TERMINATION OF AGENCY WITH IMPORTANT CASE LAWS

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Termination of agency means putting end to the legal relationship between

principal and agent.  Section 201 to 210 of the Indian Contract Act 1872 lay

down the provision relating to the termination of Agency.

Section 201, Indian Contract Act 1872 provides for termination of an

agency - 

Sec 201: Termination of an Agency- 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.

According to Section 201 of the Indian Contract Act, 1872, Termination of

agency takes place in the following circumstances: –

1. By revocation of agent’s authority by the principal.

2. By renunciation of the business of agency by the agent;

3. By the completion of the business of agency;

4. By the death or insanity of either principal or agent;

5. By insolvency of the principal.

Rules of Revocation of Authority:

Revocation may be either express or implied (Sec 207)

207. Revocation and renunciation may be expressed or implied. —

Revocation or renunciation may be expressed or may be implied in the

conduct of that principal or agent respectively.

In the case of R.D. Saxena v. Balaram Prasad Sharma, the Apex Court said

that the right of the litigant was to be read as the corresponding counterpart

of the professional duty of the advocate. Therefore, the refusal to return the

files to the client when he demanded the same, amounted to misconduct

under Section 35 of the Advocates Act, 1961. Reiterating those observations

in N.I.A. Co. Ltd. v. A.K. Saxena, the Apex Court ruled that the right of the

client to receive back the papers would hold good for every case.

(Vakalatnama) is a written document submitted before a court by a

lawyer/solicitor/advocate/counsel declaring that his clients have

authorized him to represent them in a legal dispute. 

Illustration
A empowers B to let A’s house. Afterwards A lets it himself. This is an

implied revocation of B’s authority.

In the case of R.D. Saxena v Balaram Prasad Sharma,1 the Apex Court said

that the right of the litigant was to be read as the corresponding counterpart

of the professional duty of the advocate. Therefore, the refusal to return the

files to the client when he demanded the same, amounted to misconduct

under Sec 35 of the Advocates Act, 1961.

(2) No revocation of agency when agent has interest in the subject-matter

(Sec 202)

Termination of agency, where agent has an interest in subject-matter. —

Where the agent has himself an interest in the property which forms the

subject-matter of the agency, the agency cannot, in the absence of an

express contract, be terminated to the prejudice of such interest.

Illustrations

(a) A gives authority to B to sell A’s land, and to pay himself, out of the

proceeds, the debts due to him from A. A cannot revoke this authority, nor

can it be terminated by his insanity or death."

1
AIR 2000 S.C. 2912.
 (b) A consigns 1,000 bales of cotton to B, who has made advances to him

on such cotton, and desires B to sell the cotton, and to repay himself out of

the price the amount of his own advances. A cannot revoke this authority,

nor is it terminated by his insanity or death."

In the case of Birat Chandra Dagara v. Taurian Exim Pvt Ltd2 there was an

intention to transfer leasehold area in favour of power of attorney holder.

Interest was created in favour of power of attorney holder in respect of such

property. The Orissa High Court held that Section 202 was attracted and

such agency could not be terminated, in the absence of any express contract,

to the prejudice of such interest.

It was held by the court that Section 202 of the Contract Act provides that

when an agent has himself an interest in the property which forms subject

matter of the agency, the agency cannot, in absence of an express contract,

be terminated to the prejudice of such interest. Learned counsel appearing

for the respondents also cited a decision of the Apex Court in the case of

Seth Loon Karan Sethia v. Ivan E. John,3 to support the contention that the

respondents having an interest in the leasehold area under the Power of

Attorney the same cannot be revoked causing prejudice to the respondents.

(3) Revocation possible before the authority has been exercised (Sec 203)
2
AIR 2005 Ori. 147.
3
AIR 1969 SC 73
When principal may revoke agent’s authority—The principal may, save as is

otherwise provided by the last preceding section, revoke the authority given

to his agent at any time before the authority has been exercised so as to bind

the principal.

Revocation when authority has been partly exercised (Sec 204)

Revocation where authority has been partly exercised. —The principal

cannot revoke the authority given to his agent after the authority has been

partly exercised, so far as regards such acts and obligations as arise from

acts already done in the agency.

Illustrations

(a) A authorizes B to buy 1,000 bales of cotton on account of A and to pay

for it out of A’s moneys remaining in B’s hands. B buys 1,000 bales of

cotton in his own name, so as to make himself personally liable for the price.

A cannot revoke B’s authority so far as regards payment for the cotton."

(b) A authorizes B to buy 1,000 bales of cotton on account of A, and to pay

for it out of A’s money remaining in B’s hands. B buys 1,000 bales of cotton

in A’s name, and so as not to render himself personally liable for the price.

A can revoke B’s authority to pay for the cotton."

