Termination of Agency- Indian Contract Act, 1872

Author-Jessica Singh Amethia

Stude ki nint at College-New Law College, Bharti Vidyapeeth Deemed to be University, Pune

Abstract:

The concept of agency under the Indian Contract Act, 1872, defines a special relationship between a Principal and an Agent, where the Agent acts on behalf of the Principal. Agency is based on the legal maxim “Qui Facit Per Alium, Facit Per Se” (he who acts through another acts himself). Termination of Agency occurs when this relationship ends, as defined in Section 201. Termination can happen either by the parties’ actions or by operation of law.

By the parties’ actions, termination can occur through mutual agreement, revocation by the Principal, or renunciation by the Agent. Revocation must follow specific rules, such as providing reasonable notice and ensuring that the Agent’s interests are protected if they are coupled with the subject matter. The Principal cannot revoke the Agent’s authority if the Agent has already partly exercised it.

By operation of law, termination occurs upon completion of the business, expiration of time, death, insanity, or insolvency of either party, or subsequent impossibility of the agency’s purpose.

The effects of termination include the immediate cessation of the Agent’s authority upon their awareness and for third parties upon their knowledge of termination. The Agent must act to protect the Principal’s interests post-termination, especially in cases of death or insanity. Termination of the main agency also ends any sub-agency.

Understanding these aspects ensures that both Principals and Agents act within legal boundaries, safeguarding their interests and maintaining valid transactions post-termination.

1. Introduction: –

Agency is a type of special contract and is defined in Section 182 of the Indian Contract Act, 1872 which describes agency as a special relationship between an ‘Agent’ and a ‘Principal’. An Agent is therefore described as a person who is employed by the principal to act on behalf of him or to do dealings with a third party whereas a Principal is a person who employs an Agent to do tasks on behalf on him.

Agency is based on the Legal Maxim of “Qui Facit Per Alium, Facit Per Se”, which means ‘A person who acts through another, acts himself’.

2. Meaning of Termination of Agency: –

Termination of Contract of Agency refers to the agency relation between the Agent and the Principal comes to an end or is said to be dissolved. 

Section 201 defines Termination of Agency which says that an agency is terminated when the principal revokes his authority, when agent renounces his business, insolvency of the principal, completion of business or by the death of either agent or principal.

3. Modes of Termination of Agency: –

Sections 201-210 of the Indian Contract Act, 1872 tells us about Termination of Agency between the Agent and the Principal.

The Contract of Agency can be terminated in the following two ways:

1. By the Act of the Parties
2. By the Operation of Law

These two modes are further divided into different circumstances that lead to the termination of Agency.

4. By the Act of the Parties: –

The contract of Agency can be terminated Either by the agent or by the principal in the following ways: –

1. By Agreement: The Agency relation can be terminated by a mutual agreement between the agent and the principal at any time or in any stage.
2. By Revocation by the Principal [Sec. 203]: The Principal can revoke the Agent’s authority at any time before the Agent has exercised the authority given to him by the Principal. The principal ought to give a reasonable notice of such revocation to the Agent before termination of the Agency.

However, there are certain rules to be followed before the Principal revokes the Agent’s authority, which includes:

1. Revocation must be expressed or implied [Sec 207]: The conduct of the principal should denote an express or implied termination of agency on behalf of the Principal.

Example: C authorizes D to let C’s house. Later, C lets it himself. This is an example of implied revocation by C of D’s authority.

2. No Revocation of authority when Agent has interest in subject-matter [Sec 202]: The Agency relation cannot be revoked by the principal if agent has a coupled interest in the subject matter unless otherwise expressed through a contract. The principal cannot revoke authority prejudice of the agent’s interest.

Examples: (A) C gives authority to D to sell C’s land, and to pay himself, out of the proceeds, the debts which are due to him from C. C cannot revoke this authority, nor can it be terminated by his insanity or death.

(B) P entrusts Q with 100kg of rice, for which Q has already made advances. P instructs Q to sell the rice and deduct from the proceeds the amount he has advanced himself. P cannot revoke this authority, nor is it terminated by his death or insanity.

In the case of Birat Chandra Dagara v. Taurian Exim Pvt. Ltd., the intention was to transfer a leased area to someone holding power of attorney. This created an interest in the property for the power of attorney holder. The Orissa High Court decided that Section 202 applied, meaning the agency couldn’t be terminated if it would harm the holder’s interest, unless there was a express agreement allowing termination.

3. Principal cannot revoke Agency where Agent has Partly exercised authority [Sec 204]: The principal can revoke the authority of the agent any time before the agent has exercised authority so as to bind the principal. This means that the revocation of agent’s authority is not possible after agent has acted on the duty conferred to him.

Examples: (A) A empowers B to buy 500kg of rice on account of A, and to pay for it out of A’s money remaining with B’s. B buys 500kg of rice in his own name, making himself personally liable for the price paid. A cannot revoke B’s authority as far as regards to payment for the rice.

(B) X authorizes Z to buy 100kg of wheat on account of X, and to pay for it out of X’s money remaining with Z’s. Z buys 100kg of wheat in X’s name, and does not render himself personally liable for the price paid. X can revoke Z’s authority to pay for the wheat.

In Subhadra v. M. Narasimha Murthy, the plaintiff sold the disputed property to the 1st defendant by giving a power of attorney, based on which the 1st defendant executed a sale deed in favor of the 2nd defendant. The plaintiff received Rs. 29,000/- from the 1st defendant as payment. The plaintiff then canceled the power of attorney without returning the Rs. 29,000/- received.

However, before terminating the agency on the grounds of fraud and concealment of facts, which led to a loss of trust, the agent must be given an opportunity to be heard. 

