Which event terminates an agency relationship by operation of law?

• A. The principal signing a new contract with a different agent.
• B. The death of the principal.
• C. The agent changing salaries.
• D. The term of the contract reaching its expiration date.

Answer: (B)

The main idea tested is that certain events terminate an agency automatically through the law. An agency is formed to enable the agent to bind the principal in transactions, but the agent’s authority exists only while the principal is alive and capable of directing those acts. When the principal dies, there is no longer anyone to act for or bind, so the agency ends immediately by operation of law, regardless of any contracts or prior dealings.

That’s why the death of the principal is the best answer here: it triggers automatic termination of the agency. The other scenarios involve changes or terms within the contract rather than an automatic legal termination. Signing a new contract with a different agent isn’t an automatic legal termination caused by law; it would require a living principal to authorize it. A change in the agent’s salary doesn’t end the agency, it just alters terms of employment. Reaching the contract’s expiration date ends the agency based on contract terms, not by operation of law.