Topic > Law of Agency (Part 1) LEARNING OUTCOMES > INTRODUCTION The relationship between a principal and an agent is very important because at times, a person needs help and assistance from another person to act on his behalf or become his proxy to perform certain acts. For example, where a person intends to sell his land, he may need the service of a real estate agent to sell the land on behalf of him. The owner will then authorise the real estate agent to deal with the land. This is where the agency relationship comes into existence. In Malaysia, the law of agency is governed by Part X of the Contracts Act 1950. Section 135 of the Act defines an “agent” as “a person employed to do any act for another or to represent another in dealings with third persons”, and a “principal” as “the person for whom such act is done, or who is so represented.” From the definition above, it can be said that the contract of agency is divided into two: (a) A contract between the principal and agent, where the agent attains the authority to act for and on behalf of the principal; andTOPIC LAW OFAGENCY (PART1) 4123 (6) Acontract between the principal and third party through an agent. An agent can therefore make contracts with third parties that are binding on the principal. ‘811 CAPACITY Section 137 of the Contracts Act 1950 provides a requirement for a person to become an agent. According to the provision, “any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal.” For example, A hires B, who is 16 years old, to buy goods from C on his behalf. C supplies the goods to A through B, but B sells the goods for his benefit. A cannot deny his responsibility to C on the ground that B is a minor. A is still liable to C for the payment of the goods and A cannot claim damages from B. B2 FORMATION OF AGENCY ‘There are several ways for a contract of agency to exist (Refer to Figure 8.1), as follows: (a) By express appointment (b) By implied appointment (©) By ratification (a) By necessity (c) By estoppel or ‘holding out’124 TOPICS LAW OF AGENCY (PART 1) oes & | |g / 2 2 y iS hse Ae \ \ | FORMATION \ OF AGENCY a0) 1 ‘ co” | y \ om \ Figure 8.1: Elements for formation of agency 8.2.1 Agency by Express Appointment An agency by express appointment is created through verbal or written authorisation by the principal to the agent. The principal gives express authority to the agent as stated in the first part of Section 140 of the Contracts Act, 1950. According to Section 140, “an authority is said to be express when it is given by words spoken or written.” 8.2.2 Agency by Implied Appointment The second part of Section 140 of the Contracts Act 1950 provides for implied appointment of an agent. The appointment is implied when the authority can only be drawn from the circumstances of the case, which means things that were spoken or written, or act done by the parties in the ordinary course of dealing.TOPIC8 LAW OF AGENCY (PART1) 4 125 For example, A stays in Shah Alam and has a shop in Kuala Lumpur. Most of the time, B, who manages the shop, orders and pays for goods from Y, using A’s name. Here it is clear that B has an implied authority from A, as an agent to deal with Y in purchasing goods for the shop. There are, however, situations where the authority given under the express appointment by the principal does not specify the extent of the agent’s authority. In such case, an agent who has been authorised to do certain acts, will have the authority to do other acts, which are connected to the authorised act. This principle is laid down in Section 141(1) of the Act that says, “an agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do the act.” Also provided in Section 141(2) of the Act, “an agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business.” For instance, M appointed (either verbally or written) N, who lives in Kota Bharu, as an agent to market his product in Kota Bharu. In his appointment, it did not specify the extent of authority in which N can act. Therefore, as a marketing agent, N has the authority to deal with the advertisement, packaging, distribution and transportation of the product as well as other matters that are connected with his appointment. pe In Summers v. Solomon (1897) AC 22, a real estate agent was instructed by a hotel owner to find a buyer for the hotel. The agent did as instructed and received a deposit from a prospective buyer. The owner then brought an | action to cancel the agent's act. The Court held that. Even though the agent was not expressly authorised to receive deposits from prospective buyer, he was presumed to have acted under the ambit of implied authority of an agent. Implied appointment of agency also exists between partners in a partnership business. Under common law, an agency relationship exists between husband and wife. It is presumed that a wife has the authority to buy