LAW OF AGENCY

The Law of Agency is governed by Part X of the Contracts Acts 1950.

Agency is the relationship which exists between the principal and the agent who is authorized
to act for the principal or represent the principal in dealings with others.

Two Contracts in Agency

Thus in an agency there are two contracts –

1. The first, is made between the principal and the agent from which the agent derives
his authority to act for and on behalf of the principal; and

2. The 2nd is made between the principal and the third (3rd) party through the work of
the agent.

Note: Part X, Contract Act 1950 does not contain any requirement for an agency contract to
be evidenced in writing.

Definition of Agent and Principal Section

135 – “Agent”(A) and “Principal”(P).

An ‘agent’ is defined as ‘a person employed to do any act for another or to represent another
in dealings with third persons.’

The person for whom such act is done, or who is so represented, is called the
‘principal’.

E.g. If Jake appoints Jack to buy some goods on his behalf; Jake is called the ‘principal’ while
Jack is her ‘agent’.

Thus, an agent is one who is authorized to act for the principal to represent the principal in
dealings with others.

Section 136 – Who may employ an agent?

Any person who is of age of majority (18 yrs and above) according to the law to which he is
subject, and who is of sound mind, may employ an agent.

1
Section 137 – Who may be an agent

As between the principal and third persons, any person may become an agent; but no
person who is not of age of majority and of sound mind can become an agent, so as to be
responsible to his principal according to the provisions in that behalf therein contained.

Creation of Agency

Necessity
Implied
Estoppel
Appointment

Express CREATION
OF Ratification
Appointment AGENCY

(i) By express appointment by the principal

This is the most common way of creating an agency. The principal may make the
appointment either orally or in writing. An express appointment in writing is
commonly done through the grant of a power of attorney.

(ii) By implied appointment

An implied appointment may arise where from the surrounding circumstances it can
be presumed that the principal had given authority to the agent to act on his behalf.

An illustration of this is provided in s.140 Contracts Act 1950 as follows: ‘A owns a

shop in Kajang, living himself in Kuala Lumpur and visiting the shop occasionally. The
shop is managed by B, and he is in the habit of ordering goods from C in the name of
A for the purpose of the shop, and of paying for them out of A’s funds with A’s
knowledge. B has implied authority from A to order goods from C in the name of A for
the purposes of the shop

2
 (iii) Agency by Necessity

Under certain circumstances a person may become an agent of another without

having being appointed as such. E.g. a commercial agent of necessity occurs when
a person is entrusted with another’s property and it becomes necessary to act to
preserve that property although he has no authority to do so. Case in point: -

Great Northern Railway Co. v Swaffield [1874]

The railway company carried the defendant’s horse to its destination. On arrival
there was no one to receive the horse. The station master did not know the
defendant or his agent’s address and directed that the horse be put in a stable.
The railway company later claimed for the charges for the stable. The defendant
refused to pay. The court held that the plaintiff acted as an agent of necessity in
this matter, so the defendant must pay.

Note: An agency of necessity can arise if 3 conditions are satisfied: -

✓ It is impossible for the agent to get P’s instructions – section 142. (With the widespread use
of modern telecommunication, this condition will be difficult to fulfil nowadays).

✓ The agent’s action is necessary, in the circumstances, to prevent loss to the Principal
with respect to the goods committed to his charge, e.g. when an agent sells perishable
goods belonging to the Principal to prevent them from rotting.

✓ The agent of necessity has acted in good faith.

(iv) Agency by estoppel

An agency by estoppel will arise where a person (the principal) has led a third
party to believe that someone was his agent when in fact he was not; and the
third party has relied on that representation to his detriment.

This is provided for in s.190 Contracts Act 1950. Illustration (a) of s.190 provides the
following example: ‘A consigns goods to B for sale, and gives him instructions not to
sell under a fixed price. C, being ignorant of B’s instructions, enters into a contract
with B to buy the goods at a price lower than the reserved price. A is bound by the
contract.’

3
 (v) Agency by Ratification

This is provided for in s.149 of the Contracts Act 1950 which states, ‘Where acts are
done by one person on behalf of another, but without his knowledge or authority, he
may elect to ratify or disown the acts. If he ratifies them, the same effects will follow as
if they had been performed by his authority’.

Agency by ratification may arise in two situations:

(i) a person duly appointed as agent by a principal exceeds his authority; or
(ii) a person is not appointed as an agent by a principal but acts as if he is so appointed.

In each case the Principal can either REJECT the contract or ACCEPT the contract. If the
Principal accepts the contract, he is said to ratify the agency.

The requirements which must be satisfied in order for an agency by ratification to arise
are as follows:

• The act or contract must be unauthorised.

