Two parties form an agency relationship when one party (the principal) legally agrees that another party (the agent) can make decisions on their behalf. This arrangement is only valid where no conflict of interest exists and the principal will be the party to appoint someone as their agent. Some conflicts of interest are familial relationships, direct stake in a pending deal, and noncompete agreements. These conflicts can be waived in some circumstances.

Agency is viewed as being fiduciary, which means that the principal is trusting their agent to act as they would when making decisions. This is why liability can fall back on the principal when something goes wrong. Some common examples of an agency relationship include an attorney (agent) and their client (principal) or real estate professional (agent) and a homebuyer (principal).

The agency relationship is governed by employment and contract law, so if any issue arises this is where a party should turn for legal recourse. It is important to know the methods of termination and penalties for wrongful termination to avoid any issues.

What are the Methods for Terminating an Agency Relationship?

There are several ways that a party can legally terminate an agency relationship. Once termination of the agency relationship occurs, the agent can no longer act on behalf of the principal. This means that any actions made by the agent holding themselves out as acting on behalf of the principal after termination has occurred will be considered unlawful on the part of the agent.

Additionally, the principal is responsible for informing all third parties that dealt with the agent prior to termination that the agency relationship is no longer in effect because it has been terminated. Without this notification, the third parties will be unaware that the relationship is no longer valid and this could potentially cause future roadblocks for business dealings and communication attempts.

The available termination methods will depend on the jurisdiction in which the relationship was formed and active. Generally, the following methods to terminate an agency relationship are available to carry out the intent to end such relationship in a legal manner:

  • Lapse of time: If the parties agree to set a time period that the agency relationship will be valid for, then after this time has passed then the agency relationship will terminate by virtue of the agreement. By agreement of both parties, the relationship can be extended. This intent should be expressed in writing and signed by both parties to ensure legal continuation of the agency relationship.
  • Purpose achieved: Some agents are hired to achieve a specific purpose, like a real estate agent that is selling someone’s house. Once that purpose is fully achieved, the agency relationship will automatically terminate. Again, if desired the relationship can be extended where both parties agree in writing. In the real estate scenario, once the sale of the house goes through then the agency relationship would automatically terminate.
  • Mutual agreement: When both parties agree to terminate the agency relationship, then it will be terminated. In this scenario, the reason behind the termination is essentially irrelevant since both parties are on board. However, to provide a layer of protection the mutual agreement should be in writing and signed by both parties. This cannot involve only one party in order to be legally binding.
  • Certain events: An agency relationship can also automatically terminate when certain events occur. Such examples of qualifying events include death of one party, when one party is rendered incapacitated, and if one party files for bankruptcy. Both parties may also specify certain events that can cause termination in their initial agreement, like failure to complete a job in a set timeframe or devastating event like a pandemic. If one party protests termination in this instance, then a court will need to get involved to enforce termination when it is legally available.

Either party can also withdraw or renounce their duties under the agency relationship at any time. However, this can carry legal consequences where there is no valid reason to take this action and the contract is violated as a result of the termination. When the other party suffers harm after this occurs, they can file a lawsuit to recover any damages.

What Penalties can Result from Terminating an Agency Relationship?

As noted above, terminating an agency relationship can carry legal consequences depending on the situation. This occurs when one party ends the agency without any of the reasons noted above applying. Again, valid bases for termination include time lapse, achieved purpose, mutual agreement, and qualifying events like death or incapacitation. If one party terminates the agency without having a reason like this to fall back on, the other party can file a lawsuit to recover damages.

Here are some legal theories that may apply for wrongful termination of an agency relationship:

  • Breach of contact: Many agency relationships are formed via contract, like when someone retains a lawyer to represent their interests in a court proceeding. When someone wrongfully terminates the agency relationship, that party could be said to breach the contract. For example, say an attorney (agent) fails to file a lawsuit within the statute of limitations and this was a condition of the retainer agreement. The attorney then terminates the agency relationship by indicating they will no longer represent their client in the matter, as agreed upon. The client (principal) can file a lawsuit for breach of contract and will also have a potential claim for legal malpractice. The former client can also report the attorney to the applicable state ethics board for improper handling of a case that violated attorney professional conduct rules.
  • Wrongful Termination: Since the agency relationship can function like an employment arrangement, an agent may have grounds for a wrongful termination claim against the principal. These claims can be a result of breaching an agreement, discrimination, retaliation, or violating public policy. For example, say an entrepreneur (principal) launching a new app hires a third-party (agent) to market the platform. If that person prepares for the relationship and starts up a marketing campaign but the entrepreneur decides to terminate the agency without cause, employment law principles may apply.

Remember that the availability of filing a claim will depend on the jurisdiction’s laws and specific facts surrounding the termination. Possible damages for terminating an agency relationship include money to compensate lost profits or other associated costs like those spent on fees, supplies, or travel. The terminating party may also have defenses like impossibility or duress for breaching a contract. This is why all agreements and communications should be in writing and it is crucial to review your state’s laws before pursuing a lawsuit.

When Should I Contact a Lawyer About Agency Termination?

Termination of an agency relationship can be complex and an contract attorney can determine whether the termination was carried out legally. If not, an attorney can help you file a lawsuit and represent you in court to recover damages.

If you are currently in an agency relationship and wish to terminate it, an attorney can advise you if there are legal grounds to end the relationship without facing potential issues. An attorney can also help you create a termination plan to ensure everything is done appropriately.