necessaries for their living by pledging her husband’s credit. The assumption is rebuttable if the husband can prove that the wife was given sufficient allowance for buying goods, or the wife was sufficiently provided for with the goods, or the order was126 TOPIC8 LAW OF AGENCY (PART 1) unreasonable, or he expressly forbade his wife to pledge his credit or he expressly warned the trader not to supply his wife with the goods 8.2.3 Agency by Ratification Agency by ratification can arise if one of the situations below exists: (a) when an agent exceeded his authority; or (b) when a person is not an agent, but acted as if he has the authority to act as an agent. In the event of the above, Section 149 of the Contracts Act 1950 provides that, “where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or to disown the acts.” If the principal accepts the contract, such acceptance is known as ratification. Ratification renders the principal liable to the contract, as if the agent has been authorised to do such act. Ratification can be done expressly or impliedly as provided in Section 150 of the Contracts Act 1950. For example, A, without authority, buys goods for B. Afterwards B sells them to C on his own account. B’s conduct implies a ratification of the purchase made for him by A. In Muthuchellapa Chettiar v. Indian Overseas Bank Ltd {1952] MLJ 25, part payment on an overdraft by the principal (which had been arranged by the agent without the principal’s authority) was an implied ratification of the loan. Ratification operates retrospectively. Thus, the ratified contract is considered valid or effective from the date it was made by the agent and not from the date of ratification. For example, on 34 January, P appointed E as an agent to purchase goods at the price of not exceeding RM200,000. On 5'* June, E agreed to purchase goods from Z at the price of RM220,000. In this case, E was not authorised to purchase the goods exceeding the amount given by the principal. Therefore, P had the option to either ratify or reject E’s contract with Z. If P accepted E’s act on 7% June, E would therefore become an agent by ratification. Consequently, the contract entered by E and Z was valid on 5" June and not on 7" June.TOPIC 8 LAW OF AGENCY (PART1) 4127 However, such ratification by the principal can only be done under the following conditions:- (a) (b) (©) (d) (e) | In Kelner v. Baxter (1866) LR 2 CP 174, a contract to buy a hotel on The unauthorised act must be recognised by the law and not a void contract. At the time the contract was made, the agent must have acted as an agent for the principal. Therefore the agent must disclose that the contract was entered into on behalf of his principal. In the case of Keighley Maxted & Co. v. Durant [1901] AC 240, the appellants authorised the agent to buy wheat at a certain price. The agent exceeded his authority and bought at a higher price, in his own name. The principal, however, agreed to take the wheat at the higher price but failed to take delivery. It was held that: The principal (Keighley) was not liable and could not ratify the contract because at the time of the contract, the agent has acted in his own capacity. At the time the contract was made, the agent must have actual principal in existence. At the time of ratification, the principal must have full knowledge of the material facts to be ratified, unless there is evidence to show that he does not care of the facts that he intends to ratify. According to Section 151 of the Contracts Act 1950, “no valid ratification can be made by a person whose knowledge of the facts of the case is materially defective.” behalf of a company by an agent could not be ratified by the company because it did not exist at that time. The principal must ratify the whole contract. He cannot ratify only part which is advantageous to him and reject the rest. Section 152 of the Contracts Act 1950 provides “a person ratifying any unauthorised act done on his behalf ratifies the whole of the transaction of which the act formed a part.”128 TOPICS LAW OF AGENCY (PART 1) (f) Ratification must not affect, injure or terminate a third party's rights. Section 153 of the Contracts Act 1950 provides that “an act done by one person on behalf of another......which.....would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have that effect.” (g) Ratification must be exercised within a reasonable time. In Grover & Grover v. Mathews [1910] 2 KB 401, a fire insurance policy ratified after the event insured against had happened was held to be ineffective. (h) At the time the contract was made and at the time of ratification, the principal must have contractual capacity. 