Introduction
A contract of agency creates a fiduciary relationship where one person, the agent, is authorised to act on behalf of another, the principal, to create legal relations with a third party. This relationship is central to the operation of modern commerce. However, like any legal relationship, it is not necessarily permanent. This essay will explain the circumstances under which a contract of agency will be terminated under the law of England and Wales. It will be argued that the law provides for termination both through the deliberate acts of the parties involved and automatically by the operation of law in response to specific events. The rules generally provide a clear framework, although the concept of an 'irrevocable' agency presents an important exception to the principal's general right to withdraw authority.
Termination by Act of the Parties
The most common way for an agency relationship to end is through the actions of the principal and agent themselves. This can occur either through mutual consent or by one party unilaterally ending the arrangement.
Mutual Agreement
The simplest method of termination is by mutual agreement between the principal and agent. As the relationship was created by agreement, it can also be dissolved by agreement (Munday, 2021). This can happen at any time during the agency relationship, regardless of what the original contract might have stated about its duration. For example, if an agency was established for a fixed term of two years, the parties are free to agree to end it after just one year. This reflects the basic contractual principle of freedom of contract, allowing parties to vary or discharge their obligations by subsequent agreement.
Performance or Expiry of Time
An agency may be created for a specific purpose or a fixed period. Once the agent has completed the task for which they were appointed, the agency relationship will automatically terminate. For instance, if an agent is hired solely to sell a particular house, the agency ends once the sale is complete. Similarly, if the agency agreement specifies a duration, such as a one-year contract, the authority will automatically expire at the end of that period unless it is renewed.
Unilateral Revocation or Renunciation
A more complex situation arises when one party wishes to terminate the agency without the other's consent. The principal can unilaterally terminate by revoking the agent's authority, while the agent can terminate by renouncing their position. Generally, a principal has the power to revoke the agent's authority at any time, even if the agency was agreed to be for a fixed term. However, the power to revoke must be distinguished from the right to revoke (Dowrick, 1957).
If the agency agreement is a binding contract (i.e., supported by consideration) and contains a fixed term or a notice period, terminating it prematurely without cause will constitute a breach of contract. For example, if a principal agrees to employ an agent for five years but dismisses them after two, the principal has the power to do so and the agent's authority is effectively terminated. However, the agent may sue the principal for damages for breach of contract, such as the loss of commission they would have earned for the remaining three years. The case of Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556 confirmed that even where a contract stated an agent would be retained for a certain period, it did not prevent the principal from terminating the relationship, although this might give rise to a claim for damages.
Termination by Operation of Law
Certain events are considered so fundamental that they automatically terminate an agency relationship by operation of law, regardless of the parties' intentions. This ensures that the agency does not continue in circumstances where it would be impractical or unjust.
Death or Dissolution
The death of either the principal or the agent will automatically terminate the agency relationship. This rule was established in cases like Campanari v Woodburn (1854) 15 CB 400. The rationale is that agency is a personal relationship; the agent is appointed to act for a specific principal, and the principal has placed their trust in a specific agent. If one of the parties ceases to exist, the basis of the relationship disappears. Similarly, if the principal or agent is a company, its dissolution will have the same effect.
Mental Incapacity
The subsequent mental incapacity of the principal also terminates the agent’s authority. The leading case is Yonge v Toynbee [1910] 1 KB 215, where a solicitor continued to conduct litigation on behalf of a client who, unknown to the solicitor, had been certified as mentally unsound. The court held that the solicitor's authority was terminated by the client’s incapacity. The solicitor was therefore held personally liable to the other party for breach of warranty of authority, as he had implicitly warranted that he had authority which, in law, he no longer possessed.
However, the law in this area has been modified by statute. The Mental Capacity Act 2005 provides a mechanism for creating a Lasting Power of Attorney (LPA). An LPA allows an individual (the donor) to appoint an attorney to manage their affairs, and it is specifically designed to continue to be effective even after the donor has lost mental capacity. This provides a crucial exception to the common law rule, allowing for continuity in the management of a person's affairs.
Bankruptcy
The bankruptcy of the principal will generally terminate the agent's authority, especially concerning any actions that would involve dealing with the principal's property. This is because on bankruptcy, the principal's property vests in the trustee in bankruptcy, and the principal no longer has the power to dispose of it. The agent's authority cannot exceed the principal's own power (Sealy and Hooley, 2020). The bankruptcy of the agent will also terminate the agency if it renders the agent unfit to perform their duties; for example, an insolvent person may be deemed unsuitable to handle a principal’s finances.
The Exception: Irrevocable Agency
While the general rule is that a principal can revoke an agent’s authority, there is a significant exception where the agency is deemed irrevocable. This occurs where the agent’s authority is given to secure a pre-existing interest of the agent. This is often described as an 'authority coupled with an interest'.
For an agency to be irrevocable, the agent must have an interest in the subject matter of the agency that exists independently of their remuneration as an agent. The authority must be given for the purpose of protecting or securing that interest. The classic case is Gaussen v Morton (1830) 10 B & C 731, where a principal who was indebted to his agent gave him a power of attorney to sell certain lands and use the proceeds to discharge the debt. The court held that the authority was irrevocable because it was intended to provide a security for the debt owed to the agent.
The Powers of Attorney Act 1971 gives statutory force to this principle. Section 4 of the Act provides that if a power of attorney is expressed to be irrevocable and is given to secure a proprietary interest of the donee (the agent) or the performance of an obligation owed to the donee, then the power cannot be revoked by the donor without the donee's consent, nor is it terminated by the donor’s death, incapacity or bankruptcy. This creates a powerful tool for commercial transactions where security is required.
Conclusion
In summary, a contract of agency can be terminated in several distinct ways. The parties themselves can bring it to an end by mutual agreement, by the agent completing the specified task, or by one party unilaterally revoking or renouncing the authority. In the latter case, while the terminating party has the power to end the relationship, they may be liable for breach of contract if they do not have the right to do so. Furthermore, the law automatically terminates an agency upon the occurrence of certain events, such as the death, mental incapacity, or bankruptcy of the principal, which fundamentally alters the basis of the relationship. The primary exception to these rules is the concept of irrevocable agency, where the authority is granted to secure an interest of the agent and cannot be unilaterally withdrawn by the principal. These rules create a framework that balances the principal’s need to control their own affairs with the agent’s contractual rights and the need for legal certainty in commercial dealings.
References
- Dowrick, F.E. (1957) ‘The Relationship of Principal and Agent’, The Modern Law Review, 17(1), pp. 24–42.
- Munday, R.J.C. (2021) Agency: Law and Principles. 4th edn. Oxford: Oxford University Press.
- Sealy, L.S. and Hooley, R.J.A. (2020) Commercial Law: Text, Cases, and Materials. 6th edn. Oxford: Oxford University Press.
Case Law
- Campanari v Woodburn (1854) 15 CB 400
- Gaussen v Morton (1830) 10 B & C 731
- Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556
- Yonge v Toynbee [1910] 1 KB 215
Legislation
- Mental Capacity Act 2005
- Powers of Attorney Act 1971
