INTRODUCTION LAW OF AGENCY

Agency is a relationship that is relevant to so many business and commercial

transactions. Agency is a triangular relationship that allows or constructs the creation
of the legal relationship between a person (the principal) and a third party via the
intervention of the agent, a person who represent and is required to act in the best
interest of the principal.

It is important for a bank employee, a law student or even a member of the public to
understand some of the main principles relating to agency. In other words, agency is
a representative of the third party in the exercise of responsibility. Where, an agents
act in accordance with the mandate and authority of the delegate. For example, the
bank may acts as an agent for his customer.

In certain circumstances, we have also act as agents or appointed ourselves to act

on our behalf. Businesses usually act as, and employ or engage, agent in the course
of carrying on their respective businesses. Outsourcing certain of an organization’s
function and work to agents (who may be individuals or companies) is quite common
nowadays.

Agency is a common, indeed vital, legal relation. It appears interstitially in many

areas of the law, including the solicitor and client relationship, employment law,
partnership law, corporate law, buying and selling of properties, land and goods.

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What is an agency?

The law of agency is governed under Part X section 135 of the Contract Act 1950.
An agent is defined as ‘a person employed to do any act for another or
represent another in dealings with third person. The person for whom
such act is done, or who is so represented, is called the “principal”. For
example, if Muhammad appoints Luqman to buy some goods on his behalf,
Muhammad is called the ‘principal’ while Luqman is his ‘agent’. The ‘agent’ may be
described as the person by whom the principal acts or is represented. The ‘third
party’ as the person with whom the agent brings the principal into a legal
relationship.

In GHL Firdman describes agency as ‘the relationship that exists between two
persons when one, called the agent, is considered in law to represent the other,
called the principal, in such a way as to be able to affect the principal’s legal position
in respect of strangers to the relationship by the making of contract or the disposition
of property.

In other words, agency is the relationship which subsists between the principal and
the agent, who has been authorized to act for him or represent him in dealings with
others. Thus, in an agency, there are in effect two separate contract such as
between the principal and the agent from which the agent derives his authority to act
for and on behalf of the principal and between the principal and the third party
through the work of the agent.

Any person who is eighteen years old or above and who is of sound mind may be a
principal. As between the principal the third persons, any person may become an
agent; but no person who is not of the age majority and of sound mind can became
an agent, so as to be responsible to his principal according to the provisions in that
behalf herein contained. For example, if Muthu employs Tommy, who is sixteen
years old, to buy some goods from Ahmad on his behalf and Ahmad supplies the
goods, Muthu cannot allege that he is not liable to pay for the goods just because
Tommy is not of the age of majority. Muthu is still liable to pay for the goods.
However, if Tommy had taken the goods and sold them for his own benefit, Tommy
is not liable to pay Muthu for those goods.

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Creation Of Agency

Agency can be created in a number of ways. Like any other contract, a contract of
agency can be expressed or implied from the circumstances and the contract of the
parties. In other words, the authority of an agent may be expressed or implied. For
example, Miss Dini lives in Shah Alam and owns a shop in Putrajaya. The shop is
managed by Suraya who normally orders goods from Umar in Miss Dini’s name for
the purpose of the shop and then pays for the goods out of funds. One can say
Suraya has an implied authority from Miss Dini to act as his agent in the purchase of
the goods.
In section 138 of the Contract Act 1950, consideration is not necessary to create an
agency.

