationship is fiduciary in nature. An agency can be created by express or implied appointment, necessity or estoppel. There are certain duties that the parties owe each other. Since the relationship of agency is one that is based on trust, there may arise circumstances where this trust no longer subsists and as a result, the agency may have to be terminated. This paper examines these situations and analyses the effect of the termination of the agency.

Introduction

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 the 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 either the 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 an agency agreement.

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

The frustration of the contract of agency.

Agency

Section 182 of the Indian contracts act 1872, defines Agent & Principal: an agent is a person employed to do any act for another or to represent another in dealings with the third parties. The person for whom such act is done, or who is represented, is called the principal. Agency is the relationship that subsists between the principal and the agent, who has been authorized to act for him or represent him in dealing with others. Thus, in an agency, there is in effect two contracts i.e.

a) Made between the principal and the agent from which the agent derives his authority to act for and on behalf of the principal, and

b) Made between the principal and the third party through the work of the agent.

Any person, who is of the age of majority according to the law to which he is subject, and who is of sound mind, can employ an Agent1. As between Principal and third person a person may become an Agent, so as to be responsible to his Principal according to the provisions contained in the Act. No consideration is necessary to create an agency[iii]. Several types of commercial agents have been recognized under Indian law, which includes inter alia brokers, auctioneers, del credere agents, persons entrusted with money for obtaining sales and insurance agents.

Creation of Agency

By express appointment by the principal

Generally, authority is conferred by the Principal to the Agent. If the agent exceeds this authority, then the principal will not be bound and the agent will be personally liable to the third party for breach of warranty of authority.

However, the common law may extend the scope of the agent’s authority beyond this, to protect an innocent third party.

The principal will then be bound to the third party, but the principal can sue the agent for overstepping his actual authority if it’s a breach of the agency contract.

By implied appointment by the principal

The law can infer the creation of an agency by implication when a person by his words or conduct acts as if he has such authority and the principal acknowledges that he was entitled to act accordingly. Implied authority, is not specifically mentioned by contract but assumed or implied by the nature of the relationship, are presumed to be given to an agent if that authority is necessary to perform the duties or responsibilities otherwise assigned to the agent or representative.

Apparent / Ostensible authority

While actual authority arises from an agreement, apparent authority is that which the law regards the agent as having, although the principal may not have consented to the agent having such authority. Apparent authority can happen in two situations:

  • Where principal by words/ conduct, makes a third party believe that ‘agent’ has the authority to make a contract for the principal.
  • Where the agent previously had authority to act, but that authority was terminated by the principal and the principal did not inform third parties that he has terminated it.

By necessity

The origins of the doctrine of necessitous intervention by someone who is in a legal relationship with the defendant lie in the principle of the agency of necessity, where an agent went beyond his or her authority by intervening on behalf of the principal in an emergency. Because of the circumstances of necessity, particularly the impracticability of the agent communicating with the principal, the courts were prepared to treat the agent as though he or she had the necessary authority to do what was reasonably necessary to save the principal’s property[iv]. If an agency of necessity was established, the agent would be reimbursed for the expense incurred in rescuing the principal’s property.

An agency of necessity may be created if the following three conditions are met:

a) It is impossible for the agent to get the principal’s instruction.

b) The agent’s action is necessary, in the circumstances, in order to prevent loss to the principal to prevent them from rotting.

c) The agent must have acted in good faith.

In an urgent situation, an agent has authority to act in the best interest for the purpose of protecting his principal from losses.

By Estoppel

A person cannot be bound by a contract made on his behalf without his authority. However, if he by his words and conduct allows a third party to believe that that particular person is his agent even when he is not, and the third party relies on it to the detriment of the third party, he (principal) will be estopped or precluded from denying the existence of that person’s authority to act on his behalf[v].

Ratification by the Principal

Agency by ratification can arise in any one of the following situations:

  • An agent who was duly appointed has exceeded his authority; or
  • A person who has no authority to act acted as if he has the authority.

When one of the above said situations arise, the principal can either reject the contract or accept the contract so made.

