Termination of an Agency Relationship

The laws concerning agencies and agency relationships fall under the broad categories of employment and contract law. In legal terms, an agency relationship is a legal relationship that is made up of a person, known as an agent, who agrees to represent another person or persons, who are known as the principal. When an agency relationship is formed, agents are granted certain authority and power to act on behalf of the principal they represent.

In general, there are four main ways in which an agency relationship may be formed:

• By Agreement: An agency relationship may be formed when both sides agree on specific conditions, and this agreement can be formed by either an express contract or by a simple conversation and handshake;
• By Ratification: An agency relationship may be formed when one party agrees to be an agent through a third party, as long as the principal is then notified and approves of the agreement;
• By Estoppel: There may be circumstances in which a party’s actions represent to a third party that another person is their agent when the person is not.
  • If the third party reasonably believes that there is an agency relationship, then a court may prevent the principal from denying that an agency relationship exists.
  • Estoppel is also known as detrimental reliance; or
• By Operation of Law: An agency relationship may be formed when courts consider a person an agent, even if there is no agency agreement.
  • However, courts generally only step in to say there was an agency relationship when doing so prevents a party from suffering an injustice.

Common examples of agency relationships include, but are not limited to:

• An attorney and client relationship;
• A business that hires a professional agent to sell or broker their goods;
• A home seller hires a real estate professional to sell their home; and
• An employee-employer relationship.

It is important to note that after an agency relationship is formed, the relationship will naturally continue until it is terminated by either or both parties. In general, an agency relationship is terminated per the contract that governs the agency. However, there are many different methods to terminate an agency relationship.

What Are the Methods for Terminating an Agency Relationship?

As mentioned above, there are numerous ways in which an agency relationship may be terminated. In general, an agency relationship is terminated according to the termination date of the agency relationship. In other words, the agency relationship is terminated per the contract initially formed when entering into the principal-agency relationship.

Because agency relationships are governed by contract law, if a principal or agent terminates the contract violating the agency agreement, either party may be liable for damages. Typically, these damages will be governed by the contract that formed the agency or the breach of contract laws in the jurisdiction in which the agency was formed.

In addition to agencies being terminated by the terms of the contract, a principal agency can also be terminated in the following ways:

• Lapse of Time: If the parties agree to set a period that the agency relationship will be valid, then after that time has passed, the agency will naturally terminate.
  • However, there are cases in which the agency relationship may continue indefinitely, or the termination of the agency relationship requires a certain notification before termination. In those cases, the party seeking to terminate the agency relationship should follow the proper notification procedures.
    • Additionally, it is important to note that the principal should notify all third parties of the termination of the agency relationship;
• Completed Purpose: There are some agents, like real estate agents, who are hired to achieve a specific purpose, such as selling a home. The agency relationship will automatically terminate once that purpose has been fulfilled.
  • If either party desires the relationship to be extended, then they can do so in writing;
• Mutual Agreement: If both parties seek to terminate the agency relationship, they can agree to terminate the relationship by mutual agreement.
  • Once again, it is important to terminate the agency relationship in writing and signed by both parties to provide a layer of protection should any legal issues arise concerning the former relationship;
• The Occurrence of a Certain Event: An agency relationship may also automatically terminate if a specified event occurs. Examples of qualifying events that may terminate an agency relationship include:
  • Death of either the principal or the agent;
  • The agency is terminated by the incapacity of either party, such as a mental incapacity;
  • The occurrence of a natural disaster that prevents the purpose of the agency from being fulfilled;
  • The parties have not moved forward with the project as intended, and an excessive amount of time has passed;
  • Bankruptcy of the principal; or
  • By operation of law.

What Penalties Can Result from Terminating an Agency Relationship?

As mentioned above, because agency relationships are governed by employment and contract law, terminating an agency relationship may carry legal consequences and penalties. Importantly, the penalties that can result from terminating an agency relationship will depend on the case circumstances and the contract that formed the agency, if any.

However, in general, if one party terminates an agency without one of the valid reasons noted above, then they may be subject to legal penalties, such as contractual damages or other civil liability. This means that if one party terminates the agency relationship and the other party suffers damages, the harmed party may initiate a civil lawsuit against the responsible party and seek to recover the damages they suffered due to the agency termination.

However, the party that terminated the agency relationship may have legal defenses, which they could use to have the case brought against them dismissed. For example, the party that terminated the agency may have defenses like impossibility or duress that excuse them from liability for terminating the agency relationship.

For example, if the agency relationship was formed under duress, then the party that was under duress may use that as a legal defense to break any sort of agency relationship that has been formed. Additionally, if the agent can’t fulfill the agency’s purpose, such as the house burned down before a real estate agent can sell the home, the homeowner may be excused from any or most damages claimed by a real estate agent.

When Should I Contact a Lawyer about Agency Termination?

As can be seen, a principal-agent relationship may be terminated for numerous reasons. However, it is important to terminate an agency relationship as clearly as possible to ensure there is no further liability down the line.

Thus, if you are involved in an agency relationship and wish to terminate it, consult an experienced employment contract attorney. An experienced contract attorney will be able to draft a proper termination agreement. An attorney can also represent your interests in court, should legal action become necessary.