D.

The Formation and Constitution of Business

Organisations
Law of Agency
6
How have the syllabus learning outcomes been
examined?

Syllabus learning outcomes Example past paper questions

a) Define the role of the agent and give examples of
such relationships paying particular regard to partners
and company directors. [2]
b) Explain the formation and termination of the
agency relationship. [2]
c) Discuss the authority of an agent. [2]
d) Discuss the rights, duties and liabilities of a
principal and an agent. [2]
On 1st June , Lee had appointed Mia to buy for
him a car not exceeding RM150,000. The next
day Mia went to Carz Motors and ordered a car
costing RM160,000., telling Carz Motor’s
salesman that he was buying the car on Lee’s
behalf. On 4th June, Carz Motors deliver the car to
Lee.
Required:
(a)   Explain whether the contract made by Mia
on behalf of Lee is binding upon Lee.
(3 marks)
(b)   In the event that the contract is not legally
binding upon Lee, state whether or not he
can choose to accept it.
(3 marks)
(6 marks)
Corporate and Business Law (MYS)

Overview

 Any person can become agent, including minors and

unsound mind persons
 However, minors are not responsible for their act.
 The principal must be responsible and take the risks of
agents’ acts.
 The law of agency is governed by Part X of the Contracts
Act 1950.
 NO requirement that the appointment of an agent or sub
agent has to be in writing.
 NO consideration is necessary to create an agency
Section 138 Contracts Act 1950

1.Law of Agency
a) Define the role of the agent and give examples of such relationships paying particular regard to partners and
company directors.[2]

1. DEFINITION

i. Agency - An agency is the relationship which subsists between the principal and the agent who has been
authorized to the act for him or represent him in dealings with others. -‐ s.135 Contract Act 1950 (CA’50)
 Thus, if A (the principal) appoints B (the agent) to perform some work on his behalf, an agency relationship
arises between them.
 The act of the agent done within the scope of his authority will become binding between the principal and
the third party.
ii. Agent - ‘a person employed to do any act for another or to represent another in dealings with third persons’ -
Section 135 CA’50

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iii. Principal – ‘the person for whom such act is done or who is so represented’ - Section 135 CA’50
iv. Section 136 CA’50 - ‘any person who is of the age of majority and of sound mind may employ an agent’
v. Section 137 CA’50 - As between the principal and the 3rd person, any person may become an agent. In the event of
a breach the agent will not be liable, the principal himself will have to be personally responsible to the 3rd parties.

b) Explain the formation and termination of the agency relationship. [2]

2. CREATION OF AGENCY

1. Express  This involves the actual consent of the principal and the agent.
Appointment  Agency entails a grant of express power by the principal to the agent
s.139 and s.140 of  May be in in a written or oral form.
CA’50  Example: express appointment in writing is the granting of a Power of Attorney
 See : Bank Bumiputra Malaysia Bhd v Hendry Gunai Anak Langgie (1990) 1 MLJ 296.

2. Implied  By way of the implied consent of the principal and the agent.
Appointment  Derived from the words and conduct of the parties in the way they have acted in
s.139 and s.140 of connection to one another
CA’50  The law infers the creation of an agency by implication when a person by his words
or conduct holds out another person as having authority to act for him.
 Illustration to s.140
 ‘A owns a shop in Kajang living himself in KL, 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 purpose of the shop.’

3. Ratification 4. Agency by ratification can arise in any one of the following situations:
[mengesahkan] i. An agent who was duly appointed has exceeded his authority.
s.149 to s.153 ii. A person who has no authority to act for the principal has acted as if he has
the authority.
 When any one of the above-mentioned situations arise, the principal can either
reject the contract or accept the contract so made. Section 149 CA’50 (ratify or to
disown the acts as if they had been performed by his authority.’

 When the principal accepts and confirms such a contract, the acceptance is called
ratification (express or implied.) Section 150 CA’50.

 Circumstances where contracts are ratified:

i. The act or contract must be unauthorized. See Brook v Hook
ii. The unauthorized act must not be unlawful. Thus, void or illegal contracts cannot
be ratified.
iii. The agent must at the time of the contract, expressly act as agent for the
principal. He must not allow the 3rd party to think that he is the principal.
Keighley Maxsted & Co v Durant
iv. The agent must have a principal, who is in actual existence or capable of being
ascertained, when the contract is made. Kelner v Baxter.
v. The principal must have contractual capacity at the time when the contract is
being made and at the time of ratification.

