A principal gives authority to the Agent to work or perform a certain task on his behalf. However, an agent can be terminated from a contract at any time. First, let us understand the termination of the Agency. In this article, we will discuss, who is principal, the Agent, and the Agency, how an agency is created, what are the rights and duties of the Principal and Agent, what are the modes of termination of the Agency, the duties of the Principal and Agent before and after the termination of the Agency, and the effects of termination of Agent’s authority.
Who are the Principal and Agent?
As per Section 182 of the Indian Contract Act 1872, a person for whom any act is done, or who is represented in dealing with a third party is called the Principal.
A person given authority to perform the act or represent another person for performing the act in dealing with a third party on behalf of the Principal is called an Agent.
What is an Agency?
The relationship between an agent and Principal to perform an act or represent the third party on the Principal’s behalf is called an agency. There are two types of contracts in an agency – 1) between Principal and Agent, where the Agent is given authority to work for or on behalf of the Principal and 2) between the Principal and third party, through the Agent’s act. E.g.; auctioneers, brokers, dealers, etc.
The features of an agency are –
1. The Principal is bound by the acts of the Agent appointed by him. The Principal is also accountable to the third parties regarding the acts performed by the Agent on his behalf.
2. In a contract of Agency, there may or may not be any consideration.
3. The Principal should have the capacity to appoint an agent, i.e., he should be sound mind and competent to enter into a contract.
4. The Agent should also have the capacity to act as an agent, i.e., he should be a major and sound person.
Creation of Agency
An Agency can be created in any of the following ways-
By express appointment – Here, the Principal expressly assigns the Agent with some authority to perform a certain task. If the Agent exceeds the authority given, the Agent’s act will not bind the Principal. The Agent will be personally liable to the third party for the act done.
However, the Principal can be liable to a third party under the circumstances and then claim the damage from the Agent for breach of the contract of the Agency.
By implied appointment – Here, the authority is not given expressly; it is assumed or implied to have been given by the Principal. The Agency is created by implication when a person acting as an agent performs certain work or acts as if he has the authority to act on behalf of the Principal. The Principal acknowledges that the Agent is entitled to act accordingly.
By necessity – An agency is created in case of an emergency. In such a situation, the Agent can intervene, takes action, or performs a certain task on behalf of the Principal. In the event of Agency of necessity, any expenses incurred by the Agent would be reimbursed by the Principal. An agent should act in the best interest to protect the Principal from loss. An agency of necessity can be created in the following situation:
It is impossible to get the Principal’s instruction.
To prevent loss to the Principal or rotting of goods, it is necessary for the Agent to take action.
The Agent acted in good faith.
By Estoppel – If the Principal (by his words or actions) makes the third party believe that the Agent has the authority to act on his behalf, when in fact, the Agent doesn’t possess such authority. Suppose the third party relied on it and suffered a loss. In that case, the Principal will be estopped from denying the existence of the Agent’s authority.
Apparent/Ostensible authority: Ostensible authority is given to the Agent by the law, and the Principal doesn’t need to consent to it. There are two situations when apparent authority is exercised – a) where the Principal makes the third party believe by his act or words that the Agent has the authority to act on his behalf. b) where the Agent’s authority is terminated, and the Principal has not informed the third party about such termination.
Ratification – An agency by ratification by the Principal can arise in any of the following circumstances a) agent exceeds the duly assigned authority; or b) agent acted without any authority. In either of these circumstances, the Principal can accept or reject the contract made by the Agent. If the Principal accepts and confirms such a contract, the Principal’s acceptance is called ratification. Ratification can be expressed or implied. Once the contract is ratified, the Principal is bound by the contract as if the Agent was duly authorised to enter into a contract.
What are the rights and duties of an Agent?
The rights of agents are as follows –
1. Right to remuneration – Section 219 of the Indian Contract Act, 1872 states that an agent has the right to receive remuneration as may be agreed between the Principal and Agent, or if there is no agreement, the Agent is entitled to receive reasonable remuneration for providing his services to the Principal provided it is not gratuitous or voluntary.
2. Lien on Goods – Agents who have possession of goods, properties, or securities of their Principal also have lien or claim on those goods, properties, or securities concerning remuneration, liabilities, or any expenses incurred by the Agent. Moreover, the Agent has the right to stop the goods in transit if the Agent is an unpaid seller.
3. Right to be indemnified – The Agent has the right to be indemnified for any charges, liabilities, and expenses incurred while dealing with third parties during the Agency.