When the principal accepts and confirms such a contract, the acceptance is called ratification. Ratification may be expressed or implied.

The effect of ratification is to render the contract as binding on the principal as if the agent had been properly authorized beforehand.

Duties of an Agent to his Principal

The duties of an agent are listed down from Section 190 to Section 218 of the Indian Contract Act 1872.

  • To obey the principal’s instruction
  • To exercise care and diligence in carrying out his work and use such skill as he possesses
  • To render proper accounts when required
  • To pay to his principal all sum received on his behalf
  • To communicate with the principal
  • Not to let his own interest conflict with his duty
  • Not to make a secret profit out of the performance of his duty
  • Not to disclose confidential information or documents
  • Not to delegate his authority

Duties of Principal to His Agent

The duties of a principal to his agent are provided in sections 175 to 178. The main duties are:-

  • To pay the agent the commission or other agreed remuneration unless the agency relationship is gratuitous.
  • Not to willfully prevent or hinder the agent from earning his commission.
  • To indemnify and reimburse the agent for acts done in the exercise of his duties.

Termination of Agency

Section 201 Termination of agency: An agency is terminated by the principal revoking his authority, or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors.

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[vi]. “An agency, when shown to have existed, will be presumed to have continued, in the absence of anything to show its termination, unless such a length of time has elapsed as destroys the presumption”. The agent’s duty to act on behalf of the principal comes to an end on the termination of an agency. The timeframe for the termination of an agency can be stipulated by a particular statute or instrument.

In such a case, if the instrument specifies in plain and unambiguous terms that an agency will terminate without action on the part of the principal or agent upon the expiration of the time specified in the instrument, the agency will in fact, terminate[vii]. If, after the expiration of the time so stipulated in the contract, the parties continue their relationship as principal and agent, a rebuttable presumption is raised that their relations are governed by the original contract and that the contract is renewed for a similar period. For instance, if the parties entered into a contract for one year and continued to act under the contractual terms after one year, the court will presume that the parties in fact intended to keep the contract alive for another year.

On the other hand, if the parties did not fix any appropriate time for the termination of contract, the contract is deemed to be terminated after a reasonable time. “What constitutes a reasonable time during which the authority continues is determined by the nature of the act specifically authorized, the formality of the authorization, the likelihood of changes in the purposes of the principal, and other factors”. Moreover, the burden of proving the termination or revocation of an agency rests on the party asserting it.

“Parol evidence cannot be admitted to add another term to an agreement even if the writing contains nothing relating to the particular provision to which the parol evidence is directed”. Thus, courts will not admit parol evidence while determining the duration of an agency contract where the written contract is viewed as integrated, or unambiguous, or both. An agency continuing for a reasonable time can be terminated by one party only after giving sufficient notice to the other party.

Different ways by which an agency can be terminated:-

  • An agency created for a specific purpose as well as an agency created by a power of attorney is terminated once the particular purpose for which it was created was accomplished. After the termination of the agency, the agent is free of any fiduciary duty to the principal arising from the agency relationship.
  • The parties can terminate the agency by mutual agreement. An agency relationship requires the mutual assent of the parties and both the parties have the power to withdraw their assent. An agency may not be terminated by the act of one of the parties and should be done mutually. The mutual abandonment of an agency is a question of fact since it is a matter of intention of both the parties. The court will ascertain such intent from the surrounding facts and circumstances of the transaction as well as implied from the conduct of the parties[viii].
  • An agency contract may be canceled on the basis of an express stipulation in the contract. In such a case, the parties will have a right of cancellation at the will of either party or upon the happening of a contingency or the nonperformance of some expressed condition. The principal cannot cancel such an agreement at will so long as the agent fulfills his/her part of the agreement. However, the principal can cancel the agency contract for any justifiable cause.
  • An agency may be revoked at the will of the principal when an agency is not coupled with an interest, and no third party’s rights are involved. The party terminating the agency must show good cause. Thus, when A enters into a contract whereby B is to provide A for a stated period of time with goods or services, which both parties realize are for use in a particular enterprise owned by A, in the absence of a specific clause so providing, A cannot escape his obligations under that contract by voluntarily selling his interest in the enterprise before the expiration of the expressed contract term.

