37144537 Chapter 11 the Law of Agency

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Law of Agency

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 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.

-‐ Section 135 CA’50 ‘a person employed to do any act for another or to represent another in dealings with third persons’

Principal-‐ The principal is defined as the person for whom such act is done or who is so represented. -‐ Section 136 CA’50‘any person who is of the age of majority and of sound mind may employ an agent’

Definitions

*Section 137 CA’50As 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.


Creation of Agency(J’07 Q2b)

1. Express Appointments.139 and s.140

-‐ This involves the actual consent of the principal and the agent.-‐ Agency entails a grant of express power by the principal to the agent.-‐ May be in in a written or oral form.-‐ Example (EA made in writing):a Power of Attorney.

2. Implied Appointments.139 and s.140

-‐ Is by way of the implied consent of the principal and the agent.-‐ This is derived from the words and conduct of the parties in the way they have acted in connection to one another.Hely Hutchinson v Brayhead Ltd

-‐ The law can infer 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.Section 140 CA’50

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.’

Chan Yin Tee v William Jacks and Co. (Malaya) Ltd(Held -‐ Irrespective of wether Yong was a partner or not, Chan had held out Yong as his his agent with authority to do things on his behalf. Hence, Chan was liable for Yong’s act.)


3. Ratification s.149 to s.153

(J’09 Q5)Agency by ratification can arise in any one of the following situations:1. An agent who was duly appointed has exceeded his authority.2.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 situation arise, the principal can either reject the contract or accept the contract so made. Section 149 CA’50.

Section 149 CA’50‘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 he ratifies them, the same effects will follow as if they had been performed by his authority.’

When the principal accepts and confirms such a contract, the acceptance is called ratification. Ratification may be express or implied. Section 150 CA’50.

Section 150 CA’50Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.Illustration to s.150(a) A, w/o 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.(b)A, w/o B’s authority, lends B’s money to C. Afterwards B accepts interest on the money from C. B’s conduct implies a

ratification of the loan.


A contract can only be ratified under the following circumstances:

1. The act or contract must be unauthorized. Brook v Hook

2.The unauthorized act must not be unlawful. Thus, void or illegal contracts cannot be ratified.

3.The agent must at the time of the contract, expressly act as agent for the principal -‐ Section 149 CA’50. He must not allow the 3rd party to think that he is the principal. Keighley Maxsted & Co v Durant

4.The agent must have a principal, who is in actual existence or capable of being ascertained, when the contract is made.Kelner v Baxter (a contract to buy a hotel made by an agent on behalf of a co. which was about to be formed, could not be ratified by the co. since it did not exist at that time. The agent was therefore held liable for the contract unless the 3rd party agreed to release him)

However, this rule does not apply to pre-‐incorporation contracts in Malaysia as s.35(2) CA’65 allows companies to ratify pre-‐incorporation contracts after they have been incorporated.

5.The principal must have contractual capacity at the time when the contract is being made and at the time of ratification. 6.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.

7.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 -‐ Section 152 CA’50

8.The ratification must be made within a reasonable time. Metropolitan Asylum Board v Kingham & Sons

9.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 -‐ Section 153 CA’50



4. Necessity s.142

(J’04 Q4)-‐ An agency of necessity may arise as a result of an emergency or urgency of the situation. -‐ In such an event the agent may do all such things as are necessary for the prevention of loss to the principal.Section 142 CA’50‘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.

-‐ An agency by necessity will arise if the following th conditions are met.1. It must be impossible to obtain the principal’s instruction.If the agent had failed to obtain the principal’s instructions when he could have obtained them an agency by necessity will not arise. Springer v Great Western Railway Company (Held -‐ they had no authority to do so. They could have contacted the plaintiffs and had not done so)

2.The agent’s action must be necessary in order to prevent loss to the principal.Where, for example, the agent sells off the goods under his charge because the goods are rotting, an agency by necessity will arise, as the action is taken urgently to prevent further loss to the principal. However, if the goods are sold merely because they are an inconvenience to the agent, no such agency will arise and the agent may be held liable to the principal.Munro v Wilmott & Co

3.The agent must have acted in good faith.