8.2.4 Agency by Necessity Agency by necessity arises when there is an emergency situation and it becomes necessary for the agent to act to preserve the principal’s property. Section 142 of the Contracts Act 1950 provides that, “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 circumstances.” For an agency by necessity to exist, the following conditions must be fulfilled.TOPICS LAW OF AGENCY (PART 1) 4129 (a) _ Itis impossible for the agent to get the principal's instructions. In Springer v. Great Western Railway Company [1921] 1 KB 257, The contract was to carry the plaintiff's tomatoes from Jersey to Covent Garden market. However, the ship arrived late at Weymouth due to bad weather and some of the tomatoes were found to be bad. Without communicating with the plaintiff, the defendants decided to sell the tomatoes locally because it was not possible for them to arrive in Covent Garden market to deliver the tomatoes in a saleable condition. The plaintiff then claimed for damages in conversion based on the market price of tomatoes in Covent Garden. The Court held that. The plaintiff was entitled to damages because the defendants were not agents of necessity. They have failed to communicate with the plaintiff. (b) The agent acted to prevent the principal from incurring loss or damages. If the goods are not perishable goods like clothes or furniture, it will not give rise to emergency situation that requires disposal of them. Therefore, an agent who acted in such case will be liable for the loss suffered by the principal. (©) The agent acted in good faith for the interest of the principal. The agent may be considered has acted in good faith to protect the interest of the principal if he collects the payment from the third party in order to prevent his principal from suffering losses, if the third party does not pay certain amount after using services provided by the principal. 8.2.5 Agency by Estoppel or Holding Out Under Section 190 of the Contracts Act 1950, “when an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by those acts or obligations if he has by his words or conduct induced such third persons to believe that those acts and obligations were within the scope of the agent's authority.”130 TOPIC8 LAW OF AGENCY (PART 1) For instance, E tells X in the presence of P that he is P’s agent and is authorised to make contract on behalf of P. In actual fact, E is not P’s agent. P does not deny E’s statement. When X sold goods to E, X may claim for the payment of the goods from P, and P was estopped from denying the existence of F’s authority 8.3, AUTHORITY OF AN AGENT Itis important to know the extent of an agent's authority because any act done by the agent within his authority will bind the principal. The agent's authority is classified into: (a) Actual authority and (b) Apparent authority. 8.3.1 Actual Authority (a) Express actual authority Express actual authority is expressly given by the principal (orally or in writing) to the agent. For example, T appoints S as his agent to purchase goods not exceeding RM10,000. In such case, $’s actual authority is to purchase goods on behalf of T, not exceeding RM10,000. (6) Implied actual or usual authority Implied actual authority is the proper or necessary authority given to the agent to execute the express authority. For example, T appoints $ as his agent to sell T’s car. S has implied authority to allow the purchaser to test drive the car.TOPIC 8 LAW OF AGENCY (PART1) 4131 In Watteau v. Fenwick (1893] 1 QB 346, The defendant appointed a manager to run a public house. A licence was taken out in the manager's name. The defendant forbade the manager to buy cigars on credit, which was disregarded by the manager. The plaintiff then claimed for the price of the cigars from the defendant. The Court held that. The defendant (as the principal) was liable to pay because a manager of a public house usually had the authority to make such purchases. Therefore, the plaintiff could rely on the usual authority of the manager if he has no knowledge of the restrictions imposed by the principal. In Panorama Development (Guilford) Ltd. v. Fidelis Furnishing Fabrics Ltd [1971] 3 AIER 16, The Court held that: The company (defendant) was liable for the contract of hiring of motor vehicles made by the company secretary. Although the company secretary exceeded his actual authority in hiring the motor vehicles from the plaintiffs, the act was within the usual authority of a company secretary, and it was considered as part of the company administration. 