India: General Principles of Law Holding the Field ... in the Matters of Termination of Contract of Agency (Agreements)

Last Updated: 26 August 2004

By Shivaji Rao, Manager - Legal, Wockhardt Ltd.,

Prelude: Sec.201 of the Indian Contract Act denotes termination of agency that an 'agency is terminated by the principal revoking his authority, or by the agent renouncing the business of the agency....'

However, if a term/duration of the agency is fixed in the agreement, it is determined on the expiration of the term. The agency may be terminated before the expiry of the term in accordance with an express reservation in the contract or for a reasonable cause. The right to cancel an agency may also depend upon some stipulation in the contract. If the right to cancel an agency is reserved, in case an agent fails to do a specified amount of business within a specified period, the contract may be cancelled if that condition is violated. Under the contracts of such kind, cancellation may be rightfully made when it appears that there has been a failure to comply with the condition prescribed. Where there is a contract express or implied, that the agency should be continued for a period of time, the principal cannot terminate it by exercising his option of revocation before the expiry of the period "without sufficient cause".

Illustrative (relevant) termination clause in the agreement :

"This agreement shall come into force on 1st April, 2001 and shall subject to the provisions hereinafter contained, continue to be in force for a period of 5 years effective from 1st April, 2001. The agreement can be terminated by either side "on its expiry" by giving six months prior notice in writing to the other party."

Termination clause is not a non-obstante Clause :

The above clause of the agreement inter alia states that this agreement is subject to the other provisions embodied in the agreement, particularly Agents responsibilities, Settlement of Accounts, Sales procedure, Storage & Insurance and lift of all consignment from the packaging station of the principal and may include more as stipulated in the agreement.

The above 'illustrative' termination clause is a general clause and not a non-obstante clause and which has to be read with the other mandatory clauses embodied in the agreement.

Incase agent is acting contrary to the understanding & stops transaction of business on one pretext or the other: - apparently, now the agent is violating the mandatory duties and responsibilities assigned to him through the said contract of agency. In other words, the conduct and acts of the agent fully demonstrate that he is renouncing the business of agency as stipulated in Sec.201 of the Indian Contract Act.

In these peculiar facts and circumstances, a big question that would arise is - - whether the principal can terminate the agency sans notice as stipulated under (relevant) clause of the Agreement. If yes, under what circumstances should the right of revocation of agency be exercised.

The facts and circumstances of the case - as may be applicable, in case acts of the agent fully demonstrate that the agent implies renouncing the relationship and the agent is bent upon to cause loss to the principal by not lifting the consignments from the packaging stations of the principal. In this curve of things, it is not gainsaid that the principal should be given six months prior notice for revocation of agency as stipulated in the contract. If that is being resorted to, the principal will be put into irreparable loss, untold misery from all the fronts and counts i.e. economically, market goodwill, accumulation of stocks, reputation etc. Therefore, in view of the aforesaid extraordinary facts and situation, the principal will be justified in revocation of the agency dispensing the prior notice as stipulated in the contract.

Sec. 205 and 206 of the Contract Act:

However, Sec. 205 and 206 of the Contract Act denotes that where there is an express or implied contract that the agency should be continued for any period of time, the principal must may compensation to the agent, or the agent to the principal, as the case may be in case the termination is without reasonable cause. Sec.206 states that reasonable notice must be given of such revocation or renunciation. (Illustrative) it is reiterated that the principal has written a series of letters to the agent to provide such information as required by law and consequences therein of failing to resume business transactions .... . If one analyses, the series of the said letters of the principal and the conduct demonstrated by the agent thereon, which goes to say that it has been brought to the notice of the agent about the consequences of the non resume business transaction ...., inter alia it can be presumed that the reasonable notice has been given to the agent.

Claim for damages:

Apart from revocation of agency, the principal may also claim damages/losses sustained due to the acts/non-acts of the agent by referring the matter to arbitration as stipulated in the contract of agency. It also is well settled that the party who has breached the contract and has by his conduct exhibited the traits of having abandoned or renounced the obligations under the contract will not be entitled to claim damages from the other side. In this case, the sole selling agent, having exhibited uncooperative attitude and conduct and by virtually sabotaging the business of the principal, notwithstanding his clear obligations both under the agreement and the Contract Act, would have no case to go before any court and seek damages or compensation - on the contrary, the principal would be well justified in claiming damages and expenses/costs against the sole selling agent. In view of the 'doctrine of necessity', the dispensing with prior to six months notice would be justified and reasonable – otherwise, to wait for six months and play into the hands of an untrustworthy agent would only witness the complete obliteration of the principal's business.

Case law on the subject:

Union of India, V/s. The Steel Stock Holders Syndicate, Poona , AIR 1976 SC 879

Held (1) that in the instant case, the plaintiff had not claimed loss of market or remote damages. Moreover, if there was no physical deterioration of the goods at all which were delivered to the consignee at Poona, the case of the plaintiff was clearly taken out of the ambit of Sections 76 and 78 and his suit for damages also could not be defeated on the ground that it was barred by Section 76 or Section 78. In view of the finding of fact arrived by the Courts below, the plaintiff was undoubtedly entitled to damages for the loss occurred to him because of the amount of money deposited in the Bank being locked up for more than six months.

