An Agent may not be held liable for entering into a contract on behalf of a Principal before knowing about revocation of authority, although his authority is revoked

1. 1.     Introduction:

The topic statement is about the termination of relationship between a Principal and an Agent. It is discussed under Law of Contract, 1872 by section 208 stating, “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.” [1]

According to this act, an Agent may not be held liable for entering into a contract on behalf of a Principal before knowing about revocation of authority, although his authority is revoked. Even if a third party related to the contract is unaware of the revocation, although the Agent is aware, the contract between the Principal and the third party is good.

Thus, the termination of a Principal and an Agent relationship is valid when the Agent acknowledges about the revocation of authority. Furthermore, the Principal is in safer position when the third party is informed regarding termination of the contract.

1. 2.     Key concepts:
2. a.      Agency

The relationship between a Principal and an Agent is called Agency. By section 182, “An `Agent’ is a person employed to do any act for another or to represent another in dealings with third persons.”[2] Principal is another person of previous definition who employs the Agent. Agency is formed by mutual consent through an express agreement. This consent is indifferent of formality and documentation except the case of Power of Attorney. Here, the Agent has the power of making a contract in the form of a deed on behalf of his Principal.

Agency is formed in three basic ways: (a) consent (express, implied, and retrospective / ratification); (b) operation of law; and (c) estoppel.

1. b.      Agent’s contracts

By section 226, “Contracts entered into through an Agent, and obligations arising from acts done by an Agent, may be enforced in the same manner and will have the same legal consequences, as if the contracts had been entered into and the acts done by the Principal in person.”[3]

This section implies with a legal maxim ‘Quit facit per alium facit per se’ meaning – “He who does through another does by himself.”

1. c.       Enforcement and consequences

An Agency is created with a view to appoint certain instructions and authorities to an Agent within the scope of his instruction to form contractual relationship with the Principal and a third party. If the Agent acts according to or within the scope of the instructions given by the Principal, then the Principal is responsible for every consequence. The Principal is free of this binding when the Agency relationship is formally dissolved which involves the acknowledgement of the Agent and third party.

Here, the Principal also have the authority over the Agent to bind by acts on his behalf. Without this power of the Principal an Agency does not exist.

 

1. 3.      Analysis:
2. a.      Termination of Agency

Termination of Agency is possible at any time. If trust is breached or is in question, then it is completely illogical to keep the relationship intact. Here, the Agency is dissolved by giving notice. In some cases, the court orders the Agency to come to an end.

The ways in which an Agency may come to an end are presented in section 201 to 210 under Law of Contract 1872.

Section 201. Termination of Agency –[4]

Under this section an Agency can be terminated in following ways:

i)        the Principal can revoke his authority, or

ii)      the Agent can renounce Agency business, or

iii)    completing the business of the Agency, or

iv)    Either the Principal or the Agent dies or becomes unsound mind person, or

v)      The Principal is adjudicated an insolvent by the court under any act.

Section 202. Termination of Agency, where Agent has an interest in subject-matter –[5]

If the Agency subject-matter is formed of a property where the Agent has an interest, then termination requires an express contract which does not involve the prejudice to his interest.

Section 203. When Principal may revoke Agent’s authority –[6]

The Principal has the power to revoke the Agent’s authority before the Agent exercises the authority given to him that binds the Principal.

Section 204. Revocation where authority has been partly exercised –[7]

The Principal does not have the power to revoke the authority of the Agent after he has exercised his authority partly.

Section 205. Compensation for revocation by Principal, or renunciation by Agent –[8]

In an Agency having an express or implied contract with a continuing period of time, revocation or renunciation of the Agency not including sufficient cause, the Principal must compensate the Agent, or the Agent does to the Principal.

Section 206. Notice of revocation or renunciation –[9]

Such revocation or renunciation must include sufficient cause to the party. Else, the damage received from the termination must be made good by revocation or renunciation party.

Section 207. Revocation and Renunciation may be expressed or implied –[10]

Express revocation or renunciation is valid as well as the implied one, where the conduct of either the Principal or the Agent implies termination of Agency.

Section 208. When termination of Agent’s authority takes effect as to Agent, and as to third persons –[11]

Revocation by the Principal does not take effect regarding the Agent until he knows about it. The same happens regarding the third party as well.

Section 209. Agent’s duty on termination of Agency by Principal’s death or insanity –[12]

Termination of Agency through death or insanity of the Principal binds the Agent to take necessary steps to protect and preserve the interest entrusted to him on behalf of the late Principal’s representatives.

Section 210. Termination of Sub-Agent’s authority –[13]

If an Agent’s authority is terminated, then his sub-Agent’s authority is considered terminated as well.

These sections indicate two basic ways of termination of Agency.

An Agency may be terminated by ac: of parties or by operation of law The different possible circumstances leading to the termination of Agency are enumerated below.-Sections 201-210.

1. b.      Termination by act of parties

The following acts of the parties of an Agency terminate Agency relationship.

(a) if the Agency is formed for a particular transaction or a particular time period, the Agency is automatically terminated when the transaction or the time period expires.

(b) Either party has the option to give a reasonable notice to the other party to terminate the Agency. When the Principal gives the notice the termination process is called revocation and in the Agent’s case it is called renunciation. If the Agency is terminated by revocation or renunciation without sufficient cause, then the harmed party from termination must be compensated by the other party.