Section 190 -218 of the Indian Contract Act, 1872 lays down the duties of an agent. These are as follows:
• To obey the Principal’s order or instructions;
• To use reasonable skills and exercise due diligence in his work;
• To render proper accounts when required;
• To pay the Principal all the amount received on his behalf;
• To communicate and discuss with the Principal any material information to his knowledge that can influence the Principal’s decision;
• The interest of the Agent should not interfere in carrying out his duty and obligations;
• He should not make any secret profit while performing his duty and also disclose any extra profit made by him during his duty;
• Any confidential information and documents of the Principal should not be disclosed to third parties;
• He should not delegate his authority and
• The Agent should not compete with the Principal.
What are the duties of the Principal?
Section 175 – 178 of the Indian Contract Act, 1872 lays down the duties of the Principal towards his Agent. These are as follows:
• To reimburse and indemnify the Agent for expenses incurred and acts done during the exercise of his duties. The reimbursement includes meals, travel costs, contingency expenses, accommodation, etc.
• Not to knowingly or wilfully hinder or prevent the Agent from earning his commission.
• To timely make payment to the Agent in the form of commission or remuneration as may be agreed between the parties. Provided that the Agency is not gratuitous.
Termination of the Agency under Indian Contract Act, 1872
When the Principal and Agent’s relationship ends, it is called the Termination of Agency. Section 201- 210 of the Indian Contract Act, 1872 deals with the termination of an Agency. Termination of Agency can take place either by the Agent or Principal. As per Section 201 of the Act, a) a principal can terminate the Agency by revoking his authority, or b) an agent can terminate the Agency by renouncing the business, or c) when the business or work for which the Agency was created is complete, or d) if either Principal or Agent dies or become of unsound mind or e) if the Principal is adjudicated as insolvent by the law for the time being in force for the relief of insolvent debtors.
We can understand the mode of termination of an agency with the help of the following chart:
Modes of Termination of Agency
1. By the Act of the Parties: The Agency can be terminated by the act of the Principal or Agent in any of the following modes –
A) By agreement – the Agency can be terminated at any time by mutual agreement between the parties. Therefore, to terminate an agency, both parties should have mutual consent.
B) Revocation by the Principal – when the Principal revokes the Agent’s authority, the Agency gets terminated. The authority can be revoked only if the Agent has not acted on it. The revocation can be either express or implied.
Example- X authorizes Y to sell X’s house. Later, X sells the house himself. This is an implied revocation of Y’s authority.
i) If the Agent has partly exercised the authority, the authority cannot be revoked. The Agency cannot be revoked unless the Agent fulfils his part of the agreement.
a) X authorizes Y to purchase 1000 jute bags from X’s account and to make payment from the balance amount remaining with Y. Now, Y purchases the jute bags in his name. Therefore, X cannot revoke Y’s authority to make payment.
b) X authorizes Y to purchase 1000 jute bags from X’s account and to make payment from the balance amount remaining with Y. Now, Y purchases the jute bags in X’s name. Hence, X can revoke Y’s authority to make payment.
ii) If the Agent is interested in the subject matter, the Agency cannot be terminated without an express contract to the prejudice of such interest. It is called an irrevocable Agency or Agency with interest.
Example- X authorizes Y to sell X’s property and use the proceeds to clear his debts from X. Now, X cannot revoke Y’s authority to sell the property. This authority cannot be terminated due to insanity or death.
C) Renunciation by Agent – Renunciation of Agency by an agent is the process of the renunciation of the Agent’s authority by the Principal.
Compensation for revocation – if the Agency is revoked before the term of Agency, then the Principal is liable to pay the Agent or vice versa, as the case may be for any earlier renunciation or revocation of the Agency without sufficient cause.
Notice of revocation or renunciation – Either party should give reasonable notice of renunciation or revocation of Agency, failing which either party will be liable to compensate the other for the loss incurred. The Principal shall also provide notice of revocation of Agency to the third person. However, a notice of revocation or renunciation is unnecessary if the parties already know or have reason to believe about such revocation or renunciation.
2. Revocation by Operation of Law – The Agency can be revoked by Operation of law in the following manner –
a) Completion of business or expiry of time – The Agency gets terminated when the business of the Agency gets completed and the relationship between the Principal and Agent also ends. Additionally, suppose the Agency is created for a fixed term. In that case, the Agency gets terminated after the expiry of that term.
b) Death of the Principal or Agent – the Agency gets terminated automatically if either the Principal or Agent dies. However, suppose the Principal dies and the third party dealing with the Agent is unaware of it and has acted in good faith. In that case, the Agency’s termination of the Principal’s death takes effect only when the Agent receives notice of the Principal’s death.
c) Insanity of Principal or Agent – the Agency gets terminated automatically if either the Principal or Agent becomes an unsound person. Suppose the Principal has lost his mental capacity (temporary or permanent). In that case, the Agency is terminated, and the third person is unaware of such incapacity.
d) Insolvency of the Principal – if the Principal is declared insolvent by the law, then the Agency gets terminated. The Agent is deprived of any authority to deal with the assets or property of the Principal, which the Principal is deprived of due to bankruptcy, irrespective of whether the Agent receives the notice of insolvency.
e) Subsequent impossibility – An agency gets terminated if it becomes subsequently impossible.
i) the subject matter of the Agency’s business gets destroyed or the value of the subject matter, business condition changes or merger or change in legal identity.
ii) agency’s business becomes unlawful. If the change of law that makes the Principal’s business unlawful can be the ground for termination of the Agency.
