Understanding Agency and Its Termination
In the modern business world, the concept of agency is crucial for conducting trade, contracts, and transactions efficiently. An agency is a relationship where one person, known as the agent, acts on behalf of another, called the principal, to create legal obligations with third parties.
This relationship is governed by the Indian Contract Act, 1872 (Sections 182 to 238). The agency relationship, however, is not permanent — it can come to an end due to various reasons. The termination of agency refers to the process through which the authority of the agent to act on behalf of the principal ceases.
According to Sections 201 to 210 of the Indian Contract Act, 1872, agency may be terminated by the act of parties or by operation of law. Understanding these modes helps prevent disputes and ensures clarity in contractual relationships.
1. Termination of Agency by Act of Parties
The first category of termination arises from the actions or decisions of the principal and agent themselves. These include revocation, renunciation, completion of business, and mutual agreement.
(a) By Revocation of Authority by Principal (Section 203)
The principal has the right to revoke the authority of the agent at any time before the agent exercises it to bind the principal. This is called revocation. However, once the agent has partly exercised the authority, the principal cannot revoke it for that transaction.
The revocation may be express or implied and must be communicated to the agent and the third parties dealing with him.
Example:
If A authorizes B to sell his car and before B sells it, A withdraws the authority, the agency is terminated. But if B has already negotiated the sale, A cannot revoke it midway.
(b) By Renunciation of Agency by Agent (Section 206)
Just as the principal can revoke the authority, the agent can also renounce the agency by giving reasonable notice to the principal. If no such notice is given, and the principal suffers loss, the agent is liable to compensate.
Example:
If an insurance agent resigns without notice during a crucial renewal period, causing the company loss, the agent is liable for the damages.
(c) By Mutual Agreement
Agency is founded on mutual consent; therefore, it can be terminated by mutual agreement between the principal and agent at any time. Both parties can decide to end the relationship when it no longer serves their interests.
Example:
A company and its marketing agent may mutually agree to terminate the contract after achieving the business targets.
(d) By Completion of Business or Expiry of Time (Section 201)
When the specific purpose for which the agency was created is completed, or the time duration for which it was created expires, the agency automatically terminates.
Example:
If a real estate agent is hired to sell a specific property, the agency ends once the property is sold. Similarly, if an agent is appointed for one year, the agency ceases at the end of that period.
2. Termination of Agency by Operation of Law
The second category of termination occurs automatically when certain legal or factual events happen, regardless of the will of the parties. These include death, insanity, insolvency, or destruction of subject matter.
(a) By Death of Principal or Agent (Section 209)
The death of either the principal or agent immediately terminates the agency relationship. The agent’s authority ceases the moment he learns about the death of the principal, and vice versa.
Example:
If A authorizes B to sell his house, but A dies before the sale, the agency automatically ends once B receives knowledge of A’s death.
(b) By Insanity of Principal or Agent (Section 209)
If either party becomes of unsound mind, the agency is terminated because an insane person cannot legally contract. This protects third parties from uncertainty.
Example:
If the principal becomes mentally unsound, the agent’s authority to act on his behalf ceases immediately.
(c) By Insolvency of Principal (Section 201)
The insolvency of the principal results in termination of the agency since the principal loses control over his property and affairs, which pass to the official receiver. However, the insolvency of the agent does not always terminate the agency unless his solvency is essential for performance.
Example:
If A, a businessman, becomes insolvent, his agent B can no longer make contracts on his behalf.
(d) By Destruction of Subject Matter
If the subject matter of the agency is destroyed or ceases to exist, the agency automatically ends.
Example:
If an agent is appointed to insure a specific ship, and the ship sinks before the insurance contract is executed, the agency terminates.
(e) By Principal Becoming an Alien Enemy
If the principal or agent becomes an alien enemy due to war between their countries, the agency terminates. This ensures that no person acts on behalf of an enemy nation.
Example:
If a principal residing in India has an agent in another country and war breaks out between the two nations, their agency relationship ends automatically.
(f) By Dissolution of Company or Firm
When a firm or company—acting as a principal or agent—is dissolved, the agency comes to an end. This is because dissolution legally ends the existence of the contracting entity.
Example:
If a firm appoints an agent to manage exports and the firm is later dissolved, the agency terminates automatically.
(g) By Change in Law or Subsequent Illegality
If the performance of the agency becomes unlawful due to a change in law or government order, the agency terminates immediately.
Example:
If an agent is appointed to trade certain goods, and later a law bans trading in those goods, the agency becomes void.
3. Notice of Termination (Section 208)
Termination of agency takes effect as to the agent when it becomes known to him, and as to third parties when they become aware of it.
This rule protects third parties who may be dealing with the agent under the belief that his authority continues.
Example:
If A revokes B’s authority but fails to inform C, who deals with B in good faith, A will still be bound by B’s actions until C is notified.
Real-Life Example: Business Context
In a 2019 case involving a real estate agency contract, a builder appointed an agent to sell apartments for two years. Before completion, the builder revoked the agent’s authority without notice. The court held the revocation invalid since the agent had already incurred expenses and partly executed the contract.
This case demonstrates the importance of proper notice and good faith in terminating agency relationships.
Mnemonic to Remember the Modes of Termination of Agency — “R.R.C.M.D.I.D.A.D.”
Use the mnemonic “R.R.C.M.D.I.D.A.D.” to remember the key modes:
By Act of Parties:
- R – Revocation by principal
- R – Renunciation by agent
- C – Completion of business
- M – Mutual agreement
By Operation of Law:
- D – Death
- I – Insanity
- D – Destruction of subject matter
- A – Alien enemy
- D – Dissolution or change in law
Mnemonic Sentence:
“Ravi’s Real Car Made Delhi’s Icecream Dealers Amazingly Delicious.”
This funny yet effective line helps law students recall all major modes of termination of agency quickly during exams.
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