Industrial Finance Corporation of India Ltd., Vs. Cannanore Spinning and Weaving Mills Ltd. and others, AIR 2002 SCOURT 1841

(A) Contract Act (9 of 1872), S.56 - Contract - Non-performance of contractual obligation - Impossibility of performance - Can be an excuse.

Maxims - "Lex non cogit ad impossibilia" also expressed as "impotentia excusat legem" -

Meaning: There can be no doubt that a man may by an absolute contract bind himself to perform which subsequently however becomes impossible, or to pay damages for the non-performance and this interpretation is to be placed upon an unqualified undertaking, where the event which causes the impossibility was or might have been anticipated and guarded against in the contract, or where the impossibility arises from the act or default of the promissor. But where the event is of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made, they will not be held bound by general words which, though large enough to include, were not used with reference to the possibility of the particular contingency which afterwards happened. It is on this principle that the act of God is in some cases said to excuse the breach of a contract. Though impossibility of performance is in general no excuse for not performing an obligation which a party has expressly undertaken by contract, yet when the obligation is one implied by law, impossibility of performance is a good excuse. (Paras 28, 29, 30)

Southern Roadways Ltd., Madurai v. S. M. Krishnan AIR 1990 SC 673

Contract Act (9 of 1872), S.201, S.221, S.208 - Revocation of agency - Effect - Agent allowed to remain in possession of premises for purpose of carrying on agency business of Company - Termination of agency by Company - Agent has no right to remain in possession of premises after termination of his agency - He is not entitled to interfere with Company's business.

The company is engaged in the business of transport of goods and parcels to different places. It has appointed commission agents at various stations for the purpose of carrying on its business. Respondent was one such agent. One of the clauses of the agreement by which he was appointed provides that the agent should arrange a suitable avenue and engage employees. Further clause provides for his removal from service at any time without notice. It also provides that upon removal of the agent the company could occupy the godown. The company could also utilise the services of employees engaged by the agent. As per the agreement the Company took on lease a godown. The godown was put in possession of the respondent for the purpose of carrying on his agency business of the company. The agent mismanaged the business and misappropriated the income of the Company. Therefore the company terminated his agency, he was informed that the company would be taking possession of the godown and carrying on the business on its own. By subsequent letter, he was also intimated that the company has taken possession of the godown and another agent was appointed in his place. The agent however, prevented new agent and also the company from carrying on business at the godown premises. The Company, therefore, had to institute a suit for declaration of its right to carry on business in the said premises. Permanent injunction restraining the respondent from interfering was also sought for.

Held, the agent's possession at the suit premises was on behalf of the company and not on his own right. It was, therefore, unnecessary for the company to file a suit for recovery of possession. The agent has no right to remain in possession of the suit premises after termination of his agency. He has also no right to interfere with the company's business. Therefore temporary injunction could be granted.

(Paras 9, 17, 19)

Contract Act (9 of 1872), S.185 - Agency - elements of - Fiduciary element agency, though the key to much of the law governing this relation, is not the essential element in relation. (Para 14)

The rights of the principal on agent committing breach of duty were briefly stated by Lord SUMNER in Christoforides V. Terry : (1924) All ER Rep 815.

Principals have three rights as against agents who fail in their duty

  1. They can recover damages for want of skill and care, and for disregard of the terms of the mandate;
  2. They can obtain an account and payment of secret and illicit profits, which have come to the hands of their agents as agents;
  3. And they can resist an agent's claim for commission and for indemnify against liability incurred as mandatory by showing that the agent has acted as a principal himself and not merely as an agent. Each remedy is distinct and is directed to a specific irregularity.

Bostan Deep Sea Fishing Co. V. Ansell (1888) 59 LT 345.

Another remedy against defaulting agent is that he can be dismissed instantly and summarily. Where the managing director of a company had taken bribes from a third party for favouring him by engaging his ships, the company was held justified in dismissing him without notice.

Notice precedent to revocation (S.206) :

Sohrabji V. Oriental Government Security Assurance Co. AIR 1946 PC9.

Where an agency has been created for a fixed period, a reasonable notice would be necessary to terminate it. The length of notice will depend, among other things, upon the length for which the agency has continued. Thus, the Privy Council has held that "the notice of 3 ½ months given by the respondents was inadequate to determine an agency which had lasted for nearly 50 years, under which a very large business had been built up, and great expense incurred by the agents".

JK Sayani V. Bright Brothers, AIR 1980 Mad 162.

Their Lordships would have accepted without question that two years a reasonable notice. in a Madras case reasonable notice for premature determination was not given. The agent was earning Rs. 4000 per month. The court allowed Rs. 12,000 as compensation in lieu of reasonable notice which should at least have been for three months.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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