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5. Estoppel s.190

-‐ A person cannot be bound by a contract made on his behalf w/o his authority.-‐ However,if a person 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 will be estopped from denying the existence of that person’s authority to act on his behalf.

Section 190 CA’50‘when an agent has, w/o authority, done acts or incurred obligations to 3rd 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 3rd persons to believe that those acts and obligations were within the scope of the agent’s authority.’Illustration to s.190(a) 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. (b)A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private orders from A. The sale is

good.


Authority of an Agent(D’05 Q3)

Actual Authority-‐ Refers to the authority that is given to an agent by agreement.

-‐ Comprises:1. Express authority; and -‐ May be given either orally or in writingSection 140 and 141 CA’50

-‐ For 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.-‐ Actual authority also includes those matters that may be properly implied in the circumstances.

-‐ For example,the implied authority will include all such powers as are proper or necessary to carry out the express instructions of the principal. Thus, if the agent has to obtain the services of a valuer in order to assess the true value of the property, the principal will be bound to pay for the services of the valuer so incurred.

-‐ Implied authority may also arise from: (objective test)(i) the circumstances of the case(ii)the custom or usage of trade; or(iii)the situation or conduct of the parties.

Watteau v Fenwick

Ostensible Authority(Apparent Authority)

-‐ Refers to the authority which the agent is said to have as a result of the principal’s words or conduct which leads a third party to believe that the agent has the authority to act on behalf of the principal.Section 190 CA’50

-‐ May also arise where the agent has previously acted on behalf of the principal, but such authority had been terminated by the principal, w/o notice to the 3rd party.

-‐ Where ostensible authority arises, 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 is precluded from denying that the agent had such authority.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.Overbrook Estates v Glencombe Properties Ltd


DutiesBased 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

Agent to Principals.164 -‐ s.174

(J’08 Q2)1. To obey the principal’s instructions -‐ Section 164 CA’50OR 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 -‐ Section 165 CA’50

The agent is expected to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business unless the principal has notice of his lack of skill. He will have to compensate the principal for the consequences of his own neglect, want of skill or misconduct.

3. To render proper accounts when required.An agent is under a duty to account for all the monies and property handled by him. Such accounts must be produced by the agent when demanded by the principal.Section 166 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 -‐ Section 167 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 -‐ Section 168 CA’50

The principal also has the right to claim from the agent any benefit received by him from the transaction.Section 169 CA’50

6.To pay to his principal all sums received on his behalf.Section 171 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, his commission and other remuneration payable to him for acting as agent. Section 170 CA’50

Section 171 CA’50 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, w/o the knowledge of the principal. When the principal discovers it, he may recover the secret profit from the agent. He may also repudiate the transaction concerned -‐ ss.168 n’ 169

Principal to Agent s.175 -‐ s.178

(J’05 Q6)1. The principal is bound to indemnify the agent against the consequences of all lawful acts done by the agent within the scope of his authority -‐ Section 175 CA’50

Illustration (a) to s.175‘B at kelang, under instructions from A, of Taiping, contracts with C to deliver certain goods to him. A does not send the goods to B and C sues B for breach of contract. B informs A of the suit, and A authorizes him to defend the suit, and is compelled to pay damages and costs and incurs expenses. A is liable to B for such damages, cost and expenses.’

2.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.

Illustration (b) to s.176‘B, at the request of A, sells goods in the possession of A, but which A had no right to dispose of. B does not know this, and hands over the proceeds of the sale to A. Afterwards C, the true owner of the goods, sues B and recovers the value of the goods and costs. A is liable to indemnify B for what he has been compelled to pay to C and for his own expenses.’

3.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 -‐ Section 178 CA’50

The section provides the following example:‘A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation to B.’

It must be noted, however, that where the 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. Thus if for example, the principal employes the agent to beat C and agrees to indemnify the agent against all the consequences of doing so, he (principal) will not be liable to so indemnify the agent if the agent has to pay damages to C for beating him.See: Illustration (a) of s.177.