    Therefore, if the right to cancel an agency contract is dependent upon some contingency, the cancellation must be justified by establishing the happening of such contingency.         An agency cannot be terminated at will during certain specific instances. For example, in the matter of distributorship or sales agency contracts of indefinite duration, an at-will termination is not feasible[ix].

    In such a case, the distributor might have made a substantial investment in establishing or furthering the distributorship. Hence, the agreement may be terminated only after a reasonable time has lapsed and reasonable notice of termination is given. An agency contract to be performed to the principal’s satisfaction can generally be canceled at will by the principal. Similarly, a power of attorney constituting a mere agency may be revoked at any time, with or without cause.

  • A principal may unilaterally cancel an agency without incurring liability for breach of contract under the following instances: misconduct or habitual intoxication of the agent which interferes with his/her employment, the refusal of the agent to obey reasonable instructions or to permit the principal to make a proper audit of his/her accounts, serious neglect or breach of duty by the agent, dishonesty or untrustworthiness of the agent, the agent’s failure to pay an indebtedness owing to the principal, disloyalty of the agent like using the agency to make secret profits.
  • Ordinarily, an agent may renounce the agency relationship by expressly notifying the principal, either orally or in writing. An agent’s cessation of all relations with the principal and abandonment by the agent may be treated as a renunciation. However, mere violation of instructions by the agent will not amount to renunciation.

    Although the agency can be terminated at will, the law stipulates that notice must be given to the party affected by the termination. However, express notice to the agent that the agency has been revoked, or to the principal that the agency is renounced, is not always necessary if the affected party actually knows, or has reason to know the facts resulting in such revocation or renunciation. The principal shall provide sufficient notice to third parties as to the revocation of the agent’s authority.

    Otherwise, the acts of an agent after his/ her authority has been revoked may bind a principal as against third persons who rely upon the agency’s continued existence. This may often happen to transactions initiated by the agent before the revocation of authority, and the rule is applied in favor of persons who have continued to deal with insurance agents, purchasing agents, and the like.

    There is no need to provide any formal written notice to third persons of the ending of an agency relationship. Actual notice of termination is sufficient in the case of third parties and such notice may be shown by a written or oral communication from the principal or the agent, or it may be inferred from the circumstances. For instance, a third party is deemed to have actual notice if he/she has knowledge of the fact that the principal has appointed another agent for the same purpose.

    The character of the notice also differs with respect to third parties. Thus, actual notice must be brought home to former customers who have dealt with the agency more directly, while notice by publication will be sufficient as to other persons. In addition, an agency may be terminated by operation of law[x]. The death of the principal operates as an immediate and absolute revocation of the agent’s authority unless the agency is one coupled with an interest.

    The rule is the same even if the agency is created with more than one principal. Where the power or authority is created by two or more principals jointly and one of them dies, the agency will be terminated unless it is coupled with an interest. However, an agency may be made irrevocable by statute, notwithstanding the death of the principal.

  • Regarding the termination of the agency upon the death of the principal, two views are prevailing. According to one view, unless the agency is one coupled with an interest, it will terminate on the death of the principal, notwithstanding the fact that the agent and third person are ignorant of the fact. Another view is that if the third person dealing with the agent acts in good faith and in ignorance of the principal’s death, the revocation of the agency on the death of the principal takes effect only from the time that the agent receives notice of such death.

    In such a case, “the principal’s estate may be bound where the act to be done is not required to be done in the name of the principal.” Similarly, the death of the agent will revoke an agency not coupled with an interest and this is the rule when there are two or more agents. However, in the case where a sub-agent is appointed by the agent, the authority of a subagent is terminated by the death of the agent, unless the agent appointed the subagent at the principal’s request[xi]. In that event, the subagent derives his/her authority form the principal and not from the agent.