Generally, an agency may arise in the followings ways:

a) By express appointment [ section 139, Contract Act 1950]

An agency may be created by express appointment by the principal. The

authorization may be given by words spoken or written. This involves the
actual consent of the principal and the agent. Agency is a consensual
relationship. In the House of Lords case, Garnac Grain Co Inc v HMF
Faure & Fairclough Ltd:
…..the relationship of principal and agent can only be established by
the consent of the principal and the agent. They will be held to have
consented if they have agreed to what amounts in law to such a
relationship, even if they do not recognize it themselves and even if
they have professed to disclaim it, as in Ex parte Delhasse, 7 Ch D
511. But the consent must have been given by each of them, either
expressly or by implication from their words and conduct. Primarily
one looks to what they said and did at the time of the alleged
creation of the agency. Earlier words and conduct may afford
evidence of a course of dealing in existence at that time and may
be taken into account more generally as historical background.
Later words and conduct may have some bearing, though likely to
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 be less important. As to the content of the relationship, the question
to be asked is: “What is it that the supposed agent is alleged to
have done on behalf of the supposed principal?”
Thus, agency entails a grant of express power or authority by the principal to
the agent. Express appointment may be in a written or oral form. An example
of an express appointment made in writing is a Power of Attorney. Even a
letter written or words spoken may be effective in appointing an agent. Actual
express authority is one of the sub-sets of actual authority, the other sub-set
being actual implied authority.

b) By implied appointment [ section 139, Contract Act 1950]

An agency can be created by implied appointment when a person, by his

words or conduct, holds out another person as having authority to act for him
– Section 140, Contract Act 1950. For example, Wong allows another person
to order goods on his behalf and habitually pays for them, an agency may be
implied. In such a case, he will be bound by the contract as if he has
expressly authorized them. For example, Chan Yin Tee v William Jacks & Co
[Malaya] LTD [1964] MLJ 290

c) By usual ratification [section 149, Contract Act 1950]

An agency by ratification can be created by either an agent, who was duly

appointment and has exceeded his authority or a person, who has no
authority to act for the principal and has acted as if he had the authority.
When either one of the above were to happen, the principal can either reject
or accept the contract so made. When the principal accepts and confirms the
contract, it is ratification. Ratification may be expressed or implied. The effect
of ratification is to render the contract binding on the principal as if the agent
had been properly authorized beforehand.

d) By necessity [section 142, Contract Act 1950]

An agency of necessity may be created it the following conditions are

satisfied:
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  It must be impossible for the agent to get the principal’s instruction.
 The agent’s action is necessary in the circumstance in order to prevent
loss to the principal with respect to the interest committed to his
charge.
 The agent has acted in good faith.
An agency of necessary is created when a person entrusted with another’s
property and it becomes necessary to do something to preserve that property
although he has no express authority to do so. There must be already some
existing contractual relationship between the principal and the person who
acts on his behalf like, between the owner and the master of the ship or an
owner and a carrier of goods. Thus, if goods are sent by train to B at Kuala
Lumpur with directions to send them immediately to C at Butterworth, B may
sell them at Kuala Lumpur if they will perish and not be able to bear the
journey to Butterworth without spoilt.

e) By estoppel
Ordinarily, a person cannot be bound by a contract made on his behalf
without his authority. However, if he, by his words and contract, allows a third
party to believe that X is his agent, when X is not, and the third party relies on
it, he will be estopped or precluded from denying the existence of X’s
authority. For example, if X tells B in the presence of C that he (X) is C’s
agent and C does not contradict this statement, C cannot later deny that X is
his agent if B sells goods to X believing him to be C’s agent and later sues
him for the price.

