This article is written by Parul Kannauje, a 4th-year B.A.LL.B. student at Gitam School of Law, Visakhapatnam, during her internship at LeDroit India.
Scope of the Article
In this article, I will examine Sections 201-210, that is, the termination of agency under the Indian Contract Act, 1872, which specifically deal with the topics of revocation, renunciation, death, and agency linked with interest. This article will also govern the effects of the termination upon the agent and the third parties; it will discuss the frameworks related to the termination, revocation, compensation, and reasonable notice. Furthermore, it will also discuss about the duties which has been arising out after the death or insanity of the principal, and the termination of the sub-agent’s authority. Moreover, this article will also be dealing with the analysis of the judicial developments and the judgments given by the Supreme Court and the High Courts.
Abstract
Under the Indian Contract Act of 1872, agency is one of the most significant and important concepts for maintaining the relationship between the principal, agent, and the third party. The relationship between the principal, agent, and third party is given from Section 201 to 210 of the Act, which discuss about the revocation, renunciation, completion of business, death, incapacity, and insolvency. The framework is provided to maintain and govern the relationship and balance between the principal, agent, and third parties.
Under the concept of agency, there is also an exception where the agent can possess the interests and rights of the agency. The judicial decisions given by the Supreme Court and the High Courts have also created principles that govern the effect of termination on third parties. The article will critically analyse the concept of agency and the sections from 201 to 210, and it will also examine judicial interpretation of the provisions and various illustrations. The article will also examine and evaluate whether the current legal framework is adequate for protecting the rights and interests of the principal, agent, and the third party.
Keywords: Agency, revocation, renunciation, termination of agency, death or insanity, Indian Contract Act, 1872.
Introduction
The concept of agency is considered one of the most important concepts under the Indian Contract Act, 1872. It consists of the relationship between the principal, agent, and the third party; the principal can appoint an agent to perform the act on his behalf and can create a legal relationship with the third party. The agent has to create the relationship with the third party to perform the business transactions that have been assigned to him by his principal. The principal is delegating his authority to the agent when he is not personally performing the dealings or transactions.
The authority which has been delegated to the agent by the principal is not permanent. The withdrawal of the authority by the principal from the agent completely depends upon the circumstances. The principal may withdraw the authority because the agent has completed the work for which he was assigned, or it can be withdrawn because of death, incapacity, or insolvency of the person. The relationship between the principal, agent, and the third party is governed by Sections 201-210 of the Indian Contract Act, 1872.
The framework provided under the Indian Contract Act is to protect and safeguard the rights of the third party and what can be the effect upon the relationship between them after termination of an agency. The framework is provided to restrict the agent from acting independently upon the subject matter. The Act has been made to balance the freedom of the principal to terminate the authority of an agent with protecting the rights of the third party. If the third party has entered into an agreement with an agent without knowing that the authority of the agent has been terminated, then the Act can protect the rights of the third party.
Therefore, sections 201-210 under the Indian Contract Act, 1872 have been made to balance the relationship between the principal, the agent, and the third party. The section deals with revocation, the effect of termination, death, and the position of the sub-agents.
The Termination of Agency Under Section 201
Section 201 of the Indian Contract Act, 1872 provides the general rule of the termination of agency. The provision talks about the circumstances under which the principal can terminate the agency. The principal can revoke the authority of the agent when the agent has renounced the business of the agency; it can be terminated when the business is completed for which the principal has created the agency, the agency can also be terminated because of the death or insanity of the principal or the agent, or due to insolvency.
The modes of termination of the agency are provided under the Indian Contract Act. The very first mode of termination is revocation by the principal. Normally, the agency has been created because the principal has delegated their authority to the agent for performing certain business transactions. The principal has the power to withdraw the authority delegated to the agent; the power of withdrawing the authority from the agent is given to the principal so that he can restrict and control the act of the agent, which has been provided under the Act.
The second mode under the framework is renunciation. Under this mode, the agent has the right to quit or stop continuing for the principal. Under this provision, the principal cannot force the agent to do the work of agency. If the agent is renouncing the relationship at a premature stage or leaving the principal in a critical situation, then the principal has to pay compensation for the losses that have been suffered by the principal.
The third mode of termination is the most important mode for the termination of agency. The third mode is known as the completion of business. Under this mode, the agency will automatically be terminated when the business has been completed, or the purpose of the agency has been achieved. After the completion of the business or the specific transaction, the agent cannot continue its authority.
The last mode of termination of an agency is death or insanity. The agency can be terminated when the principal or the agent is suffering from insanity or the death of either of them. This mode of termination has an exception under Section 202, where the agent can possess the interest depending upon the subject matter.
Therefore, Section 201 of the Indian Contract Act provides the general rules of termination of agency, whereas Sections 202-210 talk about the impact and consequences of the termination of agency.
