Meaning and Legal Provisions
The concept of Termination of Agency is governed by the Indian Contract Act, 1872 under Sections 201 to 210. An agency is a relationship in which the agent is authorized to act on behalf of the principal. This relationship can end in several ways, either by the act of the parties themselves or by operation of law. According to Section 201, an agency is terminated when (a) the principal revokes his authority, (b) the agent renounces the business of the agency, (c) the business of the agency is completed, (d) either the principal or agent dies or becomes of unsound mind, or (e) the principal is adjudicated insolvent. Termination ends the agent’s authority, and any act done after termination is not binding on the principal, except when the agent acts without knowing about the termination, provided the third party is also unaware. This ensures fairness in transactions and protection of third parties acting in good faith.
Termination by Act of Parties or Operation of Law
Termination by the act of parties includes revocation by the principal (Sec 203) or renunciation by the agent (Sec 206). However, revocation cannot take place when the authority is coupled with an interest (Sec 202). Also, reasonable notice must be given; otherwise, the aggrieved party can claim compensation. Termination by operation of law occurs in cases of (i) completion of business, (ii) death or insanity of either party (Sec 209), (iii) insolvency of the principal, or (iv) destruction of the subject matter. According to Sec 208, termination of agency takes effect when it becomes known to the agent or third parties. Therefore, public notice of termination is crucial to avoid liability for subsequent unauthorized acts of the agent. The provisions strike a balance between the rights of principals, agents, and third parties.
Importance and Legal Effect
The termination of an agency is significant as it marks the end of the binding relationship between principal and agent. After termination, any act done by the agent without authority is void against the principal unless protected by Section 207, which provides that authority may be terminated expressly or impliedly. If termination is not communicated properly, the principal may still be bound by the acts of the agent, especially if third parties were unaware of the termination. For example, revoking an agent’s authority to sell goods must be notified not only to the agent but also to prospective buyers. Failure to do so may result in the principal being held liable for contracts made by the agent in good faith. Thus, termination is not merely an internal matter between principal and agent but also affects outsiders dealing with them. Ensuring clarity and timely notice is key to protecting all parties from unnecessary disputes.
Real-Life Example
Suppose Ramesh appoints Suresh as his agent to sell machinery. Later, Ramesh revokes Suresh’s authority but fails to inform third parties. Suresh, without knowing of the revocation, sells the machinery to a buyer, who also has no knowledge of the termination. In this case, the sale will still bind Ramesh, since both the agent and the buyer were unaware of the revocation, as per Section 208. However, if Suresh had been informed and still sold the goods, the transaction would not bind Ramesh. This example illustrates how communication of termination is crucial and how the law balances fairness between principals, agents, and third parties acting in good faith.
Mnemonic to Remember – “C-DRIP”
To remember the modes of termination of agency, use C-DRIP:
- C = Completion of business
- D = Death/Disability of principal or agent
- R = Revocation by the principal (Sec 203)
- I = Insolvency of the principal
- P = Principal’s revocation / Agent’s renunciation (Sec 206)
Think: “Agency ends when it C-DRIPs away.”
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