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vi. The principal must have full knowledge of all material facts. Section 151 CA’50
states that no valid ratification can be made by a person whose knowledge of the
facts is materially defective.
vii. 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.
viii. The ratification must be made within a reasonable time. Metropolitan Asylum
Board v Kingham & Sons
ix. The ratification must not injure a 3rd party, i.e. it must not subject the 3rd party
to damages or terminate his right or interest
4. Necessity  An agency of necessity may arise as a result of an emergency or urgency of the
Section 142 CA’50 situation.
 In such an event the agent may do all such things as are necessary to prevent loss
to the principal.
That is as would be done by a person of ordinary prudence, in his own case, under
similar circumstances.’
 An agency by necessity will arise if the following 3 conditions are met.
i. It must be impossible to obtain the principal’s instruction. Great Northern
Railway Co V Swaffield (1874)
ii. The agent’s action must be necessary in order to prevent loss to the
principal. See Munro v Wilmott & Co
iii. The agent must have acted in good faith.

5. Estoppel  A person cannot be bound by a contract made on his behalf without his authority.
 However, if a person(B; agent) by his words and conduct allows a 3rd party to
believe that that particular person (B) was his agent even when he (B) is not, and
the 3rd party relies on it to the detriment of the 3rd party, he(principla) will be
estopped from denying the existence of that person’s authority to act on his
behalf. See Freeman & Lockyer V Buckhurst Park Properties Ltd

3. EFFECT OF CONTRACTS MADE BY AGENTS

General Rule:
Where an agent contracts in his capacity as agent for his principal, and he acts within the scope of his
authority, he incurs no rights or liabilities under the contract.
The contract is regarded as one between the principal and the 3rd party. Only the principal can sue or be
sued upon it - Section 179 CA’50

Named Principal Disclosed Principal (Unnamed Undisclosed Principal

 principal identity is made
known to the third party.
 third party fully aware that
agent is contracting on behalf
of principal
Principal)
 principal existence is made
known to third party but his
identity is not disclosed.
 third party knows that agent
is contracts on behalf of
someone else but does not
know who principal is.
 principal identity/existence is
not made known to third party.
 the third-party contracts with
the agent under the impression
that he is contracting
personally with the agent.
 that is only afterwards third
party knows that the person
with whom he was contracting

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Corporate and Business Law (MYS)

was in fact acting on behalf of

someone else.

4. TERMINATION OF AGENCY - s.154 to s.163

Circumstances an agency may be terminated (Section 154 CA’50)

1. By the performance of the contract of agency.

That is the agency was created for a single specific transaction and the transaction has been performed.

2. By the expiration of the period fixed or implied in the contract of agency.

Where the duration of the agency is expressly fixed or may be implied in the contract of trade, the agency is
terminated when the period for which it was created to endure has expired, even if the business has not been
completed, unless there are other terms to the contrary.

3. By the death of either the principal or agent .

General rule (s.154) states that an agency is terminated when either the principal or the agent dies.

However,
i) the termination of the authority of an agent does NOT, so far as regards the agent, take effect before it
becomes known to him, OR, so far as regards 3rd persons, before it becomes known to them. S.161 CA’50

Example
‘A directs B, his agent, to pay certain money to C. A dies and D takes out probate to his will. B, after A’s death,
but before hearing of it, pays the money to C. The payment is good as against D, the executor’.

ii) where the agent has himself an interest in the property which forms the subject-matter of the agency, the
agency is not terminated on death of either party. On the death of the principal, the agent may continue
to exercise his authority and if the agent dies, his authority is exercisable by his personal representatives.

iii) if principal dying or becoming of unsound mind, the agent must, on behalf of the representatives of the
deceased principal, take reasonable steps to protect and preserve principal’s interests

4. By principal or agent becoming of unsound mind. (as above)

As persons of unsound mind are not competent to contract, an agency is terminated by reason of such
unsoundness of mind.
On the termination of the agency due to the unsoundness of mind of the principal, the agent must take all
reasonable steps to protect and preserve the interest entrusted to him - Section 162 CA’50

5. By the bankruptcy or insolvency of the principal.

On a principal becoming insolvent or being declared a bankrupt, his rights and liabilities are vested in the

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official assignee thus agency ends.