Source: Termination of Agency- Section 201 of the Indian Contract Act
Agency Coupled with Interest: The Exception under Section 202
Section 202 of the Indian Contract Act talks about the exceptions to the revocability of agency. If an agent forms a personal interest in the subject matter of the property without the permission given by the principal, then the agency can be terminated. An agency cannot be continued without an express contract, because the interest and subject matter of the agent vary from the principal; then the principal can terminate the agency.
The rule behind this framework is very clear. An agent is getting its authority delegated from the principal, and if the agent possesses the authority delegated by the principal, then it can be revoked. But if the interest and independent subject matter of the agent is providing the benefit, then the agency cannot be revoked, because if the principal revokes the agency, then the rights of the agent will be affected. Therefore, Section 202 has restricted the power of the principal to terminate or revoke the agency.
The Supreme Court in the case of P. Seshareddy (D) Rep. by LRs v. State of Karnataka (2022). The court held that, according to Section 201 of the Act, the agency will get terminated automatically if the principal dies, but this cannot be considered alone. According to Section 202, the agency cannot be terminated based upon the prejudice of interest if, after the death of the principal, the agent has an interest in the subject matter; then the agency cannot be terminated.
Therefore, Section 202 protects the existing interest and the subject matter of the agent, and it also protects them from the revocation and termination of the agency.
Revocation By the Principal: Section 203 and 204
Section 203 of the Indian Contract Act, 1872 provides a principal with the power to revoke the authority which has been transferred to the agent before exercising its authority, subject to the provision given under Section 202 of the Act.
The framework provides the power to the principal to withdraw the authority from the agent before he exercises the authority. The principal can withdraw or revoke the authority from the agent when the business or the work has not been started; in these circumstances, the principal has the capability to withdraw the authority from the agent.
On the other hand, there is another section which has restricted the power of the principal to withdraw or revoke the agency. Under Section 204 of the Indian Contract Act, if the principal has delegated the authority to the agent and it has been partially exercised by the agent, then the principal cannot withdraw or revoke the agency, because the obligation has already arisen from exercising the delegated authority.
Sections 203 and 204 of the Act are very similar; there is a minor difference between both sections. Section 203 provides the power to the principal to revoke or withdraw the authority transferred to the agent. Whereas Section 204 provides the framework to protect the rights of the agent from the sudden revocation of the agency by the principal.
Source 1: When principal may revoke agent’s authority— Section 203 of the Indian Contract Act
Source 2: Revocation where authority has been partly exercised. — Section 204 of the Indian Contract Act
Compensation for Premature Revocation or Renunciation: Section 205
Section 205 of the Indian Contract Act discusses the compensation to be paid if the agency is terminated before the completion of the business transaction or before the time period fixed for completing the business transaction.
The framework is important to protect the rights of all the parties. The parties cannot simply terminate the agency without facing any financial consequences. The consequences have to be faced by the parties if the agency is terminated prematurely or without completing the business transaction or the assigned work, because if, in between, the agency is terminated, then it is very difficult for the parties to bear the loss incurred.
The termination of the agency should depend upon the circumstances which are being faced by the parties. The parties have to check whether the termination is being done because of a sufficient cause that existed.
In the case of J.K. Sayani v. Bright Brothers Pvt. Ltd., the Madras High Court has stated that the consequences of the termination of agency cannot be examined by knowing whether the principal or the agent has possessed the power to terminate the agency. The manner in which the authority has been exercised can also be considered relevant.
Therefore, section 205 of the Act balances and protects the rights and interests of the parties. The provision states that the termination of the agency at a premature stage should provide compensation to the affected party.
Reasonable Notice Under Section 206
Section 206 of the Indian Contract Act, 1872 discusses providing reasonable notice before the termination, revocation, or renunciation of the agency, and if the reasonable notice for the termination has not been provided, then the party has to pay compensation to the affected party.
Under Section 206, the concept of “reasonable notice” is necessary to provide a safeguard to the parties who are affected and incur loss because of the termination of the agency. The provision is intended to maintain the relationship between the parties. The reasonable notice should include the reason and the circumstances due to which the agency is being terminated, and what are the consequences can be faced if it is an immediate termination.
For Example, Ramesh appoints Suresh to sell his car and then revokes the authority without telling Suresh. Suresh finds a buyer but can’t complete the sale.
Section 206 of the Act shall also be read with Section 205, because Section 205 of the Act deals with the premature termination of the agency agreed between the principal and the agent. While Section 206 can address the problem that arises out of the termination, and the party has to pay compensation to the affected party.
In the case of Siba Prasad Singh v. District Sub-Registrar, the Orissa High Court has stated that the notice should be sent after making proper communication with the other party and sufficient cause should be provided for the termination of agency.
Thus, Section 206 of the Act prevents unnecessary disputes between the parties at the time of terminating the agency. The party can send reasonable notice to the other party with sufficient cause for terminating the agency.