  • The loss of capacity of a party resulting from temporary or permanent mental incompetency may result in the termination or suspension of the agency relationship. Thus, the termination of the agent’s authority due to the loss of capacity of the principal may not affect the rights of third persons if such third persons do not have notice of such fact. Also, if the agent’s authority is coupled with an interest, it is not suspended by the principal’s insanity.

    Similarly, the bankruptcy of the principal is a valid reason for the termination of agency and the agent is divested of any authority to deal with any assets or rights of property of which the principal was divested by reason of the bankruptcy, irrespective of whether the agent receives notice of the bankruptcy. A power of attorney may be terminated by the bankruptcy of the principal. The mere insolvency of the principal will not automatically terminate the agent’s authority.

  • A change in the value of the subject matter or a change in business conditions may terminate or suspend the agent’s authority if the agent should reasonably infer that the principal would not consent if aware of such facts. Similarly, a change in the legal identity of, or merger by, the principal is a valid ground for termination of an agency contract. The loss or destruction of the subject matter of the agency or the termination of the principal’s interest is yet another ground for terminating the agent’s authority.

    The agent’s authority ceases when the agent has notice of the fact. However, destruction of subject matter will not always result in the termination of the agency, especially when the subject matter can be replaced without substantial detriment to either party[xii].

    In addition, a change of law making the required act illegal may terminate an agency contract. If the authority or power of an agent is coupled with an interest, it is not revocable by the act, condition, death, or mental incapacity of the principal before the expiration of the interest, unless there is some agreement to the contrary. Power is coupled with an interest where the agent receives title to all or a part of the subject matter of the agency. In order to support a claim of power coupled with an interest, either legal title or equitable title is sufficient. A power coupled with an interest will survive to the personal representative of the agent upon the agent’s death.

  • R. Sayani v Bright Bros (P) Ltd, AIR1980 Mad 162

    Where an agency has been created for a fixed period, compensation would have to be paid for its premature termination, if the termination is without sufficient cause. Reasonable notice for premature determination of agency was not given. The agent was earning Rs. 4000 per month.     The court was of the view that at least three months’ notice should have been given. A compensation of Rs. 12,000 was accordingly allowed.

  • Carter v White, (1883) 2 Ch D 666: (1881-85) All ER Rep 921.

    A principal owed a sum of money to his agent and gave him an accepted bill of exchange with an authority to fill in the drawer’s name. The principal died before the agent could complete the bill. His authority to fill in the drawer’s name was held not to be terminated.

  • Sukhdev v Commr of Endowments, (1998) 1 BC 403 (AP)

An agency comes to an automatic end on the expiry of its term. Where 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. There was no renewal clause, nor in fact, there was any renewal.

  • Trueman v Loder (1840) 11 Ad & El 589

    Here A traded as B’s agent. With the authority of B, all parties with whom A made contracts in that business, were held to have a right to hold B liable to them until B gives notice to the world that A’s authority is revoked and it makes no difference if in a particular case the agent intended to keep the contract on his own account[xiii]. The court repelled the contention that it was very unreasonable to expect that the principal should inform the whole world that he has canceled the power of attorney given to his agent and that he cannot be expected to approach everybody with whom the agent was likely to enter into a contract and inform him of the cancellation.

Effect of Termination of Agent’s Authority

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.

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.

Notice to Third Parties

Apparent 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. Some bases for termination by operation of law (such as changed circumstances) may provide such notice.

Under the Restatement (Third) of Agency, an agent’s apparent authority may continue even after the principal’s death or loss of capacity. An agent may act with apparent authority following the principal’s death or loss of capacity because the basis of apparent authority is a principal’s manifestation to third parties, coupled with a third party’s reasonable belief that the agent acts with actual authority[xiv].

When third parties do not have noticed that the principal has died or lost capacity, they may reasonably believe the agent to be authorized. The rule that the principal’s death does not automatically terminate apparent authority is consistent with the interest of protecting third parties who act without knowledge of the principal’s death or loss of capacity.

To protect themselves against unwanted liability, however, prudent principals will want to notify third parties themselves. The required type of notification varies with the third party in question.

