A contract of agency is a species of the general contract. As such, an agency may terminate in the same way as a contract is discharged except where the agency is irrevocable. Broadly speaking, an agency may be terminated either by the act of parties or by the operation of law.
(a) Termination by act of parties:
A contract of agency may come to an end by the act of the parties as follows:
1. By agreement:
An agency is generally created by an agreement, it may also be terminated by an agreement so far as future transactions are concerned. Transactions that took place prior to the termination shall continue to bind the principal. However, notice to third party is necessary.
2. By revocation by the principal:
Sec. 203 provides that the principal may, except where the agency is coupled with interest, revoke the agency at any time before the authority has been exercised so as to bind the principal.
However, where the authority has been partly exercised the principal cannot revoke the authority in respect of acts and obligations already undertaken.
Further, if the agency is for a particular period and it is revoked earlier, without sufficient cause, the principal must compensate the agent. A reasonable notice of revocation to the agent and third party must be given, otherwise the principal will be liable to third party for the acts of the agent and to the agent for compensation. Revocation may be express or implied in the conduct of the principal or agent.
3. By revocation by the agent:
An agent has also a right to revoke the agency by giving a reasonable notice in the same manner and with same liabilities regarding compensation, as discussed above in the case of revocation by the principal.
(b) Termination by operation of law:
An agency is terminated by operation of law as follows:
1. By performance or completion of the act of agency:
It is, by far, the most usual manner in which an agency is terminated.
2. By expiry of time:
If the agent is appointed for a particular period, the agency is terminated, on the expiry of that period even if the whole of the work or purpose of the agency has not been accomplished.
3. By death or insanity of either the principal or agent:
Knowledge of the death or insanity of either the principal or the agent terminates the agency.
4. By insolvency of the principal:
Similarly, knowledge of the insolvency of the principal will terminate the agency. As regards insolvency of the agent, the Act is silent. However, it is logical to say that the insolvency of the agent also terminates the agency.
5. By dissolution of a company:
A company being an artificial person cannot be declared insolvent. However, when it is not able to pay its debt, it can be wound up. Hence on dissolution of a company, the agency is terminated.
6. By destruction of the subject-matter:
When the subject matter, for which the agency was created, is destroyed, the agency is terminated. For example, A is employed to sell a scooter. Before the sale is negotiated, the scooter is destroyed by fire, the agency is terminated.
7. By the principal or agent becoming alien enemy:
When the principal or agent becomes an alien enemy, the agency is terminated, e.g., when a war breaks out between two countries, the agency is at an end. It may be revived after the war is over.
8. By termination of sub-agent's authority:
A sub-agent derives his authority through the agent. Hence termination of an agent's authority also puts an end to the sub-agent's authority (Sec. 210).
When Termination of Agency Takes Effect?
The termination of authority of an agent does not take effect until it becomes known to the parties concerned, i.e., the agent and third party (Sec. 208).
(1) A directs B to sell goods for him, and agrees to give B 5% commission on the price fetched by the goods. Later on a through, by a letter, revokes B's authority. B, after the letter is sent, but before he receives it, sells the goods for Rs. 1,000. The sale is binding on A, and B is entitled to his commission.
(2) A at Chennai, through a letter, directs B to sell for him some cotton lying in a warehouse in Mumbai and afterwards, through another letter revokes his authority to sell, and directs B to send the cotton to Chennai. B after receiving the second letter, enters into a contract with C who knows about the first letter, but not about the second, for the sale of the cotton to him. C pays B the money, with which B absconds, C's payment is good as against A.
Sec. 210 provides that the termination of the agent's authority will also put an end to the sub- agent's authority.
However, termination of an agent's authority does not ipso facto terminate the authority of the substituted agent. Therefore, a separate notice of termination of substituted agent's authority is necessary.