8.3.2 Apparent or Ostensible Authority Apparent authority arises where a principal (by words or conduct) makes the third party believe that the agent has the authority to make contracts for the principal. According to Section 190 of the Contracts Act 1950 “when an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by those acts or obligations if he has by his words or conduct induced such third persons to believe that those acts and obligations were within the scope of the agent's authority.” The principal is therefore precluded from denying the authority of the agent because the element of estoppel applies. It is due to the representation made by the principal to the third party that leads the third party to believe that the agent has such authority.132 TOPIC LAW OF AGENCY (PART 1) In the case of Graphic Lines Pte Ltd v. Chai Chee Mein & Ors (1987) Nov. Butterwoths’ Digest, The Court held that. The assistant manager had an apparent authority because the general manager had represented to the plaintiffs that advertisements should be done through the assistant manager. (a) Whois an agent? (b) Cana minor become an agent ? (©) Whatare the ways of formation of agency contract? (a) Must the appointment of an agent be done expressly? (©) Under what circumstance can the principal ratify his agent’s act? () Does ratification of agency contract operate retrospectively? (g) What are the conditions for an agency by necessity to exist? (h) What is meant by agency by estoppel? (i) What is the importance of an authority to an agent? (j) | What is the difference between usual authority and ostensible authority?TOPIC8 LAW OF AGENCY (PART1) 4133 a Xai iiag Discuss the following questions (a) Zila was appointed by Jaya to supervise the purchase of 1000 plastic bottles produced by Syarikat Kalis Berhad (SKB). While carrying out such duty, Zila decided to place an order of 1050 plastic bottles produced by SKB in her own name. Discuss the effect of Zila’s act according to the law of agency. o Richard has just sold his share in one company and decided to buy a new car for his wife. On 15 June 2007, Richard appointed Gary as his agent to buy a car at the price not exceeding RM70,000. The next day, Gary went to see Tan Chong, a car dealer and booked a car at the price of RM75,000 and paid the deposit of RM7,500. Gary told Tan Chong that the car was meant for Richard’s personal use. One month after the booking date, Tan Chong sent the car to Richard and claimed for the balance purchase price of the car. Richard told Tan Chong that he has never authorised Gary to purchase the car at that price and refused to accept the car. Tan Chong knew about the limitation of Gary’s authority. Decide whether Tan Chong could claim for the price of the car from Richard. (©) Charlie has appointed Yuppie as his agent to carry out the following: i. To deliver 200 bags of Taj Mahal rice at the price of RM4,000 to Kedai Runcit Tampan (KRT) in Bukit Tinggi on 10 February 2004; ii, To obtain the supply of 100 kilograms salted fish from Tamban Enterprise (TE) after delivery of the rice bags to KRT. On the 10t* of February, upon reaching KRT, Yuppie discovered that the shop was closed beginning 9" February and would be opened on 15'" February 2004. Without contacting Charlie for further instruction, Yuppie went to Pasar Mini Sayugia (PMS), which agreed to buy all the rice bags at the price of RM3,000. Later, Yuppie went to TE and bought 150 kilograms of salted fish on behalf of Charlie. Advise Charlie on the legal claims that he can take against Yuppie.134 TOPICS LAW OF AGENCY (PART 1) * Agency arises from an agreement between the principal and the agent. ¢ In the agreement the principal authorises the agent to do things on behalf of the principal. * The formation of an agency contract can be done through an express or implied appointment, ratification, necessity or estoppel. * Agency by express appointment can be done verbally or in writing. ‘* Agency by ratification arises when the principal accepts the contract made by the agent who exceeds his authority or acts without authority. * A ratified contract is valid and effective from the date the contract was made. * Agency by necessity arises when there is an emergency situation which would require the agent to act promptly. + Implied actual authority is the proper or necessary authority given to the agent to execute the express authority. * Apparent authority arises where a principal makes the third party believes that the agent has the authority to make contracts for the principal. MD eee cece es Principal Implied appointment ‘Agent Ratification Actual authority Necessity Apparent authority Estoppel Express appointment Holding out Text Books: * Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. * WuM. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman.TOPIC 8 LAW OF AGENCY (PART 1) 4135 Cases: Graphic Lines Pte Ltd v. Chai Chee Mein & Ors (1987) Nov. Butterwoths’ Digest. * Grover & Grover v. Mathews [1910] 2 KB 401. * Keighley Maxted & Co. v. Durant [1901] AC 240. * Kelner v. Baxter (1866) LR 2 CP 174. © Muthuchellapa Chettiar v. Indian Overseas Bank Ltd [195] ML] 25. * Panorama Development (Guilford) Ltd. v. Fidelis Furnishing Fabrics Ltd [1971] BAIL ER 16. © Springer v. Great Western Railway Company [1921] 1 KB 257. Summers v. Solomon (1897) AC 22. © Watteau v. Fenwick [1893] 1 QB 346.