For third parties who have previously dealt with the agent or who have begun to deal with the agent, actual notification is necessary. This can be accomplished by-

(1) a direct personal statement to the third party; or

(2) writing delivered to the third party personally, to his place of business, or to some other place reasonably believed to be appropriate.

For all other parties, constructive notification  Usually, these other parties are aware of the agency but did no business with the agent. Constructive notification normally 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 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.

Claim for damages

Apart from the revocation of the agency, the principal may also claim damages/losses sustained due to the acts/non-acts of the agent by referring the matter to arbitration as stipulated in the contract of agency. It also is well settled that the party who has breached the contract and has by his conduct exhibited the traits of having abandoned or renounced the obligations under the contract will not be entitled to claim damages from the other side[xv].

In this case, the sole selling agent, having exhibited uncooperative attitude and conduct and by virtually sabotaging the business of the principal, notwithstanding his clear obligations both under the agreement and the Contract Act, would have no case to go before any court and seek damages or compensation – on the contrary, the principal would be well justified in claiming damages and expenses/costs against the sole selling agent. In view of the ‘doctrine of necessity’, the dispensing with prior to six months notice would be justified and reasonable – otherwise, to wait for six months and play into the hands of an untrustworthy agent would only witness the complete obliteration of the principal’s business.

Conclusion

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, when shown to have existed, will be presumed to have continued, in the absence of anything to show its termination, unless such a length of time has elapsed as destroys the presumption Agency may be brought to an end either by the act of the parties, or by operation of law”[xvi].

Agency may be terminated by subsequent events. These may be physical, as where, for example, the subject matter is destroyed, or the principal or agent dies or becomes insane. Alternatively, they may be legal, as where the principal or agent becomes, bankrupt, or the relationship becomes illegal (for example, if the principal becomes an enemy alien). The effects of termination are that as far as principal and agent are concerned, rights vested at the time of the termination will subsist, but no new rights can be created, at least once the agent has notice of the termination. Where the agency was created by agreement, it will be determinable in the same way. A continuing agency may also be determined by giving such period of notice as is specified in any agreement, or failing that, reasonable notice.

Finally, if either party acts in a way which is inconsistent with the continuation of the agency then it will be terminated though of course, this may well give rise to rights of action for breach of contract. As regards termination by operation of law, if an agency is for a particular transaction, the relationship will terminate when that transaction is completed. If it is for a specified period, it will cease at the end of that period.

Formatted on March 21st, 2019.

REFERENCES:

[i] www.isca.in/IJSS/Archive/v2/i11/10.ISCA-IRJSS-2013-108.pdf.

[ii] http://www.studymode.com/essays/Termination-Of-Agency-1469514.html.

[iii]https://www.inkling.com/read/business-law-jane-mallor-15th/chapter-35/termination-of-an-agency.

[iv] www.isca.in/IJSS/Archive/v2/i11/10.ISCA-IRJSS-2013-108.pdf.

[v] http://www.studymode.com/essays/Termination-Of-Agency-1469514.html.

[vi] http://www.studymode.com/essays/Termination-Of-Agency-1469514.html.

[vii] https://www.scribd.com/doc/48004714/The-Formation-of-Agency-and-Termination.

[viii] http://agency.uslegal.com/duration-and-termination-of-agency/.

[ix]http://www.lawteacher.net/commercial-law/essays/the-law-of-agency-commercial-law-essay.php.

[x] http://www.studymode.com/essays/Termination-Of-Agency-1469514.html.

[xi] https://www.scribd.com/doc/48004714/The-Formation-of-Agency-and-Termination.

[xii] http://agency.uslegal.com/duration-and-termination-of-agency/.

[xiii] www.isca.in/IJSS/Archive/v2/i11/10.ISCA-IRJSS-2013-108.pdf.

[xiv] http://www.studymode.com/essays/Termination-Of-Agency-1469514.html.

[xv] http://www.studymode.com/essays/Termination-Of-Agency-1469514.html.

[xvi] www.isca.in/IJSS/Archive/v2/i11/10.ISCA-IRJSS-2013-108.pdf.

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