Principal to compensate, if there is premature revocation without

justification (Sec 205)

Compensation for revocation by principal, or renunciation by agent. —

Where there is an express or implied contract that the agency should be

continued for any period of time, the principal must make compensation to

the agent, or the agent to the principal, as the case may be, for any previous

revocation or renunciation of the agency without sufficient cause.

Principal should give reasonable notice of revocation (Sec 206)

Notice of revocation or renunciation. —Reasonable notice must be given of such

revocation or renunciation, otherwise the damage thereby resulting to the principal or

the agent, as the case may be, must be made good to the one by the other.

Agent’s duty on termination of agency by principal’s death or insanity (Sec 209)

Agent’s duty on termination of agency by principal’s death or insanity. — When an

agency is terminated by the principal dying or becoming of unsound mind, the agent is

bound to take, on behalf of the representatives of his late principal, all reasonable steps

for the protection and preservation of the interests entrusted to him.

Time from which the termination of agent’s authority becomes effective (Sec 208)
When termination of agent’s authority takes effect as to agent, and as to third

persons. —The termination of the authority of an agent does not, so far as regards the

agent, take effect before it becomes known to him, or, so far as regards third persons,

before it becomes known to them.

Illustrations

(a) A directs B to sell goods for him, and agrees to give B five per cent. commission on

the price fetched by the goods. A afterwards by letter, revokes B’s authority. B after the

letter is sent, but before he receives it, sells the goods for 100 rupees. The sale is

binding on A, and B is entitled to five rupees as his commission."

(b) A, at Madras, by letter directs B to sell for him some cotton lying in a warehouse in

Bombay, and afterwards, by letter revokes his authority to sell, and directs B to send the

cotton to Madras. B after receiving the second letter, enters into a contract with C, who

knows of the first letter, but not of the second for the sale to him of the cotton. C pays B

the money, with which B absconds. C’s payment is good as against A."

(c) A directs B, his agent, to pay certain money to C. A dies, and D takes out probate to

his will. B, after A’s death, but before hearing of it, pays the money to C. The payment

is good as against D, the executor."

In the case of Ram Asri v. Rakesh Chand,4 it was held by the Court that the

As regards the liability of the principal on the agreement of 16th October, 1964, there is

no manner of doubt that the contract of agency terminated w. e. f. 30th September,

1964, but we are of the view that such termination would not affect the buyer. So far as

4
AIR 2008 P & H. 194.
third parties are concerned, the law is that the termination of a contract of agency takes

effect only from the time the third party obtains knowledge of it. This is clear from

Section 208 of the Contract Act. The principle is also now well settled that a third party

is not affected unless he has knowledge of such termination”

The Madras High court reiterated and relied upon the decision in Trueman v Loder,5

where it was observed:

“The policy of the law, apparently, in the interests of Trade and commerce, is that the

agent’s action should bind the principal, even though the principal might have

cancelled the agent’s authority unless the third persons with whom the agent’s enters

into contracts knew of the termination of the agency”.

Agency may be terminated two ways (Summary)

1) By the Act of the Parties -  

2) By Operation of Law - 

1) By the act of the parties - 

i) By agreement - The Contract of Agency can be terminated at any time by mutual

agreement between the principal and agent

ii) By revocation of the principal - The Principal revoke agency at any time by giving

notice to the agent

iii) By Renunciation of an agent - Renunciation which means withdrawing from

responsibility as Agent.  Like Principal, Agent can also renounce the agency. 
5
(1840) 11 Ad & EI 589.
According to Section 206 of the Indian Contract Act 1872, the agent must give to his

Principal reasonable notice of renunciation. Otherwise, he will be liable to make good

for the damage caused to the principal for want of such notice.

2) By operation of law - 

Agency can be terminated by operation of law

i) By the completion of agency - Agency can come to an end after the completion of

work for which the agency is created. 

ii) By expiry of the time - Agency can also be terminated by the expiry of time. if the

agency is created for the specific period, it is terminated after the expiry of the time.

iii) Death or insanity of principal or agent - Section 209 of the Indian Contract Act

1872 imposes an agent, duty to terminate the contract of agency on the death of the

principal. In other words, Agency comes to an end on the death or insanity of the

principal or agent.

iv) Insolvency of principal - According to Section 201 of the Indian Contract Act

1872, an insolvent or bankrupt is a person who is unable to run the business due to

Excess of liabilities over assets. In this way, if the principal becomes an insolvent

agency can be terminated.

v) Destruction of the subject matter - If this subject matter of the agency is destroyed

agency comes to an end.

For example - Any agency is created for sale of an Airplane if the Airplane caught fire
before the sale the agency comes to an end. In this contract Airplane is the subject

matter. 

vi) Principal becoming an alien enemy - If the Principal becomes an alien enemy the

contract of agency comes to an end.

vii) Dissolution of company or firm - A Firm or company may be regarded as a

Principal in the contract of Agency. If the company or firm is dissolved the agency

comes to an end.