Mutual agreement from both parties also terminates the Agency. But, in some cases, there are some other agencies which are irrevocable. These agencies are:

(i) ‘authority coupled with an interest’  is employed to the Agent and purpose of the Agency is to protect the Agent’s interest. Here, the Agent does not possess the power of withdrawing authority.

(ii) the Agent’s authority has taken effect by partial performance and incurrence of liability.

(iii) the Agency is declared irrevocable by statute. It happens when the Agent is a power of attorney for a limited period expressed to be irrevocable, or when it is formed under the Enduring Powers of Attorney Act 1985.

1. c.       Termination by operation of Law

If any of the following incidents occurs, an Agency is terminated by court orders (except for irrevocable agencies).

(a) death of Principal or Agent,

(b) insanity of Principal or Agent,

(c) bankruptcy of the Principal, as well as bankruptcy of the Agent when he becomes incapable to perform his duties, and

(d) frustration.

Proper termination:

When an Agency is terminated, it affects the Principal and the Agent first. It brings an end to the authority of the Agent regarding entering into contracts and performance on behalf of the Principal. But, a third party entering in a contract with the Agent without knowing about the termination will hold liable the Principal. So, the Principal also have to send notice to related third parties to avoid unlawful activities from the Agent. The notice should carry the actual and constructive information regarding dissolving of the Agency.

Still termination of Agency because of Insanity of Principal has produced two conflicting decisions and here the law stays obscure.

Case 1: Drew v Nunn 1879

A husband represented his wife to have authority to purchase goods on credit as his Agent when he was sane. When he became insane, his wife continued to act as his Agent and purchased goods from the same supplier on his behalf. When he recovered sanity, he refused to pay for the goods purchased by his wife on his account. He proposed that his insanity (although unknown to the supplier) had terminated his wife’s authority as Agent.

Held: Insanity terminated the Agency relationship between husband and wife. but the court esropped the husband from denying that his representation (that the wife was his Agent) was true. So, he had to pay for the goods.[14]

Case 2: Yonge v Toynbee 1910 .

A client instructed the solicitors to defend an action on behalf of him who later became insane, unknown to the solicitors.

Held: the solicitors breached the warranty of authority and they were liable to the plaintiff (the client was not bound by what they had done – yet in Nunns Case[15] he continued to be liable). [16]

Still, a formal power of attorney in tire prescribed form may continue in force even though the Principal becomes insane according to the Enduring Powers of Attorney Act 1985. But the law on informal Agency arrangements cannot be altered by this procedure.

1. 4.     Relevance:

An illustration from http://www.vakilno1.com regarding the Law of Contract, 1872 section 208, will be helpful regarding our analysis, which states that:

A directs his Agent B to sell goods on behalf of him, and consents to grant B five per cent commission on the price obtained from the sale of 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.[17]

Section 201 complies with A’s revocation. A can terminate the Agency by revocation. The Agent does not have an interest on A’s property as well. So, no problem arises here as well (section 202). A also revokes the authority of B before B exercises the authority given to him by A (Section 203). Still, the law says A is not responsible for B’s act.

But, Section 208 holds A liable for B’s action. Sending notice is not enough to terminate an Agency. The notice must be reached to the Agent. When the Agent receives the notice, the Agency is considered to be terminated. Here, B acted before he received the letter of revocation. So, his action is valid as A’s Agent. A also is liable to pay B the commission he promised.

Thus, the whole scenario is that the Principal terminates Agency relationship with the Agent which was unknown to the Agent. Then, the Agent acts on behalf of the Principal. This act is not invalid because the termination procedure completes when the Agent acknowledges about the termination. Before the Agent receives the revocation, he still has the authority to work on behalf of the Principal.

The situation becomes more difficult to handle for the Principal if the Agent partly uses the authority given to him. Here, the Principal cannot even revoke the Agency (Section 204). If an Agency is revoked then the Principal has to show sufficient cause (Section 206). When such act harms the Agent the Principal also has to compensate (Section 205).

1. 5.     Conclusion:

This study focuses on termination of the relationship between a Principal and an Agent. Although the relationship is a contractual one, its termination sometimes becomes complex. Especially, when revocation or renunciation is involved, both parties have to know that he Agency has been terminated. Only then the authority ends.

Bibliography:

1. 1.      Law of Contract and Specific Relief(2010) Dr. Avtar Singh,Eastern Book Company Luknow.
2. The Pocket Indian Evidence ACT, Containing Also the Contract ACT, the Specific Relief ACT, the Transfer of Property ACT, the Negotiable(2010) Generel Books LLC.
3. Law of contract(1912) William Theophilus Brantly, M. Curlander.
4. 4.      Law of contract(2007-2008) Adrian Chandler, Oxford University Press.
5. The Contract Act: (IX of 1872) (2009) Shaukat Mahmood, Nadeem Shaukat Qanoon.
6. 7.      The Indian Contract Act 1872 Series-05 Abhinav Misra.
7. The Indian Contract Act, 1872, Volume 1(1966) Asia Pub house.

       8.      Law of contract 4^th Edition Hugh Collins, Lexis Nexis Butterworths.

       9.      Law of contracts (The Indian Contract Act, 1872) (2009) Noshirvan Jhabvala, Jamnadas.

      10.  On Contract, the Indian Contract Act, 1872 (1990) D. C. Dutta. State Mutual Book & Periodical Service, Limited.