TERMINATION OF AGENCY AS PER PROVISION OF THE INDIAN CONTRACT ACT 1872

INTRODUCTION

Agency’ is one of the different kinds of contract where contractual rights can be provided and contractual obligations can be imposed on a stranger. Although the Indian Contract Act does not contain a precise definition of the word ‘agency’ under section 182[1] of the Act, the agency is implied. According to this provision, an “agency” can be described as a contract under which an agent is hired by a principal to act on the principal’s behalf or to represent the principal[2]. Alternatively stated, “the relation of agency develops when one person has the power to act on behalf of another”. The agency requires “representation,” which is a crucial component. Any adult who is major and is of sound mind may work with an agent. However, “even a minor can be appointed as an agent”, in those cases, the principal will be held accountable for his acts to third parties but not the other way around.[3] To establish an agency, all the conditions of a contract must be met, except for the consideration.

One particular type of general contract is an agency contract. Except in the case of irrevocable agencies, the agency may therefore be dissolved in the same manner that a contract is discharged. Only the actions of the parties or by the operation of law can terminate the agency and relationship between principal and agent. Any damages that arise from the termination of such contract are compensated by the parties responsible. Where the contract is set for some time, the principal shall make compensation to the agent or the agent shall make compensation to the principal, respectively for any prior revocation without any reasonable cause.[4] In addition to the agency being terminated, the principal may also seek compensation for losses or damages caused by the agent’s actions or inaction. The agent will only receive remuneration if he abides by the rules outlined in the agreement, and it is important to remember that the agent must consent to this condition for compensation to be granted. There is no upper limit to the amount of compensation that may be added to the agent under Indian law.

HOW CAN AN AGENCY CONTRACT BE TERMINATED BY THE ACTS OF THE PARTIES INVOLVED?

Any contract can be affected by the acts of the parties involved hence it is the responsibility of one party to look out for the other party so that they do not suffer because of one’s actions. There are various ways as per the Indian Contract Act can terminate a contract agency due to the actions of the parties. Since the parties are involved, mutually deciding the termination is the most common way out of any contract. “An agency may be terminated by mutual consent of the parties i.e., the principal and the agent”.[5] The relationship between the parties will end if both sides agree to terminate their agency contract. However, the mutually agreed-upon termination of the agency must not be at the expense of the interest of the third party involved. Apart from mutually ending the contract if one of the parties through any breach or the agent leaving the agency can also terminate the agency. Both the principal and the agent have the potential to be responsible for the breach. However, the party who experiences any damage as a result of such a breach shall receive compensation from the party that is responsible for such a breach. Consecutively agency can also be dissolved by the agent by renunciation. But if an agency is established for a set period or the completion of a specific goal, the agent who renounces it is responsible for making up any losses suffered by the principal as a result of that renunciation. The agent, however, has the right to resign from the position at any time by submitting “fair notice” if the agency is not to last for a set period. It could be explicitly made or implied. Renunciation might happen simply by the agency refusing to conduct business.[6] As mentioned in section 201 of the Indian Contract Act[7] the principal can also revoke the agency by taking away the authority given to the agent by him. Therefore, the principal is no longer forced to retain the services of an agent who has become unfaithful. Despite a fixed period of agency, this type of revocation can still apply. To provide the agent enough time to protect the client’s interests, notice must be given. As held in J.K. Sayani v Bright Brothers (P) Ltd[8], if an agency is established for a set amount of time and is terminated early without good reason, compensation must be paid.

TERMINATION OF AGENCY BY OPERATION OF LAW

Law has beforehand only set aside some common situations that can end an agency contract. These conditions were taken into consideration in case something unpredictable that is not in the hands of either of the parties happens then in those cases how will the contract be dealt with? For example, one of the parties after some accident turns lunatic. These conditions also include the already decided terms for termination of the contract as the parties decided example when the period set in the contract ends. The most common way to terminate any contract is to fulfill the contractual liability of the contract. Upon completion of business, the agency is terminated automatically and per the law. No notice of termination is required from either party. Even when the task is finished, it might be terminated by any other party without the involvement of the agent. As Per Section 201 of the Indian Contract Act[9], an agency ends when the business is finished. We have seen a difference in opinion of the Allahabad and the Calcutta High Court from the Madras High Court. According to the Madras High Court, the agency of sales of goods terminates when the sales of the goods are completed and will not extend till the payment is done but the Allahabad High Court and Calcutta High Court say otherwise. According to them, the agency will terminate after the payment of the sales proceeds to the principal.[10]

Death of either of the parties or either of the parties turning insolvent can interfere with the purpose of the agency, hence it shall also be considered as a condition to terminate any agency contract. When one of the two dies, the termination occurs automatically. The agency ends when the principal dies since the agent cannot act on behalf of a non-existent individual. However, if an agency is attached to interest, it cannot disappear upon the passing of the principal.[11] It shall continue until the agent receives his rightful interest. If an agent enters into a contract with a third party without the knowledge of the death of the principal, the deal will be enforceable,[12] as per section 208 of the Indian Contract Act.[13] According to Section 209[14], when a principal dies, the agent is required to take all reasonable measures to safeguard the interest that has been entrusted to him by the deceased principal. “When the principal or the agent becomes insane, the agency is terminated. When the principal goes insane, the agency only ends once the agent becomes aware of the principal’s insanity”. Therefore, if the agent enters into a contract with a third party who is unaware of the primary’s insanity while acting on behalf of the principal, the contract is enforceable. Similarly, to this, an agency ends when an agent becomes insane. It stops as soon as the agent loses his or her mind.[15] The primary goal of the agency is to choose someone as an agent who may be qualified to carry out the principal’s instructions.