• The unauthorised act must not be unlawful. Thus, void or illegal contracts cannot be
ratified.
• The agent must, at the time of the contract expressly act as agent for the principal.
He must not allow the third party to believe that he is the principal.The principal
must be in existence when the contract is made.
• The principal must have contractual capacity at the time the contract is made and at
the time of ratification – s.136 Contracts Act 1950.
• The principal must have full knowledge of all material facts. Section 136 of the
Contracts Act 1950 states that no valid ratification can be made by a person whose
knowledge of the facts is materially defective.
• The principal must ratify the whole act or contract. He cannot ratify one part and
reject another part. If he does so he is deemed to have ratified the whole
transaction – s.152 Contracts Act 1950.
• The ratification must not have the effect of subjecting a third person to damages, or
of terminating any right or interest of a third person – s.153 and Illustration
(a) of s.153 Contracts Act 1950.

• The ratification must be made within a reasonable time

4
Example of agency by ratification

E.g. on Jan 1, X appointed Y as his agent to buy a car with instruction that it should not cost
more than RM30K.

On 2nd Jan, Y went to Z’s shop and ordered a car which costs RM31K, telling Z that he was
ordering it for X. On 3rd Jan, Z delivered the car to X.

Y has exceeded his authority and so X can either accept and confirm the contract or reject it.
If X confirms it, then Y is an agent through ratification. The contract entered into by Y on 2nd
Jan to purchase the car is binding on X.

When any one of the above situations arises, the principal can either reject the contract or
accept the contract so made – see S149, which reads:

AUTHORITY OF AN AGENT

The agent’s act is binding on the Principal if it is done within his authority. Anything which
the agent does in excess of that authority does not bind the Principal unless the Principal
ratifies the unauthorized act. Thus, it is important to know the extent of an Agent’s
authority.

Agent’s authority may be of 2 types i.e.

✓ Actual authority

✓ Apparent or Ostensible authority.

Actual Authority

Actual authority Actual authority refers to the authority that is given to an agent by
agreement.

Actual authority comprises both

• express authority

• implied authority.

5
 Authority of
Agent

Actual Apparent or Ostensible

Express Implied

Express authority

Express authority may be given either orally or in writing (see ss.140 and 141 of the Contracts
Act 1950).

For example, if the principal appoints an agent with express instructions to buy for him a
piece of land at a price not exceeding RM500,000, then the agent’s actual authority is to
purchase such land for any price not exceeding RM500,000. The principal will be bound so
long as the agent has acted within this express authority.

Implied authority

The implied authority will include all such powers as are proper or necessary to carry out the
express instructions of the principal.

E.g. Principal appoints A to sell his car and lets A have possession of the car. A, by
implication, has the authority to allow potential buyers to drive the car for the purpose of
testing it.
6
Implied authority may also arise from:

(i) the circumstances of the case,

(ii) the custom or usage of trade, or,

(iii) the situation or conduct of the parties.

The above shows that certain authority is implied if it is of the type that a person who
deals with the agent in that particular trade, profession or business would expect the
agent to have. A general guide would be to ask what a similar agent in the same trade,
profession or business would usually be authorized to do.

Panorama Development (Guilford) Ltd. V Fidelis Furnishing Fabrics Ltd.

A company secretary exceeded his actual authority in hiring motor vehicles from the
plaintiffs. The court had to decide whether the defendant company could be taken to have
authorized the hiring.

Held: The defendant company was liable because in appointing a company secretary, the
defendant company was stating that the secretary had authority to do things which
company secretaries usually did. The hiring of motor vehicles was something which a
company secretary usually did, as it was part of company administration.

Apparent or Ostensible Authority

While actual authority arises from an agreement, apparent authority is that which the law
regards the Agent as having, although Principal may not have consented to Agent having
such authority. Apparent authority can happen in 2 situations:

1. Where Principal, by his words or conduct, makes a third party believe that A has
authority to make contracts for Principal. It is the conduct of the Principal that
creates apparent authority.

2. Where Agent previously had authority to act, but that authority was terminated by
the Principal without notice to third parties that he has terminated the agent.

7
Graphic Lines Pt. Ltd. V Chai Chee Mein & Ors (Singapore case) –

In this case, the assistant manager of a nightclub had placed advertisements for the
nightclub with the plaintiffs. He did not have the actual authority to do so but the general
manager, who was one of the partners of the nightclub had represented to the plaintiffs
that advertisements should be authorised through the assistant manager. Since the general
manager had actual authority to authorise the assistant manager to place advertisements on
behalf of the club, the defendants were bound by his act. It was clear that the assistant
manager had apparent authority to place such advertisements.

It must be noted that where the third party knew, or ought to have known, that the agent
did not have the authority in question, he cannot rely on apparent authority of the agent to
enforce the transaction.

