Termination of Agency under Indian Contract Act, 1872 | Law Optional Notes for UPSC PDF Download

Termination of Agency

Definition: Termination of agency occurs when the relationship between a principal and an agent comes to an end. This can happen through various means as outlined in Sections 201-210 of the Indian Contract Act.

Modes of Termination

By the Act of Parties

• Revocation by Mutual Agreement: The agency contract can be terminated at any time by mutual agreement between the principal and the agent.
• Revocation by the Principal: The principal can terminate the agency by revoking the agent's authority. Proper notice must be given for such revocation. Example: If A empowers B to rent out A's house but later decides to rent it out personally, this action implicitly revokes B's authority.
• Revocation by the Agent: The agent can also terminate the agency by providing proper notice to the principal as per Section 206 of the Indian Contract Act.

By Operation of Law

• Completion of Agency: The agency concludes upon the fulfillment of the purpose for which it was established. Example: If Mahesh appoints Sachin to sell his house in China, once the sale is completed, the agency terminates.
• End of Time: An agency created for a specific period ends upon the expiration of that time frame. Example: Anandam hires Anjana as a secretary for 3 years; the agency ceases at the end of this term.
• Death or Insanity: If either the principal or agent dies or becomes incapacitated, the agency is terminated.
• Insolvency of Principal: If the principal becomes insolvent, the agency may be terminated.
• Destruction of Subject Matter: If the subject matter of the agency is destroyed, the agency is terminated. Example: If an agency is established for selling airplanes and the airplane is destroyed before the sale, the agency ends.
• Foreign Enemy Status: If the principal becomes an enemy of the state where the agent operates, the agency is terminated. Example: Due to wartime hostilities between the countries of the principal and the agent, the agency is dissolved.
• Winding up of Company: If the firm or company is dissolved, the agency is terminated.

Agent’s Duties Before Termination of Agency

• Conducting the principal’s business as per instructions: An agent must operate within the authority granted by the principal. In the absence of specific instructions, the agent should adhere to local customs.
• Running the agency competently: Agents are obligated to work diligently and skillfully. If a particular skill is necessary, it must be utilized.
• Maintaining accurate accounts: Agents must keep transparent and correct records, disclosing any additional profits to the principal.
• Communicating with the principal: Agents need to stay in contact with the principal, diligently seeking and following their directives.
• Payment to the principal: All funds received during business operations must be promptly remitted to the principal without deduction.

Principal’s Liability before Termination of Agency

Duty to Compensate Agent

• An agency relationship should involve fair compensation. The terms of compensation should ideally be outlined in the agency agreement. When the contract is silent on compensation details, the principal must ensure reasonable compensation for the agent’s services.
• Example: In a standard sales agent scenario, it is customary for the agent to receive a reasonable commission upon completing a sale or meeting specific targets.

Duty to Reimburse an Agent

• The principal is responsible for reimbursing the agent for reasonable expenses incurred during the performance of duties. This includes costs related to travel, meals, accommodation, incidental expenses, and the like.

Indemnifying an Agent

• Typically, a principal is obligated to indemnify an agent against liabilities arising from the agent's authorized actions. This becomes relevant when the principal's instructions expose the agent to third-party liabilities.
• If an agent exceeds their authority or acts beyond their scope, the principal may release them from indemnity. However, if the principal later ratifies the agent's actions, they will be bound to indemnify the agent against any liabilities incurred.

Liability of Principle and Agent After Termination:

• Duty to compensate agent: An agency relationship may end in different ways. If the terms of compensation are not specified in the agency contract, the principal is responsible for providing fair compensation to the agent.
• Notice of revocation: When terminating the agency relationship, the principal must notify both the agent and any relevant third parties, providing reasons for the termination. This notification should be delivered to all parties involved.
• Revocation may be express or implicit: The termination of the agency can be clearly stated or implied through the actions of the parties involved.
• Freedom to enter new contracts: After the termination of the agency relationship, both the principal and the agent are free to engage in other contracts or agreements with different parties.

Case laws related to termination of agency

R. Sayani v. Bright Bros (P) Ltd., AIR 1980 Mad 162

• Organization formed for a specific period
• Liability for premature termination requires compensation if unjustified
• Agent entitled to Rs. 4000 per month
• Court emphasized the need for a three-month warning
• Reward of Rs. 12,000 granted

Carter v. White, (1883) 2d 666: (1881-85) All ER Rape 921

• Principal paid agent, authorized bill filling
• Principal's death did not terminate authority to fill the bill

Sukhdev V. Command of the Command, (1998) 1 BC 403 (AP)

• Agency termination with termination of name
• Agent obliged to vacate premises after specified time
• No extension or renewal provision

Truman v. Lauder (1840) 11 AD and L589

• A working as agent of B
• Parties can hold B accountable until informed of A's loss of authority
• Principal not required to notify the world of agent's revoked power

Conclusion

• Agency relationships in business law are prevalent and can be either expressed or implied. They are formed when one person delegates authority to another, appointing them for specific tasks or assigning them to particular areas of work.
• An agency relationship establishes the rights and duties of both the principal and the agent. Both parties have obligations to fulfill and benefits to gain from this relationship.
• Various examples of agency relationships include insurance agencies, advertising agencies, travel agencies, factors, brokers, and agents. Each of these operates within the framework of a principal-agent relationship.
• There are specific methods for terminating an agency relationship. Understanding these termination procedures is crucial for both parties involved in the agreement.