The contract of agency is a type of contract which represents and defines a relationship between two parties. It is a dealing, where one party is a representative of the other in business dealings and helps create a relationship of a contract with the third party. It is a part of the general contract.
The contract of agency under the Indian Contract Act, 1872 is understood as ‘a contract by which a person employs another person to do any act for himself or to represent him dealing with a third person’.
The representative that is hired is called an ‘agent’ and the person that is being represented is called ‘principal’. Any person who is of the age of 18 and above can employ an agent. There is no consideration needed when a contract of agency is made.
Agent and principal are defined under Section 182 of the Indian Contract Act, 1872. As per which, an agent is a person employed to do any act for another, or to represent another in dealings with a third person. The person for whom such an act is done, or who is so represented, is called the ‘principal’.
An agency has 2 types of contracts:
- An agreement between the agent and principal from which the agent has the right to act on behalf of the agent.
- A contract between a third party and the principal due to an agent.
The authority of an agent can be revoked at any time of the day by the principal. If during the period of the contract the trust is broken between the agent and the principal then it is a risk for the principal to allow transactions to be continued by the agent.
TERMINATION OF AGENCY
The termination of an agency is given under Section 201 of the Indian Contract Act which states that ‘an agency is terminated by the principal revoking his authority, or by the agent renouncing the business of the agency, or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors’.
Since the contract of agency is a part of general contracts, it can be terminated as a normal contract except when the contract is irrevocable. The duty of an agent comes to an end once the contract has been terminated or if the contract was drawn in such a way that it was time-bound. If the contract specifies that it is to be stipulated by time then the contract will be terminated but if the parties continue to maintain a contract of that of principal and agent than it is assumed that the principal and agent are acting according to the stipulations of the previous contract than the contract is renewed for a similar amount of time.
If there are no time constraints then the contract is said to be terminated after a certain period of time has passed. There are a lot of factors that constitute a reasonable time period and that could be depending on the principal, agent, the authority that is there, etc.
The burden of proof rests on the asserting party to prove that a contract is terminated and it can be either the principal or the agent. When it has to be proved that what was the duration of the contract then parol evidence which protects the sanctity of the contract is not admissible in court where the expressed contract is one that is either unambiguous or integrated or in certain cases both unambiguous and integrated.
The contract of agency can only be terminated after an adequate amount of time is given to the other party.
Thus, an agency can be terminated in the following ways:
BY AN ACT OF PARTIES
THE PERFORMANCE OF AN AGENT
In this case, the agency is terminated when the agent completes the specific task or purpose for which the agent was hired. Once the task is accomplished the agency will automatically terminate.
REVOCATION BY THE PRINCIPAL
The authority of an agency or an agent can be revoked at any time by the principal. It can at any time provided a sufficient notice period is given and it is done in a reasonable manner by the principal. The revocation should be done without any hidden agenda and all the dues of the agent must be covered once the contract is terminated. If the contract is terminated in such a way that it is not in accordance with the terms of the contract, then the agency or agent may sue the principal for the breach of contract. The revocation of the contract does not release the principal from the contract that is signed with a third party. This is a liability that must be bored by the principal. The third part must be immediately notified of the revocation of an agent.
RENUNCIATION BY AN AGENT
An agent also has the right to renounce the contract like the principal. The agent must also give a reasonable period of notice to the principal regarding the intention to renounce the contract otherwise the agent may be held accountable for the damage that is caused to the principal due to the insufficient period according to section 206 of the Indian Contract Act, 1872. The agent can also notify the principal of his intention of renouncing his power by refusing to act on behalf of the principal. If the agent terminates the agreement in a unilateral way before the commitment to the principal is completed, then the agent is liable to the principal for the damages caused and the loss that the principal has gone through.
BY AN AGREEMENT
The contract of agency can be terminated by a mutual agreement between the principal and the agent. It can be done either in an implied or expressed manner. As the agency is terminated due to an agreement that is reached mutually at any stage the authority of the agent is discontinued when the agreement between the principal and the agent is finalized.
This is a type of contract where the contract is terminated specifically in a written way due to the completion of the specified duration of the contact. If there is no time-bound clause then the contract of agency is terminated as a normal contract that is a notice to revoke the contract being given in a reasonable amount of time.
BY OPERATION OF LAW
BY COMPLETITION OF AGENCY
The agency is terminated due to the work that is assigned to the agent being completed. The contract of agency is brought to an end either due to the completion of the terms of the contract or due to the expiry of time or due to a mutual agreement to cease the contract.
BY EXPIRY OF THE TIME
The contract of agency is terminated due to the time of the contract having come to an end after a stipulated amount of time. In this case, the specific period is written in the contract or mentioned orally or if a certain event took place.
DEATH OR INSANITY OF PRINCIPAL OR AN AGENT
It is mentioned in section 209 of the Indian Contract Act, 1872 that the agency can be terminated by an agent on the death of the principal. If either the agent or the principal passes away the Contract of the agency is mechanically terminated as either person cannot be approached if the person is non-existent. The agency is also terminated if either the agent or principal is of unsound mind as an unsound person is not allowed to contract.
THE PRINCIPAL EING INSOLVENT
An insolvent person is not allowed to contract as the person’s liabilities exceed the assets according to section 201 of the Indian Contract Act, 1872. The insolvent is disqualified from being allowed to contract due to not having the necessary assets.
THE PRINCIPAL IS AN ALIEN ENEMY
If there is a war between the country of the principal or the agent, then the contract is immediately terminated. During the duration of the contract if the principal is an alien enemy the contract is immediately terminated.
DISSOLUTION OF COMPANY OR FIRM
In certain cases, the company may be considered a principal in a contract of agency and if it is dissolved then the contract comes to an end. If the company is that of either principal or agent and it is dissolved, then the contract comes to an end.
AN EVENT RENDERS THE AGENCY UNLAWFUL
Due to an act of either the principal or the agent the agency that was lawful may be declared unlawful which makes it impossible for the agency to continue and the contract of agency is hence terminated. It is also possible during the time of war.
It can be concluded that the contract of agency is an interesting aspect of the law of contracts. It shows that an agency may be terminated in a variety of ways with a variety of reasons to it as well. It tells us of a relationship between the principal and the agent and the basic and most important reason for a contract of agency to break is that the trust is no longer there between the two partners. If there is no trust then the business cannot take place and hence the agency is terminated.
 The Indian Contract Act, 1872, s.182.
 The Indian Contract Act, 1872, s.201.
BY LISA ALBE ZACHARIAH | NMIMS, NAVI MUMBAI