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The duties of a principal towards his agent
Where an agent enjoys certain rights against the principal, it follow that these rights
would become the duties of the principal.
These duties of a principal to his agent include:-
a) To pay the agent the commission or other remuneration agreed, unless the
agency relationship is gratuitous. The principal is only obliged to pay the
agent if the agent complied with the terms of the agency agreement and when
the agent has earned the payment. However, the agent’s right to commission
is not affected by the fact that the transaction has not been beneficial to the
principal; or the fact that the transaction or contract has subsequently fallen
through no fault of the agent.
b) Not to wilfully prevent or hinder the agent from earning his commission. The
agent’s right to commission is not affected even if the transaction has not
been beneficial to the principal or if the transaction has subsequently fallen
through no fault of the agent.
c) To indemnify the agent for acts done in the exercise of his authority. The
principal is obliged to indemnify or reimburse the agent for costs incurred in
carrying out the agency relationship. The agent only has a right to be
indemnified for authorized transaction within the express, implied or usual
authority of the agent and this right is not available where the loss is due to
the agent’s own negligence, default or insolvency. The right to be indemnified
entitles the agent to recover not only his commission or remuneration but also
money which he paid on the principal’s behalf and all losses suffered by him
in carrying out the directions of his principal. However, the agent loses his
right to be indemnified if he acts beyond his duty or if he has performed his
duty negligently.
d) To respect any lien the agent has over the property of the principal in the
actual or constructive possession of the agent. The lien is, in the hand of the
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 agent, a passive right of detention of the property of the principal. Where an
agent has an outstanding claim against a principal for remuneration or an
indemnity, the agent can enforce that claim by exercising a lien over any
property or money of the principal’s which is lawfully in the agent’s
possession.

The duties of an agent towards his principal.

The relationship between the agent and principal is generally accepted as a fiduciary
relationship, involving trust and confident. The right and duties of the agent depend
on the express or implied terms of the contract of agency. Where there is no such
contract of agency, the right and duties of an agent to his principal and vice versa
are laid down in section 164 – 178 of the Contract at 1950. This is their duties as an
agent towards his principal.
a) To obey the principal instructions [section 164, Contract Act 1950]
Failure to do so will result in breach of contract and the agent will be liable for
any loss suffered by the principal. In Turpin v Bilton, the agent was held liable
when he failed to insure a ship when instructed to do so and the ship was lost.
Similarly, in Bostock v Jardine, the agent was liable when he bought more
than he was directed to buy. However, an agent is under no duty to obey
instruction of his principal if the instructions are unlawful.

b) In the absence of instruction from the principal.

To act according to the customs which prevail, in doing business of the same
kind, at the place where he carries on his work. Otherwise, he has to make
good any loss sustained by the principal.

c) To exercise care and diligence in carrying out his work and to use such
skill as he possesses [section 165, Contract Act 1950].
An agent must use his skill and be diligence about the interest of his principal.
An agent must make sure that when he is acting on behalf of the principal, it is
important for him to be careful. For example, Keppel v Wheeler, an agent was
liable because he must use skill and care for the benefit of his principal.

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 Since, an agent failed to do so he was liable to pay the principal the difference
between the two offers.

d) To render proper accounts when required [section 166, Contract Act

1950].
An agent is under a duty to account for all monies and property handled by
him as agent for the principal and to produce such accounts when demanded
by the principal. For example, Yasuda Fire and Marine Insurance Co of
Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd, an agent has
a duty to provide the principal with access to the agent’s record.

e) To pay to his principal all sums received on his behalf

However, an agent may retain or deduct form such sums received, advances
made or expenses incurred by him in carrying out the duty, his commission
and other remuneration payable to him for acting as agent. In section 174 of
the Contract Act 1950, gives the agent the right to retain his principal’s
property in his possession until his remuneration is paid, unless his contract
provides to the contract.

f) To communicate with the principal [section 167, Contract Act 1950]

In case of difficulty, an agent must use all reasonable diligence in
communicating with and in seeking to obtain instruction from the principal.
However, in emergencies, the agent may use his own discretion in adopting a
course of action to safeguard the interest of the principal.

g) Not to let his interest conflict with his duty.

The duty of an agent is to act solely for the benefit of the principal and he
cannot allow his own personal interest to conflict with duty [section 169,
Contract Act 1950]. This is the so-called “self-dealing” rule, reflecting the
fiduciary character of the agency relationship. Cairns LC said in Parker v
McKenna:
Now the rule of this court …. As to agents is not a technical or arbitrary rule. It is a
rule founded on the highest and truest principal of morality. No man can, in this court,
acting as an agent be allowed to put himself in a position in which his interest and his
duty will be in conflict.

