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Terminating Agency Relationships

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  • 0:06 Agency
  • 1:25 Acts of the Parties
  • 2:57 Operation of Law
  • 5:18 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

Many business transactions are conducted using agency relationships. The agent's actions can bind the principal, so it's important to know when the agency relationship ends. This lesson discusses terminating agency relationships.

Agency

Many business transactions are conducted using agency. An agency relationship is a business relationship where one party acts on behalf of the other party. The principal is a party who gives legal authority to another to act on his or her behalf. The agent is a party who is legally authorized to act on behalf of the principal when dealing with a third party.

When the agent works with the authorization of the principal, the principal will be obligated, or bound, by the agent's actions. This means the principal will be obligated to fulfill authorized business contracts that the agent makes with a third party.

Because the principal is bound by the agent's actions, it's important for all parties to know how and when the agency relationship is terminated. The agent no longer has authority to act for the principal after the agency relationship ends, and the principal must inform any affected third parties. Generally speaking, the agency relationship terminates in one of two ways:

  • By the acts of the parties
  • By operation of law

Let's take a separate look at each of these.

Acts of the Parties

Agency relationships are consensual. This means the agency relationship only exists as long as both parties agree to be a part of it. Unless there's a contract stating otherwise, either party may freely withdraw from the agency at any time. A party can terminate the agency relationship by any oral or written communication that conveys withdrawal of consent. Of course, the parties can also mutually agree to terminate the agency at any time.

If there's a contract governing the agency relationship, then agency terminates according to the contract. Many agency relationships are established for a particular time period or to accomplish a particular act. Once the time period expires or the act is accomplished, the relationship automatically terminates.

Once terminated, the principal should notify all third parties that did business through the agent. Otherwise, the agent might act with lingering apparent authority. This means that the principal can be held liable for contracts made if the principal's conduct conveys a valid agency. The principal should note that agency is presumed to exist until evidence shows otherwise. Therefore, the principal should clearly convey that the agent no longer has authority to work on his or her behalf.

Operation of Law

There are also several operations of law that act to automatically terminate an agency relationship.

Agency terminates by any of these legal reasons:

  1. If either party dies or is permanently incapacitated
  2. If either party is declared bankrupt
  3. If either party materially breaches the agency contract
  4. If either party experiences impossibility of performance of agency duties
  5. If there's a frustration of agency purpose
  6. If there's a subsequent illegality pertaining to the business venture

Let's look at a few examples.

Let's say Patricia hires Angelo as her real estate agent. Angelo is supposed to sell Patricia's house for her. Patricia tells Angelo to sell it for $100,000. But Angelo, instead, offers Patricia's house for $50,000 without Patricia's consent. This is a material breach of the agency contract and will automatically terminate the relationship.

Now let's say Angelo is working on selling Patricia's house for her, and Patricia's happy with his efforts. However, Patricia's house is completely destroyed in a fire before Angelo sells it. It's now an impossibility to sell the home, and the agency automatically terminates.

Let's say, instead, that Patricia's house is only partially destroyed. The house itself still stands, but it isn't fit to sell for anywhere near the price Patricia requested. The purpose of the agency is therefore frustrated. Since it can no longer be accomplished, the relationship terminates.

Lastly, let's say Patricia hires Angelo to sell her house. As Angelo's working on selling it, he discovers the house doesn't belong to Patricia. It legally belongs to her ex-husband. Angelo doesn't have the ex-husband's permission to sell the house. This is an example of subsequent illegality and automatically terminates the agency relationship.

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