(D’04 Q4)A person is said to be in a fiduciary position towards another when the relationship between the two is one of trust and confidence. As such a person in a fiduciary position has to act honestly and in utmost good faith in all his dealings with the other and his undertakings on his behalf. He must in no circumstances make use of his position to obtain an advantage for himself w/o the principal’s consent.


Remedies for Breach of Duty(D’04 Q4)

There are several remedies available to a principal where the agent has breached his fiduciary duty and made a secret profit.

These may be summarized as follows:

1. Repudiate the contract if it is disadvantageous to him.Section 168 CA’50If an agent deals on his own account in the business of the agency w/o first obtaining the consent of the principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction if the case shows either that any material fact that has been dishonestly concealed from him by the agent or that the dealings of the agent have been disadvantageous to him. See also: illustration to s.168.

2.Recover the amount of secret profit from the agent.Section 169 cA’50If an agent w/o the knowledge of his principal, deals in the business of the agency on his own a/c instead of on a/c of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.Tan Kiong Hwa v Andrew S.H. Chong

3.Refuse to pay the agent his commission or other remuneration, or recover any commission already paid.Andrews v Ramsay & Co

4.Sue the agent and the 3rd party giving the bribe, for damages for any loss he may have sustained through entering into the contract.Mahesan v Malaysian Government Officers Co-‐operative Housing Society Ltd

5.Dismiss the agent for breach of duty.Boston Deep Sea Fishing & Ice Co v Ansell


Effect of Contracts Made by Agents(D’03 Q7)

Named Principal

-‐ is a principal whose identity has been brought to the knowledge of the 3rd Party.

-‐ Thus, the 3rd party would be fully aware of who exactly the agent is contracting on behalf of.

Disclosed Principal(Unnamed Principal)

-‐ is a principal whose existence is made known to the third party but whose identity has not been disclosed to the 3rd party.

-‐ Thus, the 3rd party would know that the agent is contracting on behalf of someone else but does not know how exactly that principal is.

Undisclosed Principal

-‐ is a principal whose existence is not made known to the 3rd party.

-‐ Thus the 3rd party would be contracting with the agent under the impression that he is contracting personally with the agent and that there is no 3rd party involved.

-‐ It is only subsequently brought to the knowledge of the 3rd party that the person with whom he was contracting was in fact acting on behalf of someone else.

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

Exceptions1. Where the agent agrees to accept personal liability or contracts in such a way as to make himself personally liable.Ching Yuen Tung v BEP Aketik

2.Where the agent executes a deed in his own name unless he has a power of attorney. Mootiah Chitty v Palianiappa Chitty

3.Where the agent signs a negotiable instrument in his own name w/o making it clear that he is signing it only as an agent.Kavena Said Meydin v Komarappa Chitty

4.Where the agent exceeds his authority and the principal has not ratified the action. In this case the agent will be personally liable for breach of warrant of authority.

5.Where a custom of a trade makes the agent liable.

Further, by virtue of Section 183 CA’50 provides that the agent is presumed to have agreed to accept personal liability in the following circumstances:(a) where the contract is made by an agent for the sale of purchase of goods for a merchant resident abroad;(b)where the agent does not disclose the name of his principal; and(c) where the principal, though disclosed, cannot be sued.

(for example, the principal is a foreign sovereign, or ambassador or a minor or of unsound mind)

However, there are several exceptions to this rule and an agent may be personally liable in the following circumstances:


Termination of Agencys.154 to s.163

(J’03 Q3)

An agency may be terminated by operation law in the following circumstances by virtue of Section 154 CA’50:1. By the performance of the contract of agency.For example,where 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,Section 161 CA’50 -‐ the termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes know to him, or, so far as regards 3rd persons, before it becomes known to them.

Example-‐ Illustration (c) to s.161‘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’.

-‐ Section 155 CA’50where 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.

-‐ Section 162 CA’50 when an agency is terminated by the principal dying or becoming of unsound mind, the agent must, on behalf of the representatives of the deceased principal, take all reasonable steps to protect and preserve the interests entrusted to him.

4.By principal or agent becoming of unsound mind.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 official assignee thus putting an end to the agency.

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

In the absence of specific terms in the contract of agency it would seem that 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.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.

37144537 Chapter 11 the Law of Agency

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