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 h) Not to make any secret profit out of the performance of his duty.
Secret profit means a bribe or payment of a secret commission or any
financial advantages which an agent receives over and above the commission
or other remuneration agreed by the parties. If the principal knows about the
secret profit and consents to it, the agent is entitled to keep the profit he
makes since the profit is no longer secret [section 168, Contract Act 1950].

If the profit then the principal may do this following:

 Repudiate the contract if it is disadvantageous to him;
 Recover the amount of secret profit from the agent – section
169, contract Act 1950;
 Refuse to pay the agent his commission or other remuneration;
 Dismiss the agent for breach of duty;
 Sue the agent and the third party giving the bribe, for damages
for any loss he may have sustained through entering into the
contract
For example, Mahesan v Malaysia Government Officers Co-operation
Housing Society Ltd.

i) Not to disclose confidential information or document entrusted to him

by his principal.
Not to tell other parties about any information or document entrusted to him by
his principal.

j) Not to delegate his authority

Agent must not ask another person to perform his duty. Unless the principal
expressly or impliedly consents to an agent delegating the duties assumed.
The relationship between principal and agent as theirs is a personal one.
However, there are exceptions to this general rule, some of which are as
follows;
 Where the principal approves or consents to the delegation of the
authority. For example, De Busche v Alt – an agent was engaged to
sell a ship in three (3) countries in Asia at a specific price. The agent

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 was unable to do so, and obtained the express permission of the
principal to appoint a sub-agent in Japan to sell the vessel at the
stipulated price. The court held that the principal was bound by the act
of the sub-agent as there was expressly authorized delegation.
 Where it is presumed from the conduct of the parties that the agent
shall have power to delegate his authority
 Where the custom, usage or practice of the trade or business permits
delegation – WA Coombs Ltd v Brown & De Busche v Alt
 Where the nature of the agency is such that delegation of the authority
to another person is necessary to complete the business – Quebec
and Richmond Railway Co v Quim
 Where the act to be done is purely ministerial or clerical or
administrative and does not involve the exercise of any special
discretion or skill – WA Coombs Ltd v Brown

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Salman was instructed by his employer to carry a consignment of vegetables from Cameron
Highlands to Kuala Lumpur. The lorry that he was driving was badly damaged when it was
involved in a road accident near Kelang.
Since he did not want to wait too long for the lorry to be repaired, Salman sold off all the
vegetables to a shop owner for half of its price.
Discuss the position of Salman with regards to this problem.

In this case Salman had to make a quick decision. His lorry was involved in an
accident and it took a long time to fix. He decided to sell all the vegetables he
brought to the shops near the scene at a cheaper price. This is because, as Salman
points out, the length of time for the lorry to be rectified will cause the vegetables to
wither and break. This would cause Salman's employer to incur significant losses.
Salman's decision is correct where in section 142, in Contract Act 1950 read;
An agent has authority, in an emergency, to do all such acts for the purpose of
protecting his principal from loss as would be done by a person of ordinary
prudence, in his own case under similar circumstance. For example, in illustration
a) An agent for sale may have goods repaired if it be necessary
b) A consigns provision to B at Taiping, with direction to send the immediately to
C at Parit Buntar. B may sell the provision at Taiping, if they will not bear the
journey to Parit Buntar without spoiling.
In other words, salman action is necessity, in the circumstances, in order to prevent
loss to the principal with respect to the interest committed to his charge.

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 An agency may be terminated.