When is an agency irrevocable?
An agency becomes irrevocable when it cannot be terminated. Here are some instances where termination of the Agency is not possible –
1. If the Agency is coupled with interest – as discussed earlier, where an agent has an interest in the subject matter of the Agency, then the Agency cannot be terminated irrespective of death, insolvency, or insanity of the Principal.
2. If the Agent has undergone some personal liability – the Principal cannot revoke an agency if the Agent has incurred some personal liability.
E.g., If X, an agent purchases some goods on Y’s instruction. Then Y cannot revoke the Agency without paying X the amount he incurred.
3. If the Agent has exercised authority partly – if the Agent has partially exercised his authority, then the Agency becomes irrevocable for the liability attached to the act performed.
Example – X authorizes Y to purchase 100 Kg of wheat. Y buys the 100Kg of wheat in ‘X’ name. Now, X cannot revoke the Agency.
When does termination take effect?
Termination of Agency or in case the Principal revokes the Agency. The termination comes into effect only if the Agent comes to know about it. However, in the case of the third party, the termination of the Agency comes into effect only when the Agent and third party are aware of it.
As per Section 210 of the Indian Contract Act, 1872, in the event of sub-agents, the termination of the Agency also terminates all sub-agents authority that the Agent appoints.
However, as per Section 209 of the Indian Contract Act, 1872, if the Principal dies or becomes an unsound person, then the Agent must protect the Principal’s interest and take reasonable steps on the Principal’s behalf.
Termination of Agency about third party – (Section 208 of the Indian Contract Act, 1872) Termination of Agent’s authority does not take effect unless it is known to either the Agent or third party.
X, directs Y through a letter to sell some furniture lying in a warehouse in Bombay, and later revokes the authority to sell through a letter and further directs Y to send back the furniture to X. Now, Y sells the furniture to Z without being aware of the second letter. Z pays Y for the furniture, which Y later pays back to X.
Notice to third parties: Apparent or ostensible authority terminates only when the third party receives reasonable notice of termination of Agency. Notice to third parties can be made directly to the third party through a personal or oral statement or in writing delivered directly to the third party’s place of residence or business or at some other place as may be appropriate to the third party.
Effect of termination of Agent’s authority
Sometimes, the Agent acts on behalf of the Principal even after the termination of the Agency. However, once the Agency has terminated, the Agent’s authority also terminates. Except in the case of apparent authority, the Agent can bind the Principal. For example, suppose the third party is unaware of the termination and believes the Agent still has the authority. In that case, the Principal can be bound by the Agent’s apparent authority.
Sukhdev V Commr of Endowments, 1998 1 BC 403 (AP)
In this case, the Petitioner was appointed as an agent by Respondent No.2 to run a retail outlet (petrol bunk) through a written agreement. The Petitioner contended that the Agency is irrevocable as the Agency is coupled with an interest. The Court rejected the Petitioner’s plea, stating that the Agency gets terminated at the expiry of the period of Agency.
Hence, the Court held that the duration of the agency agreement was mentioned in the contract, and nothing was mentioned about its renewal. Therefore, respondent No.2 has no contractual obligation to extend the duration or renew the appointment of the Agency. The Court also held that the Agency expires on the term specified in the agreement. The Petitioner is not an agent after the expiry of the term of the Agency and thus, has no right to question the Respondent in carrying out their obligations. Henceforth, the Court directed the Petitioner to vacate and hand over the possession of the petrol bunk.
A contract of Agency is a contract between the Principal and Agent. An agency is created when an agent is appointed to perform certain work or represent third parties on behalf of the Principal. Termination of Agency can occur either by an act of parties or by the Operation of law. The authority of the Agent ends after the termination of the Agency. The Agent must act according to the directions of the Principal, use his skill in his performance, maintain confidentiality and keep updating the Principal about the performance of his duty. The Principal also has a duty towards his Agent, such as a duty to compensate or reimburse the Agent and indemnify him. If the Principal should give the Agent a notice of revocation of Agency.