4. Principal should give Reasonable Notice of Revocation [Sec 206]: A reasonable notice must be given for such revocation or renunciation of the contract of Agency or else the damage occurring because of such action to either the agent or principal must be compensated in good faith by one for another, as the case may be.

3. By Renunciation by the Agent or Compensation for revocation by Principal [Sec 205]: The Agent can renounce the Agency in the same way as that of the Principal.

However, if the agency is an expressed or implied agency created for a fixed time schedule or for a specific purpose but was either revoked by principal or renounced by the agent, either of them have to compensate the other party as the case may be.

V.       By the Operation of Law: –

1. Completion of Business or Expiry of Time: The relationship between the Principal and the agent automatically ends when the agency’s business is completed. Likewise, if the agency was established for a specified period, it automatically terminates when that period ends.
2. Death of the Principal or Agent: The agency relationship is automatically terminated if either the Principal or the agent dies.
3. Insanity of Principal or Agent: The agency relationship is automatically terminated if either the Principal or the agent becomes of unsound mind.
4. Insolvency of the Principal: The agency relationship is terminated if the Principal is declared insolvent.
5. Subsequent Impossibility: The agency is also terminated if, after its creation:

1. the subject matter of the agency business is destroyed; or
2. the business of the agency becomes unlawful.

VI.       Effect of Termination of Agency: –

Section 208- 210 talks about effects and duties of agent after termination of Agency.

1. When the termination of an agent’s authority takes effect with respect to the agent and third parties [S.208]: The termination of the agency does not take effect immediately. It becomes effective:

1. for the agent, when he becomes aware of the termination; and
2. for third parties, when they become aware of it.

Examples: (A) X, in Mumbai, sends a letter directing Y to sell some rice stored in a warehouse in Bombay. Later, X sends another letter revoking Y’s authority to sell and instructing Y to send the rice to Mumbai. After receiving the second letter, Y enters into a contract with Z, who knows about the first letter but is unaware of the second, to sell the rice to Z. Z pays Y the money, with which Y absconds. Z’s payment is valid against X.

(B) P instructs Q, his agent, to pay a certain amount of money to R. P dies, and D takes out probate to his will. Q, after P’s death but before learning of it, pays the money to R. The payment is valid against D, the executor.

In Ram Asri v. Rakesh Chand, Mahant Jaram Dass granted a general power of attorney on 10-6-1968, which he canceled on 18-4-1977. His son, Ram Gopal, sold the property on 7-7-1977. The defendants were unaware of the cancellation. The High Court of Punjab and Haryana upheld the sale’s validity, citing Section 208 of the Contract Act, 1872, which states that termination of the agent’s authority does not affect the sale’s validity without notice of cancellation.

2. Agent’s duty upon termination of agency due to the principal’s death or insanity [Sec 209]: If the agency ends because the principal dies or becomes mentally incapacitated, the agent must take all reasonable actions to protect and preserve the interests entrusted to him on behalf of the principal’s representatives.

3. Termination of agency terminates sub-agency also [Section 210]: According to Section 210, the termination of the authority of an agent causes the termination of the authority of all sub-agents appointed by him.

VII.       Conclusion: –

The concept of agency as defined under the Indian Contract Act, 1872, plays a crucial role in facilitating various business and legal transactions through the relationship between the Principal and the Agent. Understanding the termination of agency is essential for both parties to ensure their actions remain within legal boundaries. 

The termination of an agency can occur either by the act of the parties involved or by the operation of law, encompassing scenarios such as mutual agreement, revocation by the principal, renunciation by the agent, completion of the agency’s business, death, insanity, or insolvency. It is imperative for both principals and agents to be aware of these modes and the specific circumstances under which termination is valid.

Moreover, the legal consequences of termination, as outlined in Sections 208-210, stress the importance of communication and awareness. Agents and third parties must be informed of the termination to avoid invalid transactions. The duties of the agent post-termination, particularly in the case of the principal’s death or insanity, underscore the agent’s obligation to act in good faith to protect the principal’s interests.

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Sources: –

• https://www.legalserviceindia.com/legal/article-10125-various-methods-of-creation-of-agency.html
• https://www.lkouniv.ac.in/site/writereaddata/siteContent/202005182323263820cp-Termination-of-Agency.pdf
• pdfcoffee.com_law-of-contract-2-part-by-dr-rk-bangia-pdf-free[2].pdf
• https://lddashboard.legislative.gov.in/sites/default/files/A1872-09.pdf

FAQs: –

1. What legal maxim is the concept of agency based on?

   The concept of agency is based on the maxim “Qui Facit Per Alium, Facit Per Se,” meaning ‘A person who acts through another, acts himself’.

2. What is termination of agency?

   Termination of agency refers to the end of the relationship between the agent and the principal.

3. Under what section is the termination of agency defined?

   Termination of agency is defined under Section 201 of the Indian Contract Act, 1872.

4. What are the two main ways an agency can be terminated?

   Agency can be terminated either by the act of the parties or by operation of law.

5. Can a principal revoke an agent’s authority at any time?

   Yes, a principal can revoke an agent’s authority any time before the agent has exercised the given authority, with reasonable notice.

6. What happens to the agency if either the principal or agent dies?

   The agency relationship is automatically terminated upon the death of either the principal or the agent.

7. What is the effect of termination of agency on sub-agents?

   The termination of the authority of an agent also terminates the authority of all sub-agents appointed by him.

8. When does the termination of an agent’s authority take effect for third parties?

   It takes effect for third parties when they become aware of the termination.

9. What is the agent’s duty upon termination of agency due to the principal’s death or insanity?

    The agent must take reasonable actions to protect and preserve the interests entrusted to him on behalf of the principal’s representatives.