An agency may be terminated in this following;

a) By the act of the parties

 An agency contract may be terminated by mutual consent or by
unilateral revocation by the principal or unilateral renunciation by the
agent at any time by giving reasonable notice.
 Termination by performance. The contract of agency is brought to an
end when the agent has performed the contract. This can happen
when an agency is created for the a single specific transcation and the
transaction is completed [section 154, Contract Act 1950]
 Termination upon expiry of the period fixed in the contract of agency. Is
an agency is created for a fixed period, the agency is terminated at the
expiry of that period whether or not the business or transaction has
been completed.

b) By operation of law
An agency may be revoked by operation of law in any of the following
circumstance:
 Upon the death of the principal or agent. As a general rule, an agent
comes to an end when the principal or the agent dies. An agency which
is terminated by the death of the principal is effective only when the
agent has notice of the principal’s death [section 161, Illustration (c),
Contract Act 1950.
 When the principal or agent becomes insane. The insanity of the agent
or the principal also terminated the agency. Since an insane person is
not capable to enter into a valid contract to appoint an agent or act as
one, agency is terminated by such insanity. When the principal
becomes insane, the agent is bound to take all reasonable steps to
protect and preserve and preserve his principal’s interest.
 When the principal or agent becomes insolvent or made a bankrupt.
Upon, insolvency a person’s rights and liabilities are vested in the

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 Director General of Insolvency and, therefore, the agency relationship
ceases.

c) By frustration
An agency contract, like any other contract may be discharged by frustration.
For example, Stevenson v Aktiengesellschaf Fur Cartonnagen Industries’ –
where an outbreak of war made the principal an enemy alien, it was held that
the agency was terminated.

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An agent cannot delegate his authority to another person

Agent is a personal relationship based on mutual trust and confidence between the
principal and the agent. Section 190 provides that an agent cannot lawfully employ
another to perform acts which he has expressly or impliedly undertaken to perform.

Thus, an agent cannot delegate his powers to a third person. The maxim applicable
in this case is delegates non protest delegate. This mean that a person to whom
authority has been delegated cannot delegate that authority to another. The reason
for this rule is that confident in a particular person is at the root of the contract of
agency. Therefore, the agent should perform his responsibilities himself. In other
words the appointment of sub-agent by agent, is no allowed by law.

In section 144, Contract Act 1950 gives the definition of sub-agent in these words;
“a sub-agent is a person employed by and acting under the control of the original
agent in the business of the agenda. So sub-agent is the agent of the original agent.
As between themselves, the relation of sub-agent and original agent is that of agent
and principal”
But to this general rule there are certain exceptions, where the agent is permitted to
delegate his authority. He may appoint sub-agents. In the following cases;
1. Where the principal has expressly allowed his agent to appoint sub-agent. His
consent may also be implied from the circumstances.
2. Where the nature of work demands that a sub-agent should be appointed.
3. Where there is a custom of the trade to that effect.
4. Act which are of routine nature and can be done by the agent or delegated by
him.
5. Where in the course of agent’s appointment unforeseen emergencies arise
which render a necessary to delegate his authority.
6. Where the principal knows that the agent intends to appoint a sub-agent.

In case of proper appointment. Where the sub-agent is properly appointed, the

following consequences emerge as per section 145:

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  As regards third person, the principal is represented by sub-agent. He is
bound by and is responsible for all the acts of sub-agent.
 The agent is responsible to the principal for the acts of the sub-agent. There is
no privity of contract between the principal and the sub-agent and therefore
he cannot sue the sub-agent.
 The sub-agent is not directly responsible to the principal, expect for fraud and
wilful wrong. The sub-agent is responsible to the agent

In Calico Printer’s Association vs Barclay’s Bank, a sub-agent failed to insure goods

belonging to principal which were destroyed by fire. But the principal could not
recover against the sub-agent. A sub-agent is however bound by all the duties of an
ordinary agent.

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Conclusion

In conclusion, this agency act can provide us with guidelines regarding the laws and
regulations to be followed as an agent or principal. In addition, it also provides us
with an explanation of the role of an agent and principal in the conduct of their
business. Thus, the existence of this act as agent and principal can be highlighted.

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References

1. Business law [2009] Oxford by Lee Mei Pheng & Ivan Jeron Detta.
2. Contract Act 1950.
3. Slide Law of Agency by Madam Dr. Faridah Binti Hussain.

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