8
LAW OF AGENCY

DUTIES OF AGENT TO PRINCIPAL

This will depend on what is in the terms of the contract of agency. Where the contract is silent
on the terms, the duties of an agent to the Principal are as stated in sections 164 to 178
Contracts Act 1950. The main duties of an Agent are as follows: -

1. Duty to obey the Principal’s instruction – An agent is bound to conduct the business of
his principal according to directions given by the principal – S164. Failure to obey is a
breach of contract and agent is liable for any loss suffered by principal because of the
breach.

Turpin v Bilton : If agent fails to insure a ship when instructed to do so and the ship is
lost, he will be liable. However, an agent is not under a duty to obey any unlawful
instructions of the principal.

2. Duty to exercise care and diligence in carrying out his work and to use such skills as he
possesses – where the agent is appointed as a professional which demands special skills,
he must display such skills that is generally possessed by people in similar profession,
unless the Principal has been put on notice of the agent’s lack of skill – S165.

Chaudry v Prabhakar: The defendant helped the claimant purchase a car, while not
realising it was unroadworthy. The claimant relied on his advice and therefore suffered
economic loss. As the claimant believed the defendant was knowledgeable about cars,
there was reliance and the claim was allowed.

3. Duty to render proper accounts when required by principal –It is the duty of the Agent
to account for all monies and property handled by him as agent for the principal and to
produce such agent’s accounts when demanded by principal – S166.

4. Duty to pay to Principal all sums received on his behalf. – Agent must pay to his
principal all sums received, but may retain or deduct, out of any sums received on behalf
of the principal, items such as any advances made or expenses incurred by him in
carrying out his work, and his commission - S171.

5. Duty to communicate with the Principal – in cases of difficulty, the agent must use all
reasonable diligence to communicate with his principal – S167. But if the situation is
such that communication is impossible or impracticable and that any delay may cause
loss to the principal e.g. in emergency situation, or fluctuating prices, then the agent
may use his discretion to adopt a course of action to safeguard the principal’s interest –
(S142).

9
6. During the Principal’s absence, duty to act to the best interest of the principal.
In the absence of any instructions from the principal, to act according to, the custom of
the trade which prevail, in doing business of the same kind, at the place where the agent
conducts the business. If he acts otherwise and incur losses, he must make good those
losses to his principal – s164.

7. Duty not to let his own interest conflict with his duty.
Duty of Agent is to act solely for the benefit of his principal He cannot allow his personal
interest to conflict with his duty. E.g. If the agent is employed to buy shares, he cannot
sell his own shares to the principal, unless he has earlier informed his principal and
obtained his consent, If no consent is obtained, the principal upon finding out can
repudiate the transaction even though the agent may have acted fairly and has actually
sold the shares at market price.

8. Duty not to make any secret profit out of the performance of his duty. Secret profit
means a bribe such as secret commission, or any financial advantage which Agent
receives over and above the commission paid by Principal without the knowledge of the
principal.

9. Duty not to disclose confidential information or documents entrusted to him by the

principal.

In the course of doing business, the agent would have access to confidential business
information, trade secrets and technical information, belonging to the principal and its
customers, which are crucial to the business and must not be divulged to competitors.
10. Duty not to delegate his authority.
Agent cannot employ another person to do his duty. This is because P has put his trust in
the Agent he chooses and it is unfair to allow the Agent to shift the authority to act for the
principal to another person. But there are exceptions:
a) Where P approves of the delegation
b) In case of necessity / emergency, e.g. illness of Agent
c) Where the act to be done is clerical and does not involve the exercise of
discretion.

Duties of a Principal towards his agent

Not to willfully prevent or hinder agent from earning his commission
Duty to Reimburse the Agent for Reasonable Expenses for all legitimate expenses incurred
and to an indemnity (compensation or reimbursement for having to spend money) from
his principal for all losses he incurred whilst performing his duties.
Section 175 - The employer of an agent is bound to indemnify him against the
consequences of all lawful acts done by the agent in exercise of the authority conferred
upon him
Section 176 of the Act states that agents may be indemnified against consequences of acts
done in good faith, although it causes injury to the rights of third persons.

10
11. Duty not to let his own interest conflict with his duty.
Duty of Agent is to act solely for the benefit of his principal He cannot allow his personal
interest to conflict with his duty. E.g. If the agent is employed to buy shares, he cannot
sell his own shares to the principal, unless he has earlier informed his principal and
obtained his consent, If no consent is obtained, the principal upon finding out can
repudiate the transaction even though the agent may have acted fairly and has actually
sold the shares at market price.

12. Duty not to make any secret profit out of the performance of his duty. Secret profit
means a bribe such as secret commission, or any financial advantage which Agent
receives over and above the commission paid by Principal without the knowledge of the
principal.