However, there is no specific statutory provision in respect of the bankruptcy of an agent and its effect on the
agency., the agency depends on the agreement between the parties and the circumstances of the case.

In the absence of specific terms bankruptcy of the agent also brings the agency to an end.

6. By the happening of an event which renders the agency unlawful. (beyond control).

This falls within the doctrine of frustration applying to contracts generally. See Stevenson v Aktiengesellschaf Fur
Cartonnagen Industrie

In addition to the above, it must be noted that by Section 163 CA’50, the termination of an agent’s authority also
ends the authority of all sub agents appointed by him.

c) ACCA Syllabus: Discuss the authority of an agent. [2]

5. AUTHORITY OF AN AGENT

Actual Authority Ostensible Authority (Apparent Authority)

 authority that is given to an agent by agreement.
 Comprises:-
1. Express authority Section 140 and 141 CA’50
 May be given either orally or in writing
Example
if the principal appoints an agent with express
instructions to buy for him a piece of land at a
price not exceeding RM100k, then the agent’s
actual authority is to purchase such land for any
price not exceeding RM100k. The principal will be
bound so long as the agent has acted within this
express authority.
2. Implied authority.(tersirat)
 Actual authority also includes those
implied from the express authority given, from the
circumstances of the case, custom or usage of
trade, and the conduct of parties
Example
it includes all such powers that is proper or
necessary to carry out the express instructions of
the principal., if the agent obtain the service order
to assess value of the property, the principal is
bound to pay for the services
 is not expressly given by the principal but which the
law regards the agent as possessing although the
principal has not consented to his exercising such
authority.
 resulted of the principal’s words or conduct cause
third party to believe the agent has the authority to
act on behalf of the principal - S190 CA’50
 also arise where the agent has previously acted on
behalf of the principal, but such authority had been
terminated by the principal, without notice to the 3rd
party.
 here, the agent is presumed to have the authority that
the principal causes him to appear to have. The
element of estoppel applies as the principal, that is
principal is precluded from denying that the agent had
such authority.
See Graphic Lines Pte Ltd v Chai Chee Mein and Ors.
It must be noted that where the 3rd 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. See
Overbrook Estates v Glencombe Properties Ltd

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d) Discuss the rights, duties and liabilities of a principal and an agent. [2]

6. DUTIES

 Based on the terms of the agreement

 Where the contract of agency is silent, the rights and duties are governed by s.164 to s.178 CA’50

Duties of Agent - s.164 to s.174

1. To obey the principal’s instructions - S164 CA’50

OR in the absence of instructions 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.

2. To exercise care and diligence in carrying out his work and to use such skill as he possesses - S165 CA’50

3. To render proper accounts for all the monies and property handled when required. S166 CA’50

4. To communicate with the principal.

In cases of difficulty, the agent must use all reasonable diligence in communicating with and in seeking to obtain
instructions from the principal - S167 CA’50

5. 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 conflict
with this duty - S168 CA’50

The principal also has the right to claim from the agent any benefit received by him from the transaction - S169 CA’50

6. To pay to his principal all sums received on his behalf.

S171 CA’50

However, an agent may retain or deduct from such sums received, advances made or expenses incurred by him in
carrying out his duty (commission and other remuneration payable) S170 CA’50

The Act allows the agent to retain his principal’s property in his possession until his remuneration is paid.

7. Not make any secret profit out of the performance of his duty.

Secret profit refers to a bribe or other financial advantage obtained by the agent in the course of carrying out his duties,
without the knowledge of the principal. When the principal discovers it, he may recover the secret profit from the agent.

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He may also repudiate the transaction concerned - S168 and S169 CA’50
Tan Kiong Hwa V Andrew S.A Chong (1974)

Duties of Principal - s.175 to s.178

1.Pay commission or any other remuneration.

2.Not to prevent Agent from earning his commission

3.Indemnify agents for act done

i. For all lawful acts done by the agent within the scope of his authority - S175 CA’50

ii. Where the principal has employed the agent to an act, and the agent does the act in good faith, the principal is
liable to indemnify the agent against the consequences of that act, even if it causes an injury to the rights of 3rd
persons.

iii. The principal must make compensation to his agent in respect of injury caused to the agent by the principal’s
neglect or want of skill - S178 CA’50

however, if principal employs the agent to do an act which is criminal, the principal is not liable to the agent,
either upon an express or an implied promise to indemnify him against the consequences of that act.

End of Chapter