Further, an organization that was established for a specific period automatically dissolves after that period has passed. Therefore, an agent’s exercise of authority after a specific amount of time has passed loses its validity. In Lalljee v Dadabhai[16], it was noted that where an agent has been appointed for a defined duration, the agency ends when the term expires, whether or not the aim of the agency has been achieved. It is suggested that the time set should be appropriate.

As per section 56 of the Indian Contract Act[17], two more ways can also be considered for termination of any agency. One of them is the destruction of the agency’ subject matter. In the case that the agency’s subject matter is destroyed, the agency is terminated. A company could be established to handle certain topics, including real estate, products, etc. The agency contract becomes invalid under Section 56[18] when such subject matter is destroyed by any naturally occurring phenomena event since the agent would be unable to execute his authority. For instance, A hires B as his agent to sell an automobile, but the car is destroyed in a fire accident before the sale. According to Section 56[19], the agency agreement is invalidated, and revocation of the agent’s authority is done automatically. Secondly, if there is a change in the law that occurs after a contract is formed but before its performance, the performance of such contracts becomes illegal. Therefore, when a change in the law makes the exercise of the agent’s authority illegal, the agency agreement will expire. Regardless of whether the agent has been informed of the change, the agency ends.[20]

CONCLUSION AND SUGGESTION

The Agency Agreement serves as a link between the Principal and the Third Party. Through the use of his abilities, the agent helps the principal carry out duties effectively in front of third parties, serving as a bridge between the two to ensure smooth business operations.[21] The Contract Act fully covers the agency contract to set forth the rights and obligations of the parties to the agreement, but it nevertheless leaves it up to governmental agencies and the general public to distinguish between various types of agencies. As a result, each connection with the agency is unique, and its character and existence rely on how it is interpreted and applied. Moreover, this also complicates the process of distinguishing whether the termination is lawful or not and whether either party is liable for compensation. The Indian Contract Act of 1872 and any other laws about the relevant agency merely provide a general framework and set of rules; they do not provide a comprehensive list of requirements. The competence of the judiciary and the courts of law heavily influences the implications of the law. Hence well-written specifications and guidelines for different types of agencies, their requirements, and necessity are required to avoid any kind of ambiguity.

The Indian Contract Act 1872 requires the principal to be competent to contract, even though an agent is exempt from this requirement, and no consideration is required to form the contract of agency.[22] It can be as easy as an adult requesting a child to make grocery purchases for them at the store. Even though he lacks the legal capacity to enter into a contract and is not compensated for his or her services, the youngster in this situation acts as an agent for the adult. This can be an easy breach of contract by the youngster and yet he will not be considered liable. The requirement of the competency of an agent is very much suggested to be included in the Indian Contract Act.

Author(s) Name: Shanvi Singh (NMIMS, Navi Mumbai)

References:

[1] Indian Contract Act 1872, s 182

[2] Akansha Sharma, ‘AGENCY UNDER THE INDIAN CONTRACT ACT’ (LAW INSIDER, October 8, 2021) <https://www.lawinsider.in/columns/what-is-agency-under-the-indian-contract-act> accessed 24 July 2023

[3] Ibid

[4] R. Shanmuga Sundaram. ‘Termination Of Agency (Section 201 – 210 of Indian Contract Act, 1872)’ ( LAW COLUMN, June 15, 2021) <https://www.lawcolumn.in/termination-of-agency-section-201-210-of-indian-contract-act-1872/#google_vignette> accessed 24 July 2023

[5] Simran, ‘Termination of Agency under Contract Act’ (Academike, February 14, 2015) <https://www.lawctopus.com/academike/termination-of-agency-under-contract-act/> accessed 24 July 2023

[6] R. Shanmuga Sundaram, ‘Termination of Agency (Section 201 – 210 of Indian Contract Act, 1872)’ ( Law Column, June 15, 2021) <https://www.lawcolumn.in/termination-of-agency-section-201-210-of-indian-contract-act-1872/> accessed 24 July 2023

[7] Indian Contract Act 1872, s 201

[8] J.K. Sayani v Bright Brothers (P) Ltd (1979) Mad 162

[9] Indian Contract Act 1872, s 201

[10] Lal Ratnakar Singh, ‘The doctrine of privity of contract under the Indian Law’ (Shodhganga, December 31, 1992) <https://shodhganga.inflibnet.ac.in/bitstream/10603/132477/12/12_chapter%205.pdf > accessed 24 July, 2023

[11] Ibid

[12] R. Shanmuga Sundaram, ‘Termination of Agency (Section 201 – 210 of Indian Contract Act, 1872)’ (Law Column, June 15, 2021) <https://www.lawcolumn.in/termination-of-agency-section-201-210-of-indian-contract-act-1872/> accessed 24 July 2023

[13] Indian Contract Act 1872, s 208

[14] Indian Contract Act 1872, s 209

[15] Lal Ratnakar Singh (n 10)

[16] Lalljee v Dadabhai (1961) Cal 23

[17] Indian Contract Act 1872, s 56

[18] Ibid

[19] Ibid

[20] Simran (5)

[21] Mukesh Kumar, ‘Law of Agency’ (Tutorial Points) <https://www.tutorialspoint.com/law-of-agency#> accessed 24 July 2023

[22] Ibid

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