13. Duty not to disclose confidential information or documents entrusted to him by the
principal.
In the course of doing business, the agent would have access to confidential business
information, trade secrets and technical information, belonging to the principal and
its customers, which are crucial to the business and must not be divulged to
competitors.

14. Duty not to delegate his authority.

Agent cannot employ another person to do his duty. This is because P has put his
trust in the Agent he chooses and it is unfair to allow the Agent to shift the authority
to act for the principal to another person. But there are exceptions:

a) Where P approves of the delegation

b) In case of necessity / emergency, e.g. illness of Agent
c) Where the act to be done is clerical and does not involve the exercise of
discretion.

Duties of a Principal towards his agent

• Not to willfully prevent or hinder agent from earning his commission

• Duty to Reimburse the Agent for Reasonable Expenses for all legitimate expenses
incurred and to an indemnity (compensation or reimbursement for having to spend
money) from his principal for all losses he incurred whilst performing his duties.

o Section 175 - The employer of an agent is bound to indemnify him against the
consequences of all lawful acts done by the agent in exercise of the authority
conferred upon him

o Section 176 of the Act states that agents may be indemnified against
consequences of acts done in good faith, although it causes injury to the rights
of third persons

11
 o By virtue of Section 177 of the Contracts Act, 1950: Where one person
employs another to do an act which is criminal, the employer is not liable to
the agent, either upon an express or an implied promise, to indemnify him
against the consequences of that act

• Duty to cooperate where principal cannot unreasonably interfere with the agent’s
ability to accomplish his task.

12
TERMINATION OF AGENCY

Termination of an agency can be divided into two categories i.e. by the act of the parties or by
operation of law.

Termination by the act of the Parties – there are three methods:

a) By mutual consent i.e. where both parties agree to end their relationship.

b) By unilateral revocation by Principal i.e. by the principal revoking the authority of the
agent by giving the required notice – S154.

c) By unilateral renunciation by the Agent i.e. by the agent renouncing the business of
the agency by giving the required notice – S154.

Termination by operation of law – there are six ways:

1. By the performance of the contract of agency i.e. the transaction undertook by the
agent has be performed or completed. S154 states that an agency is terminated…by
the business of the agency being completed.

2. By the expiration of the period fixed or implied in the contract. Where the duration
of the agency is expressly fixed or the duration is implied in the contract or trade, the
agency is terminated when the time period expires, even if the business has not
been completed.

3. By the death of either Principal or Agent - because the relationship between the
Principal and the Agent is confidential and personal. The termination of the agency is
only effective when the agent, Ben, has notice of the principal’s death

4. By the subsequent insanity of either Principal or Agent – insanity of either party

terminates the agency because person of unsound mind cannot validly contract to
appoint or act as agent – S151.

5. By bankruptcy / insolvency of Principal – upon the principal being declared a

bankrupt his rights are now vested in the official assignee - S154. There is no specific
provision if an agent goes bankrupt. Generally it seems that bankruptcy of the agent
also brings the agency to an end.

6. By the happening of an event which renders the agency unlawful – this fall within the
doctrine of frustration of contract. Example, where there is a change in the law
13
which renders the object of the agency unlawful.

14
Effect of Termination

After an agency has been terminated, the agent can no longer bind the principal in
future transactions anymore. If the agent continues to do so, he will be personally liable
to the third parties for the contract.

• Termination of the agency ends the agent’s power to act on behalf of the principal.

He will be personally liable to the third parties or be liable for breach of warranty of
authority if he continues to contract as an agent. Under s.163, this also results in the
termination of the sub-agents.

• Confidential information remains confidential and unusable, even after the end of the
agency.

Principal’s Remedies When the Agent Breaches a Duty

• Dismiss the agent for breach of duty.

• Refuse to pay the agent his commission or other remuneration.

The agent is not entitled to any remuneration where he is guilty of misconduct.

• Recover the amount of secret profit or any benefit that the agent may have
made from the transaction, even if the principal has suffered no losses.

• Repudiate the transaction with the third party, where material facts have
been dishonestly concealed from him by the agent or that the transaction has
been disadvantageous to him.

• Sue the agent and/or the third party (who bribes the agent) for damages for
any losses that the principal may have suffered as a result of entering into the
contract.

• Where the agent has taken a bribe, the Principal may report the agent and/or
the third party (who bribes the agent) so that they can be subject to criminal
prosecution for corruption.

In Mahesan v. Malaysian Government Officers' Co-op. Housing Society, it was

held that a principal only has alternative remedies against the agent and the
third party (who bribes his agent). The principal can only elect to recover
either:
✓ the amount of the bribe or
✓ damages for fraud, i.e. the actual loss sustained in the transaction.

15