Source: Notice of revocation or renunciation. — Section 206 of the Indian Contract Act
Express and Implied Revocation Under Section 207
Section 207 of the Act states that revocation and renunciation can be made expressly and impliedly. According to the Act, express revocation is done when the principal communicates to his agent, in an appropriate or formal manner, that he is withdrawing the agent’s authority; then the revocation will be considered an express revocation. Whereas implied revocation may arise after observing the act or the work done by the agent. If the agent is not performing his work in an appropriate manner, then the principal can impliedly revoke the authority.
In the case of Thankamma George v. Lilly Thomas, the Supreme Court held that the implied form of revocation can arise from inconsistent conduct or discontinuity of the agency, which may withdraw the authority of the agent rather than merely the non-communication of the principal before revocation of the agency. The court has further discussed the termination of agency under sections 207 and 208 and stated that the termination depends upon whether the agent or the third party has knowledge of termination.
The section is very important because it is necessary for the principal to express his intention before the termination of agency; the principal has to expressly or impliedly terminate the agency, and it should also be communicated to the agent.
Source: Revocation and renunciation may be expressed or implied. — Section 207 of the Indian Contract Act
When does the Termination Become Effective? Section 208
Section 208 of the Indian Contract Act deals with when the termination of an agency becomes effective against the agent and the third party.
The termination of an agency will not take effect until and unless it has been known to the agent. Similarly, like the agent, the third party also has the right to know about the termination of agency, so before terminating the agency, both the agent and the third party should have proper knowledge of the termination of agency. Under this Section, the third party has the right to know about the authority that has been withdrawn from the agent.
The third parties are mostly dealing with the agents which has been appointed by the principal for a particular work; if the third party does not have knowledge of the termination, then it would be unfair, and it will affect their rights.
Therefore, Section 208 provides and serves as an important provision for protecting the rights and interests of the third parties.
Death or Insanity of the Principal: Section 209
Section 209 of the Act deals with what happens to the agency if the principal has died or become insane. Section 209 states that after the death or insanity of the principal, the agency will automatically be terminated and what can be the legal consequences that may arise after the death or insanity of the principal.
Under Section 209, after the death or insanity of the principal, the agent should take appropriate decisions to protect his interests and the third party as well. The agent can also ask the principal’s legal heirs or representatives to protect and preserve the rights of the agent and the third party.
The section gives the agent the power to take responsibility after the death or insanity of the principal before completely terminating the agency. Therefore, this framework has been provided to protect and preserve the subject matter and interest of the third party. Section 209 should be read with Section 202 if the agent has an independent interest and subject matter of the agency.
The Supreme Court of India, in the case of P. Seshareddy v. State of Karnataka, stated that if you are reading Section 209 with Section 202, then Section 201 will be isolated.
Termination of Sub-Agent’s Authority: Section 210
Section 210 of the Indian Contract Act deals with that till what extent to which the termination of agency will affect the sub-agents. A sub-agent is a person who has been delegated authority by the agent, and the agent is the person who has delegated their authority by the principal. If the delegated authority of the agent is terminated by the principal, then the authority transferred to the sub-agent will also be terminated.
For Example, A real estate agent hires sub-agents to find buyers. If the main agent is fired by the property owner, the sub-agents can’t continue working for that property.
Therefore, this provision controls the delegation of authority from the agent to sub-agents. An agent cannot transfer the whole authority to a sub-agent which he has derived from the principal. Thus, Section 210 completes the chain of events that is happening between the principal, agent, sub-agents, and the third party.
Source: Termination of sub-agent’s authority. — Section 210 of the Indian Contract Act
Landmark and Recent Judicial Developments
- P. Seshareddy v. State of Karnataka– In this case, the Supreme Court held that after the death of the principal, the agency will automatically be terminated, but the interest and the subject matter of the agent shall be protected under Section 202.
- Thankamma George v. Lily Thomas– The Supreme Court in this case stated that the revocation of the agency can be made impliedly depending upon the conduct, and it must be sufficient enough to communicate to the agent related to the withdrawal of authority. The agent and the third party should have knowledge regarding the termination of the agency.
- M.S. Ananthamurthy v. J. Manjula– In this case, the Supreme Court held that the irrevocable power of attorney which has been given to an agent cannot establish an agency with an interest. The existence of the protected interest remains decisive. The court has interpreted Section 202 of the Act.
- Saroj v. Surender Singh– In this case, the Delhi Court decided the relevance of Sections 201 and 202. The case has provided the importance of whether the agent can possess an interest in the subject matter.
These important decisions have made clear that Sections 201 to 210 have continued to be relevant in modern disputes.
Conclusion
To conclude, the Indian Contract Act,1872 provides the systematic framework for governing the termination of agency through revocation, renunciation, completion of business, death, and insanity.
The framework has been provided to maintain the balance between the principal, agent, and the third party. The provision provides the power to the principal to withdraw the authority from the agent, and the termination can be made expressly or impliedly, and it should be communicated to the agent and third party in an appropriate manner.
Therefore, the decisions given by the High Courts and the Supreme Court have provided the relevance of these provisions in the modern and contemporary world.
