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When Does Agency Relationship Terminate?

Cite this article as: Jason Mance Gordon, "When Does Agency Relationship Terminate?," in The Business Professor, updated January 11, 2015, last accessed April 8, 2020, https://thebusinessprofessor.com/knowledge-base/when-does-agency-relationship-terminate/.
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Terminate Agency Relationship
This video explains the methods for terminating a principal agent relationship.



When and how does the agency relationship terminate?

The establishment, duration, and termination of the agency relationship is generally governed by the agreement between the principal and agent. In the absence of an express agreement, several default rules apply regarding the point at which the agency relationship terminates. Below are common rules for terminating the agency relationship:

Withdrawal by Either Party – A principal or agent may withdraw from the relationship at any time. This legal authority is separate from the contractual right to withdraw.

  • Note: While withdrawal terminates the agency relationship, it may lead to liability of the withdrawing party.
  • Example: Daisy hires Jeb as a sales agent for her new product line. Jeb will earn a commission on sales of the product. Jeb studies the product lines, develops a sales plan, and hits the road. Shortly after the relationship begins, Daisy decides to hire Luke and fire Jeb. Daisy’s withdrawal terminates the agency relationship with Jeb. Jeb, however, may have the legal right to seek damages against Daisy for terminating the relationship.

Withdrawal by Both Parties – The parties can terminate the agency relationship upon mutual consent.

Termination by the Principal – Either party may terminate the agency relationship, even if it violates a contractual agreement between the parties. A principal will be subject to a breach of contract action for terminating the agency relationship if the agent’s status is part of an agreement that is supported by consideration and terminating the agency relationship will harm the agent’s rights.

  • Note: This scenario commonly arises in an agency “coupled with an interest”. An agency relationship is coupled with interest when the agent has a specific interest in the subject matter of the agency, such as a consignment of goods for resale.
  • Example: I enter into a contract with Ernest to package and sell his products on the Internet. In exchange for my effort, I will keep in percentage of the sale value. As such, the agency is coupled with an interest and cannot be revoked without breaching a contract.

Renunciation by the Agent – The agent can renounce the business of the principal and terminate her agency status and authority. This may, however, violate a contractual relationship between the parties.

  • Example: I enter into a contract to serve as your agent. I may terminate the agency by renouncing my duties. Unless I have a justification, my actions will likely violate my contractual obligations to you.

Duties of Agent Complete – If the purpose of the agency ceases to exist, the agency relationship terminates. This often arises when the agent discharges all of her agency obligations. Further, it could arise when the subject matter of the agency no longer exists.

  • Example: You higher me to represent you in the sale of your real estate. The real estate is the subject of an eminent domain action and is taken by the government. The agency relationship terminates when the purpose of my agency is gone.

Death or Incapacity – The agency relationship terminates upon the death or incapacity of either party.

Bankruptcy – The agency relationship terminates upon the liquidation or reorganization of either party.

The above situations resulting in termination of the agency relationship are default rules. The parties may reserve any rights or restrictions on terminating the agency relationship within their agreement.

Discussion: How do you feel about either party’s right to terminate the agency relationship? What should the remedy be if termination of the agency relationship by a party violates a contract between the parties? Should a party have additional rights if she is harmed by the termination of the agency and the other party’s rights are not? Why or why not?

Practice Question: Earl runs a showroom for baby products. Gayle, the inventor of a new product, consigns a large quantity of goods with Earl. Earl agrees to display the goods and represent them to potential retailers. Earl earns a percentage of all future sales to the retailer as compensation for his services. Can Gayle cancel the agency relationship?

Proposed Answer

  • The parties to the agency can terminate the relationship at any time. If there is a contract expressly limiting the ability to terminate the relationship, this could lead to liability.

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